Calculations Document COPYRIGHT INFORMATION 2005 Bankers Systems, Inc., St. Cloud, Minnesota. All rights reserved. Printed in the United States of America. The reproduction of this material is strictly prohibited. Information in this document is subject to change without notice and does not represent a commitment on the part of Bankers Systems, Inc. (BSI). The software described in this document is furnished under a license agreement and may be used or copied only in accordance with the terms of the agreement. LEGAL COUNSEL In developing this program, online documentation, printed manuals, forms, and documents we have interpreted the various laws, regulations, and commentary. We cannot and do not guarantee that our interpretations are correct, except as is stated in the ARTA Lending license agreement. We encourage you to seek the advice of your own attorney concerning the use and legality of this program, documentation, and forms. If your interpretations or your counsel s interpretations are contrary to ours, you should, of course, follow your own interpretations in using this program, documentation, and forms. BANKERS SYSTEMS PRODUCTS AND SERVICES ARE NOT A SUBSTITUTE FOR THE ADVICE OF AN ATTORNEY. TRADEMARKS AND CREDITS Expere is a trademark of Bankers Systems, Inc. ARTA Lending, BANKERS SYSTEMS INC, and LoanProcessor Plus Laser are registered trademarks of Bankers Systems, Inc. Microsoft, MS, MS-DOS, Windows and Windows NT are registered trademarks of Microsoft Corporation in the United States and/or other countries. All other trademarks are the property of their respective owners.
Calculations Documentation The following document has been developed for use as a training guide and reference tool. For the most part, this document will follow the flow of the screens. Calculations Repayment methods There are currently nine different repayment methods in the ARTA Lending application. Each repayment method is listed below with a brief explanation. Installment Skip Payment Balloon / Amortized Balloon Single Payment Interest Only Principal Reduction Irregular Payment Demand Two phase Custom repayment Calculates fully amortized loans with a regular schedule of principal and interest payments. The skip payment option can be used as part of an installment loan. The skip payment feature allows you to specify the months that will be skipped. Skip payment is located in the calculation options button. Once skip pay is selected, each month is listed and can be selected as months to skip. ARTA Lending does not require the skipped months to run consecutively. The same period is skipped each year for the term of the loan. Note: Interest is not capitalized (added back into the loan balance) for the skipped month(s). A balloon loan is a loan in which you either specify the regular payment and a final payment is calculated or you specify a final payment and a regular payment is calculated. An amortized balloon loan, also known as a Canadian rollover, calculates a regular and balloon payment based on a long-term amortization with a balloon payment due on a shorter term (call date). A single payment loan calculates a single payment of principal and interest that is made on the maturity date. An interest only loan calculates interest payments due on a regular basis with a final payment of interest and the remaining principal. A principal reduction loan calculates interest payments due at regular intervals with principal payments at the same or different intervals. You can specify a principal reduction payment or allow ARTA Lending to calculate it. A final payment of principal and interest is made on the maturity date. An irregular pay loan calculates a series of payment streams which can then be repeated for as many years as necessary to complete the loan. Payment streams can be Principal & Interest, Principal, Interest, and/or a Final Payment. A demand loan calculates interest payments due on a regular basis. The interest and remaining principal is payable when the institution demands payment. Regulation Z 226.17 (c) (5) states that the disclosures are based on an assumed maturity of one year, so the calculations are done with a term of one year. A two-phase loan calculates a two-part repayment with Phase I being interest only and Phase II allowing a choice of installment, balloon, or amortized balloon. Allows you to type your own repayment language for commercial transactions. This repayment method is available for commercial transactions only and does not provide any calculated payment streams. ARTA Lending Calculations Page 2 of 21
Accrual Methods There are nine different accrual methods. These accrual methods may not all be available for each state. You can select which of these options are applicable for your institution in Lending Setup > Policy. All of the options that are applicable for your state are listed under the Accrual methods option. Actual/365 Actual/360 Actual/Actual Periodic Precomputed add-on Precomputed discount Precomputed simple Split rate add-on Split rate simple With this method, the actual refers to the actual days in each period that are counted in charging interest. The daily interest factor is calculated based on 365 days per year. With this method, the actual refers to the actual day in each period that are counted for charging interest. The daily interest factor is calculated based on 360 days per year. Again, the actual refers to the actual days in each period that are counted in charging interest. The daily interest factor is calculated based on 365 days in a nonleap year and 366 days for leap years. The daily interest factor is calculated based on equal-length periods. This accrual method follows the Fed Calendar as defined in Reg Z, Appendix J. NOTE: The Periodic accrual method is most similar to the 30/360 accrual method used in LP+Laser. The interest on the loan is calculated at the beginning