The Leader in Loan Quotation and Loan Calculation Software

APR Compliance Software for Irregular Cash Flows

Submitted 2014-04-24 08:35:00 -0700

The SCEX family of products features loan calculation and compliance software for the end user, as well embedded solutions for partners to use in their own end user applications. Just over a year ago, we published an article entitled APR Calculation Software for PayDay Lenders. This article discusses the allowed 1/8% APR disclosure tolerance, and how dangerously easy it is to violate this Federal restriction, when the APR is in the hundreds of one percent. Finally, the article introduces our APR compliance software as a complete solution to this critical, highly sensitive, and difficult calculation.

The interest in our APR compliance software led us to create a specialized calculation engine exclusively for compliance, called the SCEX – Compliance. Whereas the SCEX is an unparalleled package of loan calculation software complete with all the compliance functionality a lending institution may need, the SCEX – Compliance focuses only on the critically important APR disclosure calculations, along with HOEPA and HPL mortgage loan compliance testing. It is the perfect solution for lending institutions that have a firm grip on their required payment calculations, but require a helping hand in the complex compliance calculations required by the Federal Government.

Recent interest in this product has come from student loan providers and commercial lenders, who occasionally write loans with irregularities in the timing of advances and payments that can cause difficulties in calculating an APR.

The method prescribed for computing the actuarial APR is given in Appendix J to Regulation Z, by the Federal Reserve Board. The method requires the determination of what is called the “unit period” of the loan, which is the common period between transactions (advances and payments) that occurs most often over the term of the loan. For most consumer lending such as mortgage and auto loans, the unit period is obviously one month. However, for loans with irregular timing, determination of the unit period can be a tedious, error-prone, and time-consuming process. This is important because much of the APR compliance software offered today requires that the user calculate and specify the unit period of the loan as one of the entries.

Consider the following loan: two streams of ten annual payments repay a $100,000 loan. One payment stream is interest only and payable at the end of each July, and a second fixed payment stream of $8,000 occurs annually on the anniversary of the date of the advance in April. The loan is paid off at maturity.

Figuring out the unit period for this loan can be tricky. From 4/16 to 7/31 each year is 106 days, occurring 10 times. From 7/31 of one year to 4/16 of the next year is 259 days which occurs only 7 times, since there are 3 leap years in the term of the loan, resulting in three 260 day periods. Thus, 106 days is the common period occurring most often between transactions and is therefore the unit period of this loan, which is then used to calculate the APR.

Some loans are even more complex and require the creation of a table just to figure out which is the common period occurring most often. Furthermore, if there is no common period, then specific rules in the regulation must be consulted in order to determine exactly what the unit period of the loan is.

Fortunately, users of our SCEX and two end-user products (eWinloan and Winloan32) don’t have to deal with this complexity, as our APR calculator automatically determines the unit period from analysis of the entered advance and payment dates. Below is the output page on from our APR Counselor for the loan described above.

RegZAPR Summary

Calculation Analysis
APR Counselor
Wednesday, April 16, 2014 - 12:00 PM
APR Finance Charge Amount Financed Total of Payments
9.8562% $95,174.48 $100,000.00 $195,174.48
RegZAPR Data
RegZ APR 9.8562
Method Actuarial
Definitions of Time Intervals
Consummation Date 04/16/2014
Unit Period 106_Days
Periods Per Year 3.4433962
Days Per Period 106
Error Analysis
Error at 9.8563% 0.3498122
Error at 9.8562% -0.2647265
Error at 9.8561% -0.8792702
Rate Tolerance
Loan Type Irregular Loan
Tolerance 0.2500
Acceptable APR Range [9.6062 - 10.1062]
# of Advances 1
Total of Advances $100,000.00
Advance $100,000.00 on 04/16/2014
# of Payments 20
Total of Payments $195,174.48
Single Payment 1 of $2,904.11 on 07/31/2014
Single Payment 1 of $8,000.00 on 04/16/2015
Single Payment 1 of $2,877.85 on 07/31/2015
Single Payment 1 of $8,000.00 on 04/16/2016
Single Payment 1 of $2,850.52 on 07/31/2016
Single Payment 1 of $8,000.00 on 04/16/2017
Single Payment 1 of $2,820.46 on 07/31/2017
Single Payment 1 of $8,000.00 on 04/16/2018
Single Payment 1 of $2,788.27 on 07/31/2018
Single Payment 1 of $8,000.00 on 04/16/2019
Single Payment 1 of $2,753.80 on 07/31/2019
Single Payment 1 of $8,000.00 on 04/16/2020
Single Payment 1 of $2,717.63 on 07/31/2020
Single Payment 1 of $8,000.00 on 04/16/2021
Single Payment 1 of $2,678.14 on 07/31/2021
Single Payment 1 of $8,000.00 on 04/16/2022
Single Payment 1 of $2,635.85 on 07/31/2022
Single Payment 1 of $8,000.00 on 04/16/2023
Single Payment 1 of $2,590.56 on 07/31/2023
Single Payment 1 of $95,557.29 on 04/16/2024
APR Counselor v1.0

If you are looking for APR compliance software that will provide absolutely accurate calculations for all types of loans, from the most trivial monthly car loan to the incredibly complex irregular period loans we have seen some lending institutions move towards, then the SCEX – Compliance is the loan compliance software package solution for you. Of course, the full version of the SCEX can compute all of these loan types for you as well, and provides an all-in-one solutions for your financial calculation software needs.

Our partner directory shows a partial list of the loan origination software providers and lending institutions that rely directly on Sherman loan calculation engines for totally accurate calculations and disclosures. We would be honored to answer any questions and discuss your needs with you. Please contact us with any questions regarding the SCEX or any of our other products.