Per Diem Interest. COMPLYING WITH CALIFORNIA FINANCIAL CODE 50204(o) and CALIFORNIA CIVIL CODE

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1 Per Diem Interest COMPLYING WITH CALIFORNIA FINANCIAL CODE 50204(o) and CALIFORNIA CIVIL CODE

2 Per Diem Interest What is per diem interest? Interest payment made by a borrower(s) on the money loaned for the period prior to the borrower(s) otherwise paying interest by way of the promissory note. 2

3 California Per Diem Statutes Financial Code section 50204, subdivision (o): A licensee may not do any of the following: (o) Commit an act in violation of Section of the Civil Code. Evidence of compliance with Section may be evidenced by (1) a certification executed by the licensee, at no cost to the borrower, pursuant to Section of the Code of Civil Procedure, or other evidence in the loan file acceptable to the commissioner. 3

4 California Per Diem Statutes Civil Code section : (a) A borrower shall not be required to pay interest on a principal obligation under a promissory note secured by a mortgage or deed of trust on real property improved with between one to four residential dwelling units for any period that meets any of the following requirements: (1) Is more than one day prior to the date that the loan proceeds are disbursed from escrow. (2) In the event of no escrow, if a request for recording is made in connection with the disbursement, is more than one day prior to the date the loan proceeds are disbursed to the borrower, to a third party on behalf of the borrower, or to the lender to satisfy an existing obligation of the borrower. (3) In all other circumstances where there is no escrow and no request for recording, is prior to the date funds are disbursed to the borrower, to a third party on behalf of the borrower, or to the lender to satisfy an existing obligation of the borrower. 4

5 California Per Diem Statutes Civil Code section con t: (b) Interest may commence to accrue on the business day immediately preceding the day of disbursement, for obligations described in paragraphs (1) and (2) of subdivision (a) if both of the following occur: (1) The borrower affirmatively requests, and the lender agrees, that the disbursement will occur on Monday, or a day immediately following a bank holiday. (2) The following information is disclosed to the borrower in writing: (A) the amount of additional per diem interest charged to facilitate disbursement on Monday or the day following a holiday, as the case may be, and (B) that it may be possible to avoid the additional per diem interest charge by disbursing the loan proceeds on a day immediately following a business day. This disclosure shall be provided to the borrower and acknowledged by the borrower by signing a copy of the disclosure document prior to placing funds in escrow. (c) This section does not apply to a loan that is subject to subdivision (c) of Section of the Business and Professions Code. 5

6 PER DIEM INTEREST ALLOWED CALIFORNIA CIVIL CODE Focus: One day prior to disbursement from escrow, except for special circumstances. Special circumstances: Disbursement will occur on a Monday or after a bank holiday. Requirements under special circumstances: Borrower agrees to the additional interest charge. Disclosure details the charge amount and informs the borrower of the option of avoiding this additional charge. Disclosure must be signed by borrower. 6

7 CHALLENGES OF COMPLIANCE Main challenges of accurately calculating per diem interest: Disbursement date Provisions related to weekend and holiday closings 7

8 Reviewing Loans for Overcharges Documents Reviewed: Note Settlement Statement Additional Per Diem Disclosure (if applicable) Document Evidencing Disbursement Date (if not identifiable on settlement statement or unreliable) 8

9 DBO Steps in Reviewing Per Diem 1. Compute daily interest (daily interest) 2. Determine number of days that interest was actually charged or credited at closing (# of days, actual) 3. Determine date interest may commence (interest commence date) 4. Determine number of days that interest may be charged or must be credited at closing (# of days, per audit) 5. Determine interest overcharge (overcharge) 9

10 1. Compute daily interest * Daily Interest = (loan amount x interest rate) / 365 or 360 days For example: Loan amount =$810,312 Interest rate = 2.75% Daily interest calculated at 365: ($810,312 * 2.75%) / 365 = $61.05 Daily interest calculated at 360: ($810,312 * 2.75%) / 360 = $61.90 DBO uses the basis (365 or 360) the licensee uses; the licensee must apply the same basis it used at closing when it is issuing an interest refund. 10