of the transaction and added to the principal. The amortization schedule is based on the Rule of 78 s. The interest of the loan is calculated at the beginning of the transaction and deducted in advance from the face value of the loan. The borrower receives the face value less the interest. The amortization schedule is based on the Rule of 78 s. The simple rate is considered an equivalent rate of interest (ERI). The calculation for this is similar to that of a loan with a periodic accrual and an ERI limit. See the APR document for more information about ERI. The amortization schedule is based on the Rule of 78 s. This method of accruing split rate interest assigns an add-on interest rate to two or three different loan amounts tiers. The tiers can be based on the loan amount or the number of months. If the tiers are based on the loan amount, the interest rate of each tier is applied to that portion of the loan balance that falls within that tier. If the tiers are based on the number of months, the interest rate is determined by a formula that weights the interest rate for each tier according to the number of months which are contained in that tier. The split rate tiers, and corresponding interest rates are setup in Policy. The amortization schedule is based on the Rule of 78 s. This method of accruing split rate interest assigns a simple interest rate to two or three different loan amounts tiers. The interest rate for each tier is applied to that portion of the loan balance that falls within that tier. The split rate tiers, and corresponding interest rates are setup in Policy. Limitations of accrual methods The precomputed options are only available with installment loans. The precomputed and split rate accrual methods are not available in all states. If they are not listed in policy (in the accrual methods details window), then they are not available in that particular state. The split rate options are only available with installment and single payment loans. Periodic is not available for single pay loans. First Period Accrual Method The first period accrual method is the accrual method that will be used to calculate the interest from the funding date to the first payment date. For periodic accrual, there is the option of accruing your first period interest with Actual/365, Actual/360, 30/360, and Periodic accruals. For all other accrual methods, the first period interest will be calculated using the selected accrual method for the loan (unless the payment frequency is FNMA Biweekly). ARTA Lending Calculations Page 3 of 21
Funding Date and First Payment Date The funding date is the date that the funds are disbursed and the day that the loan begins accruing interest. The first payment date is the date that the first payment is made. Shortcut Description Example T Defaults the system date (today) The date is 4/1/2000. If a t is entered into the funding date field, 4/1/2000 will be defaulted. 1, 2, 3, Default the date the specified number of days greater than the system date when entered into the funding date field or the specified number of days greater than the funding date when entered into the first payment date field. M, 2m, 3M, Defaults a month, 2 months, or the specified number of months from the system date when entered into the funding date field or the specified number of months from the funding date when entered into the first payment date field. Given the date above, if 30 is entered into the first payment date field, 5/1/2000 will be defaulted. Given a funding date of 4/1/2000, if 1m is entered into the first payment date field, 5/1/2000 will be defaulted. Prepaid odd days interest This option allows the long days to the first payment to be prepaid. If the option is not selected, the extra interest is paid in the first payment. This will increase all payments slightly. The prepaid interest can be paid in cash or subtracted from the proceeds. The POC checkbox allows this fee to be specified as paid outside of closing. Checking this box does not affect the calculation on the loan. The POC checkbox is only available on Real Estate transactions. Interest credit (short days) This option allows interest to be charged for a full period when there are short days to the first payment. If the option is selected on a monthly loan with 12 days to the first payment, the program will calculate an entire month of interest for the first period. An interest credit amount disclosed as a negative value will appear on certain forms. Payment Frequency There are eight payment frequencies. The payment frequencies are: Weekly, FNMA Biweekly, Every other week, Semimonthly, Monthly, Quarterly, Semi-Annually, Annually. FNMA Biweekly FNMA Biweekly is a special real estate calculation based on FNMA guidelines. A monthly payment is calculated using the chosen accrual method. Once the monthly payment has been calculated, the payment is divided in half. This payment is then made every 14 days using an Actual/365 accrual method. The result is that each year an entire extra payment is made. This causes the principal to be paid off quicker and therefore shortens the term of the loan. This payment frequency is available on installment and amortized balloon loans. ARTA Lending Calculations Page 4 of 21
