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Mortgage APR Accuracy

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  • #5453
    TheBank
    Participant

    1026.22(a)(2) states as a general rule the disclosed APR is accurate if it is within 1/8% above or below the correct APR. 1026.22(a)(5) goes on to say in addition to that tolerance, if the finance charge is calculated incorrectly but is accurate under .18(d)(1) or .23(g)or(h), the disclosed APR is accurate if either (i) or (ii) is true.

    1. Is it saying that if the finance charge was calculated correct under .18(d)1) or .23(g) or (h) and either 1026.22(a)(5) (i) or (ii) are true, then the APR does not have to be within 1/8% above or below the correct APR?

    2. Or is that in addition to, i.e. the 1/8% above or below tolerance always applies?

    3. What does 1026.22(a)(5)(ii) mean by ….but it is closer to the actual annual percentage rate than the rate that would be considered accurate under paragraph (a)(4) of this section?

    #5462
    rcooper
    Keymaster

    1 & 2: Review 1026.22(a)(4) carefully before you try to understand (a)(5); this explains that for a mortgage loan, even if the APR is outside the 1/8% or 1/4% tolerance, respectively, it can still be considered accurate if the rate resulted from the finance charge and that finance charge is considered accurate.

    Here’s an example of this from the commentary:
    22(a)(4) Mortgage Loans

    1. Example. If a creditor improperly omits a $75 fee from the finance charge on a regular transaction, the understated finance charge is considered accurate under §1026.18(d)(1), and the annual percentage rate corresponding to that understated finance charge also is considered accurate even if it falls outside the tolerance of 1/8 of 1 percentage point provided under §1026.22(a)(2). Because a $75 error was made, an annual percentage rate corresponding to a $100 understatement of the finance charge would not be considered accurate.

    3: Then when you look at 1026.22(a)(5) it states that if you have a mortgage loan with an APR that is inaccurate due to a finance charge being calculated incorrectly, if that finance charge is considered accurate then the APR can also be considered accurate if it is within the range corresponding to the finance charge discrepancy and the accurate APR.

    Here’s an example from the commentary:
    22(a)(5) Additional Tolerance for Mortgage Loans

    1. Example. This paragraph contains an additional tolerance for a disclosed annual percentage rate that is incorrect but is closer to the actual annual percentage rate than the rate that would be considered accurate under the tolerance in §1026.22(a)(4). To illustrate: in an irregular transaction subject to a 1/4 of 1 percentage point tolerance, if the actual annual percentage rate is 9.00 percent and a $75 omission from the finance charge corresponds to a rate of 8.50 percent that is considered accurate under §1026.22(a)(4), a disclosed APR of 8.65 percent is within the tolerance in §1026.22(a)(5). In this example of an understated finance charge, a disclosed annual percentage rate below 8.50 or above 9.25 percent will not be considered accurate.

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