11 2. Determine number of days that interest was actually charged or credited at closing # of days = Amount of interest charged or credited at closing / daily interest 11

12 3. Determine date interest may commence Interest may commence on the following dates: 1. On disbursement date 2. One day before disbursement date Per (a), interest may not be charged more than one day prior to disbursement date 3. On the business day immediately preceding disbursement date IF two requirements are met Per (b), interest may commence to accrue more than one day prior to disbursement - on the business day immediately preceding the disbursement date if 1. Borrower affirmatively requests and lender agrees that disbursement will occur on a Monday or after a bank holiday; and 2. Certain information is disclosed to borrower. Disclosure provides the additional amount of interest and informs the borrower of the option of avoiding this additional charge. Disclosure must be signed by borrower. 12

13 Disbursement on a Monday or after a Bank Holiday 1. If the disbursement date is a Monday or a day after a bank holiday: Per Diem Interest Disclosure must be provided. If not provided, no additional days of interest may be charged If provided, it must contain the required information and signature. If missing information or unsigned, no additional days of interest may be charged. See Slide 6 for required information. 2. If disbursement is not on a Monday or a day after a bank holiday: Per-diem interest disclosure is not applicable. Please note this is not a routine form to provide to the borrower(s). Only applicable when borrower(s) affirmatively requests to that the disbursement occur on a Monday or after a bank holiday. 13

14 DBO Rejection of Per Diem Disclosure The DBO will reject a per-diem interest disclosure if: 1. Signed blank 2. Not filled out completely 3. Provided to all borrowers by default 4. Wrong amount is disclosed 5. No amount is disclosed 14

15 3.1 Establish Disbursement Date Release No. 58-FS, issued August 1, 2007: DISBURSEMENT DATE Defined Disbursement date refers to the date on which the majority of loan proceeds are disbursed to the borrower, to a third party on behalf of the borrower, or to the licensee to satisfy an existing obligation of the borrower. 15

16 EVIDENCE OF DISBURSEMENT DATE Compliance with Civil Code section may be evidenced by: 1) A certification executed by the licensee, at no cost to the borrower. 2) Other evidence in the loan file acceptable to the Commissioner. Other Evidence See Release 58-FS Disbursement date reflected on the settlement statement issued by the settlement agent pursuant to Section 2603 of Title 12 of the United State Code Final Hud-1 (pre-trid) Closing Disclosure (post-trid) Written or electronic records reflecting communications between the licensee and the settlement agent verifying the disbursement date of loan proceeds and identifying the name of the settlement agent providing the information and the electronic or business address used to contact the settlement agent 16

17 EVIDENCE OF DISBURSEMENT DATE Contemporaneous written or electronic records memorializing oral communications between the licensee and the settlement agent verifying the disbursement date of loan proceeds and identifying the name and telephone number of the settlement agent. When the Commissioner believes compliance is uncertain or unclear from a review of the above information provided by the licensee, the Commissioner may request additional information to demonstrate compliance with Section Example: disbursement ledger 17

18 EVIDENCE OF DISBURSEMENT DATE Acceptable Evidence of Disbursement Date Per: PRE-TRID POST-TRID 1. Certification, executed by the licensee under penalty of perjury, at no cost to the borrower. FC 50204(o), clarified in Release 58-FS Acceptable Acceptable 2. Other evidence in the loan file acceptable to the Commissioner. FC 50204(o), clarified in Release 58-FS Acceptable Acceptable 3. Disbursement date reflected on the settlement statement or Closing Disclosure issued by the settlement agent. Release 58-FS Acceptable Acceptable 4. Written or electronic records reflecting communications between the licensee and the settlement agent verifying the disbursement date of loan proceeds and identifying the name of the settlement agent providing the information and the electronic or business address used to contact the settlement agent. Release 58-FS Acceptable Acceptable 5. Contemporaneous written or electronic records memorializing oral Release 58-FS Acceptable Acceptable communications between the licensee and the settlement agent verifying the disbursement date of loan proceeds and identifying the name and telephone number of the settlement agent providing the information. 6. Additional information requested by DBO when it is believed Release 58-FS Acceptable Acceptable compliance is uncertain or unclear from a review of the above information provided by the licensee Example: Disbursement ledger 18