Rate definition The rate can be defined as either fixed or variable rate. If fixed rate is chosen, then a single interest rate is entered. Variable (Adjustable) rate The rate of interest may vary from the initial rate. The amount that it can change may vary by the rate caps, ceiling, and floor. This rate is tied to an index such as the 1 year Treasury index. Base Also known as index rate, this is the rate on which variable rate loans are based. The index rate is usually published in newspapers periodically, such as the prime rate, U.S. Treasury bill, or note rate. Margin / Points A number of percentage points added to or subtracted from the index rate to compute the variable interest rate on a variable rate loan. In ARTA Lending, a margin may be a specific number of points above or below the index rate. Round market rate This field allows you to round the market rate. The options are up, down, nearest, and the values are:.001,.01,.1,.125,.25,.5, and 1. Initial Rate established by The initial rate can be equal to the market rate (base + margin). The initial rate could also be a discount, which would indicate that the initial rate is less than the market rate. Or it could be a premium, which would indicate that the initial rate is more than the market rate. There are four ways to specify this in ARTA Lending. You can specify it as Market Rate, Specific value, Premium, or Discount. If Specific value, Premium, or Discount is chosen, an additional field is available to enter the initial rate, premium, or discount. Interest rate change information There are two options to specify when the first rate change can occur. It can be specified as a payment date where the initial rate is specified by a number of payments. The interest rate change date can also be specified by entering a date. Subsequent rate changes can be specified as a number of: payments, days, weeks, semi-months, months, or years. Payment change information The time to the initial payment change and the time between subsequent payment changes can be indicated as a number of payments. Periodic Cap The periodic cap limits the amount the rate can change with each adjustment. Increase for Variable rate example When a variable rate option is chosen, the hypothetical variable rate example (hypovar) is calculated and printed on the disclosure. This is required for variable rate consumer loans except for residential RE loans secured by the consumer s primary residence with a term greater than 1 year. For these loans, the ARM early disclosure is provided rather than the hypovar. An example of a hypovar is: Any increase will take the form of an increase in the amount of each payment. If the rate increase by 5.000% on 09-01-2000, the payment amount will increase to. Rate change affects You have the option to select what should change due to the increase or decrease in the rate. You can choose to change the regular payment, final payment, regular and final payment or the number of payments. You may also want to reference the Rate Change Affects section on page 21. Ceiling The rate cannot exceed this value over the term of the loan. Your ceiling can be entered as a Specific value, relative to 1 st market, or relative to initial. If you choose Specific value, the entered value is the maximum rate for the loan. If you specify relative to 1 st market or relative to initial, the entered value is a percent above (or below) the market or initial rate. Floor The rate cannot fall below this value over the term of the loan. Your floor can be entered as a Specific value, relative to 1 st market, or relative to initial. If you choose Specific value, the entered value is the maximum rate for the loan. If you specify relative to 1 st market or relative to initial, the entered value is a percent below (or above) the market or initial rate. ARTA Lending Calculations Page 5 of 21
Preferred Rate Lending The preferred rate lending option allows the bank to offer preferred rates to employees or customers who have a deposit account open at the bank or choose to make their payments by automatic debit. Preferred rate lending on fixed rate loans requires a disclosure similar to the variable rate example (given for all variable rate loans). This is calculated to disclose how the payment would change if for some reason the preferred rate was discontinued. Calculation Options Minimum interest (fee in lieu of interest) If the bank charges a specified amount of interest regardless of whether that amount has been accrued, this amount would be entered in this field. The option to charge minimum interest is not available in all states. Limit Equivalent Rate of Interest This check box limits the Equivalent Rate of Interest (ERI). The ERI is an APR-based rate, but without prepaid fees figured into the calculations. For more information on ERI, refer to the APR document. If the first payment is due on the last day of the month, make all subsequent payments occur on the last day of the month If the first payment occurs on the 28 th, 29 th, or 30 th of a month and that is the last day of the month, then selecting this option will cause all subsequent payments to occur on the last day of each month thereafter. If this option is not selected, the payments will always occur each month on the same day as the first payment. For example: The first payment date is February 29, 2000. If this option is selected, the following payments would occur on the last day of the month March 31, April 30, May 31, etc. If this option were not selected, the remaining payments would occur on the 29 th of the month. The exception here would be February where the payments would occur on the 28 th in non leap years. Skip payments month apply This is available on installment loans. When this is selected, a grid will appear which will allow the months that need to be skipped to be specified. See Repayment Methods for more information on skip pay loans. Private Mortgage Insurance (PMI) The private mortgage insurance applies box will appear on Real Estate transactions. The rate and payment information for PMI can be completed entirely in the PMI setup area, or completed partially at transaction time. At the time the transaction is entered, you can select a pre-set plan.from the drop down list. If Transaction PMI is selected in the Group setup area for that user, the information in the PMI plan can be completed or modified if information already exists. The PMI premium will be based on the answers to the HOPA questions at transaction time. There is more detail on PMI and the PMI setup area on page 8. ARTA Lending Calculations Page 6 of 21
Credit Insurance At the time that the loan is being entered, a credit insurance plan can be selected. This plan was previously entered into setup. There is a place to indicate whether the insurance is for single or joint debtors and a place to select the insured parties. If truncated insurance was selected in setup, a truncated coverage available checkbox will be available at transaction time. There is more detail on credit insurance starting on page 9. Truncated coverage Truncated coverage allows for a term less than the term of the loan to be covered with insurance. This is mainly used in two situations. If the debtor will reach the maximum age allowed by the insurance company before the end of the term of the loan, then the term of the insurance can be changed to reflect the effective term of coverage and the premiums will be calculated accordingly. Secondly, if the term of the loan is greater than the maximum term of insurance, instead of refusing to insure the entire loan, the financial institution could opt to insure the loan up to the maximum term of insurance. By truncating this to the maximum term of coverage, the premium will be calculated appropriately. There is an option in setup to select whether truncated coverage is available. If this is selected in setup, you will be able to select whether truncated applies at transaction time. If truncated coverage applies, you will be asked to enter the truncated term. ARTA Lending Calculations Page 7 of 21
Private Mortgage Insurance (PMI) The PMI plan(s) can be completely entered in the Insurance setup area. If Transaction PMI is selected in the Group Setup area, then the only setup information required in Insurance setup for a PMI plan would be the plan name and the coverage type. All other rate details for the plan can be completed at transaction time, by selecting the PMI rate details option.. Coverage types PMI insurance is often charged on loans that do not have at least a 20% down payment. This is insurance that the consumer pays but that insures the financial institution that is servicing your mortgage. There are three types of PMI coverage. Level Balance insures the loan amount over the coverage term. The amount of coverage does not decline. There is an option to specify a number of payments to prepay as well as a number of payments to escrow. Renewals are charged for the remainder of the applicable term. Declining balance, however, does insure a declining balance. The balance that is used to calculate the premium declines on an annual basis. There is an option to specify a number of payments to prepay as well as a number of payments to escrow. Renewals are charged for the remainder of the applicable term. Single premium is calculated and paid at the beginning of the loan. Prepaid Premium The PMI Insurance Setup area allows a value for number of payments prepaid as well as an optional prepaid rate. If this prepaid rate is not entered, then the prepaid payment will use the rates from the PMI Rate Table. It is common to see a payment or more prepaid. Adding prepaid payments does not increase the number or PMI payments made as these payments will be taken off the end of the PMI term. Escrow Premium The setup area also allows a value to be entered for number of payment in escrow and an optional escrow rate. If the rate is not entered, the escrow payment will use the rates from the PMI Rate Table. It is common to see the a couple of payments in escrow. If the PMI payments are due semiannually and the payment due date is only 4 months away, the financial institution may ask for 2 payments in escrow. An option is available to indicate whether you want to include escrow PMI payments in the payment stream through the termination point. If you chose to include them, the escrow payments will increase the number of PMI payments made. If you chose NOT to include them, the escrow payments will NOT increase the number of PMI payments made as these payments will be taken off at the end of the PMI term. Home Owners Protection Act of 1998 (HOPA) In most cases, it is only necessary to keep PMI insurance on your loan until your loan is 80% Loan-to-Value (LTV). However, most borrowers were not aware that they had the right to cancel this coverage at that point and further more, were not able to determine when their loan reached 80% LTV. The Home Owners Protection Act of 1998 specified that, depending on the risk associated with the loan, the lender may be required to disclose the likely cancellation date (80% LTV) and be required to terminate coverage at 78% or the midpoint of the loan. Depending on the risk and some state specific regulations, the requirements may be different. They may not be required to note the cancellation date and the actual termination date may be calculated at 77%, a midpoint of the loan, or the greater of 77% or the midpoint of the loan. Changes were made to ARTA Lending to support this regulation. The termination and cancellation dates are calculated based on the level of risk selected in the application. Lender Paid PMI Lender paid PMI is not a calculated PMI premium. With Lender paid PMI, the lender charges a higher interest rate but does not charge a separate fee for PMI premium. There is a PMI form used specifically for Lender paid PMI. ARTA Lending Calculations Page 8 of 21