19 Disbursement Date and TRID Closing Disclosure Concerns: Estimated Disclosure Date The licensee should maintain a written record, that was prepared contemporaneously with the disbursement of funds, which documents the actual date of disbursement, in the event the date of disbursement is different than represented on the Closing Disclosure. This could be a written statement by the licensee. The DBO will consider the disbursement date on the Closing Statement inaccurate if the estimated disbursement date on the Closing Statement pre-dates the date of the signature(s) of the borrower(s) on the promissory note in the loan file, and will require other evidence of disbursement date. A contemporaneous statement could suffice, but would not preclude the DBO from requesting evidence of actual disbursement in another form. 19

20 Common errors/non-compliance with Disbursement Date 1. Evidence of disbursement date is not in file 2. Issues when requesting evidence of disbursement date - not provided - not provided promptly - had to be requested multiple times 3. Evidence of disbursement date was not for majority of funds 20

21 When May Interest Commence? Disbursed On Monday or Bank Holiday Did borrower affirmatively request and lender agree to disbursement on Monday or after bank holiday? Yes Yes Yes Disclosure is properly signed and contains all information under One Business Day Prior to Disbursement No No No Additional Day of Interest May Be Charged No Additional Day of Interest May Be Charged Not Disbursed On Monday Or Bank Holiday One Day Before Disbursement 21

22 3. Determine date that interest may commence (cont.) Summary by Scenarios: Legend: Key: Interest may be charged based on: Disbursement date Allowed 1-day interest, per (a) Allowed extra days of interest, if requirements are met, per (b) * Date interest may commence Scenario#1: Disbursed on a Friday; Thursday is a business day WED THU FRI Business day Disbursement date Interest may be charged on these days: Interest may commence on Thursday * 22

23 3. Determine date that interest may commence (cont.) Scenario#2. Disbursed on a Monday; Friday is a business day; Per diem disclosure is acceptable FRI SAT SUN MON Business day Weekend Weekend Disbursement date Interest may be charged on these days: Interest may commence on Friday * Scenario#3. Disbursed on a Monday; Friday is a business day; Per diem disclosure is not acceptable or not provided FRI SAT SUN MON Business day Weekend Weekend Disbursement date Interest may be charged on these days: Interest may commence on Sunday * 23

24 3. Determine date that interest may commence (cont.) Scenario#4. Disbursed on a Friday; Thursday is a holiday; Wednesday is a business day; Per diem disclosure is acceptable WED THU FRI Business day Holiday Disbursement date Interest may be charged on these days: Interest may commence on Wednesday * Scenario#5. Disbursed on a Friday; Thursday is a holiday; Wednesday is a business day; Per diem disclosure is not acceptable or not provided WED THU FRI Business day Holiday Disbursement date Interest may be charged on these days: Interest may commence on Thursday * 24

25 4. Determine number of days interest may be charged or must be credited at closing Detailed Steps*: 1. Identify 1 st payment due date from the mortgage note 2. Determine 1 st month that interest started accruing on the mortgage 3. Compare with interest commenced date determined at Step 3 If interest commenced date occurred before the 1 st month of accrued interest, interest may be charged at closing. If interest commenced date occurred within the 1 st month of accrued interest, interest must be credited at closing. 4. Count number of days interest may be charged or must be credited at closing. * This discussion pertains to 1 st trust deed loans only 25

26 5. Determine interest overcharge Detailed Steps: 5.1 Calculate number of days overcharged Formula = number of days charged (credited)* minus number of days that may be charged (or must be credited) ** 5.2 Calculate interest overcharge Overcharge = number of days overcharged*** x Daily interest**** 5.3 Check for accuracy of interest dates disclosed in settlement statement/closing disclosure * From Step 2 ** From Step 4 *** From Step 5.1 **** From Step 1 26

27 Questions? Thank You! 27

28 Thank You! Thank you! 28