Credit Insurance The credit insurance plans are entered in the setup area. These plans are then selected at transaction time. The information below explains the information that is setup in the plan. Coverages Life insurance Life coverage pays the benefit covered if the insured dies. The benefit is printed on the certificate or policy. Depending on the type of coverage, the benefit may be the total of payments or the loan amount. This value may also be affected by maximum disability benefit, maximum life amount, or truncating. More information is found on pages 14 and 7, respectively. Life coverage is currently available on the following loan types: Installment Balloon / Amortized Balloon Single Payment Interest Only Principal Reduction Life coverage is not available with the payment frequency of FNMA Bi- Weekly. Disability Insurance - Disability insurance makes the loan payment if the insured becomes disabled. This is also referred to as Accident and Health Insurance. Disability insurance is available on the following loan types: Installment Balloon / Amortized Balloon Disability coverage is not available with the following payment frequencies: FNMA Biweekly, quarterly, semiannual, or annual (payments which occur less frequent than monthly). The premium does not insure the full balloon payment, but under some circumstances it may insure a portion of the balloon payment Premium Type There are two options for paying for the premium. They are single premium and outstanding balance. With single premium, the total insurance premium is financed and added to the loan amount. The other option is outstanding balance. With outstanding balance, the premium is collected and submitted to the insurance company on a monthly basis. This premium is not financed and not added to the loan. Credit Life Insurance Credit insurance is available in five different coverage types. Gross, net payoff, straight net, and CUNA straight net are types of single premium insurance. The last option, Outstanding balance, is an outstanding balance premium type. Decreasing versus Level insurance Depending on the type of loan, it may be insured with decreasing, level, or a combination of both rates. Balances that decrease over the term of the loan, such as installment loans, are generally insured with decreasing insurance. Balances that remain constant for long periods of time, such as single pay loans, are insured with level insurance. Therefore, balloon loans (specifically with gross coverage) would have a decreasing and level premium. The decreasing insurance would cover the regular payments and the level insurance would cover the balloon payment. ARTA Lending Calculations Page 9 of 21
Coverage Types Gross Coverage Net Payoff Straight Net CUNA Mutual Straight Net Generally insures the total of payments. This may vary depending on the loan repayment method. Generally insures the outstanding loan balance. Generally insures the loan balance according to the straight net formula. This formula divides the original loan amount by the number of payments and reduces the amount of coverage by this amount with each payment. Insures the loan balance according to the straight net formula. Additional modifications have been made for balloon types of loans. For instance, the insurance term on a balloon loan is the term that would be required to pay off the loan if the regular payment would continue to be made until the loan were paid off. Outstanding Balance Insures the outstanding balance of the loan. This is not a single premium type of insurance. The premiums are collected with each loan payments and not financed. This option is only available on closed end loans. Outstanding balance coverage is available on real estate loans on ARTA Lending, but the notes that support this insurance coverage are limited. Deviation Factors These fields allow for a percent of deviation to be entered to adjust the single and joint life rates. If there isn t a deviation factor these fields can be left blank. Some states set prima facie rates and then require their financial institutions to file reports of the gain/loss experience. Based on these reports, rate deviations are given. In the past, it was necessary to enter a table with these deviations already calculated. However, with these fields, it will be much easier for the deviation to be changed. Balloon Payment coverage This option allows you to indicate how you would insure the balloon payment. This option is only available with gross coverage. The options are Level insurance only and Decreasing and level insurance. NOTE: Generally, the disability term of insurance will be the same as the decreasing term. This option also affects the disability premium. With the Level insurance only option, the balloon payment would be insured with level insurance. For example: If you have a 60 month loan with 59 payments of $100 and a balloon of $5000, with Level insurance only selected, your decreasing coverage would insure 59 payments of $100 and your level coverage would insure $5000. The decreasing and disability coverage terms would be 59 while the level coverage term would be 60. With the Decreasing and level option, the balloon payment would be insured with both decreasing and level coverage. The decreasing coverage would insure one payment portion of the balloon payment and level coverage would insure the balloon payment less one regular payment. In the example above, if Decreasing and level were chosen, then decreasing coverage would be 60 payment of $100 and the level coverage would be $4900. The decreasing, disability, and level coverage terms would all be 60. This option causes some confusion as some misinterpret this as an option for how to insure your balloon loan. This option only indicates how to insure the balloon payment portion of your balloon loan. Calculation Method for Payments occurring less frequently than monthly This option allows you to indicate how you insure your payments that are made less frequently than monthly quarterly, semiannually, or annually. This option is only available with Gross coverage. With Multilevel coverage, each payment is covered with a separate level premium. These premiums are added together to get the total premium. With the Periodic decreasing (modal) option, the decreasing rate is adjusted for payments made less frequently than monthly. ARTA Lending Calculations Page 10 of 21
Discounting Method The discounting method is only used on Net payoff plans. It allows the discounting method to be specified. There are two options in ARTA Lending. For Average discounting, the monthly outstanding balance (MOB) rate is modified using an average discount. This is the option to use if no discount factor is used or if the net payoff premium is calculated by modifying a cents/100/year rate. This is the most common method of discounting. The other option is Exact discounting. With exact discounting, each insured balance is discounted. This option is only used in a few states, such as MT, CA, and NY. Weight Initial Balance If selected, the net payoff formula weights the initial balance to account for a loan with a first period which is shorter or longer than the regular payment period. This is only available on net payoff plans. Calculation Method for Limited Insurance This option is available with life and disability insurance. The calculation method for limited insurance gives the option to choose whether the limited insurance is based on level or proportional methods. With Level Limiting, the maximum insurance amount is covered until the outstanding balance falls below the maximum amount of coverage. Proportional limiting covers a ratio between the maximum amount of coverage and the original balance as the balance of the loan declines. This option is available with net payoff and outstanding balance coverage. Use nonweighted method for calculating premiums This option is available with outstanding balance life and disability insurance and allows the plan to be setup to either weight or not weight the premium based on the chosen accrual method. Allow coverage when insurance term is greater than maximum coverage term This option is available with outstanding balance life and disability insurance. When this box is checked, the insurance coverage will automatically be truncated to provide partial coverage when the insurance term is greater than the maximum coverage term. When this box is not check, coverage is NOT allowed when an insurance term is greater than the maximum coverage term. Limit balloon loan coverage This option is available with gross coverage. Limit balloon coverage gives the option to specify to cover either decreasing before level coverage or level before decreasing coverage on a balloon loan. For example: Our sample loan has a decreasing coverage amount of $40,000 and a level coverage amount of $25,000 and a Maximum Amount of Coverage of $50,000. If the Limit balloon option was set to be first applied to decreasing insurance, the decreasing coverage would be $40,000 and the level coverage would be limited to $10,000. If the Limit balloon option was set to be first applied to level insurance, the level coverage would be $25,000 and the decreasing coverage would be $25,000. Rates Term used for calculating life rates There are options for rounding the term use to calculate the life rates. There are five options. The options are listed below. To illustrate these, an example will be used. Assume that you have a 60-month installment loan with 40 days to the first payment. Options Resulting term Include odd days and do not round to whole months 60.333 Do not include odd days and do not round to whole months 60.000 Include odd days and round to the nearest month 60.000 ARTA Lending Calculations Page 11 of 21
Include odd days and round up to the nearest month 61.000 Include odd days and round down to the previous month 60.000 Rate entry Rates can be entered in two manners. They can be entered into the rate table or then can be entered into the monthly entry table. The rate table is the method of entry for rates that follow the standard /100/year or /1000/month formulas. The monthly entry option can be used by selecting the button titled Monthly Entry Rates and entering each rate individually. For Net Payoff plans, there is a field to specify any additional months or any additional payments that need to be insured. These fields are optional. Substitute Level Life Rates In a limited number of states, it is acceptable to substitute level rates where decreasing life rates would normally be used. The institution should check with their legal counsel to ensure that they are able to write this type of insurance in their state. When substitute level rates is selected, the option would be available to print the premium level life area of the form. If they don t opt to have it print in the level life area, then it would automatically print in the decreasing life area. Additional Coverages Additional coverage options are available with credit life insurance in some states. These additional coverages would cover dismemberment, accidental death, terminal illness or accelerated death, or paraplegia/quadriplegia. These are considered riders to the credit life insurance policy. The values for these can be entered as dollars or percents, but is most common to enter them as dollar amounts. Credit Disability Coverage Disability insurance makes the loan payment if the insured becomes disabled. Single Premium disability With single premium disability, like with single premium life insurance, the premiums are financed and added to the amount requested. The following information determines when a borrower is considered disabled. Waiting period The waiting period is the number of days the debtor must be disabled before a claim can be filed. This will be 7, 14, or 30 days. Coverage type The coverage type can either be retroactive or elimination. If the coverage is retroactive, then the benefits are paid back to the date of disability, after the defined waiting period has elapsed. If the coverage is elimination, otherwise known as non-retroactive, then the benefits are paid only after the completion of the defined waiting period. Pre-existing conditions In ARTA Lending, there are three different options to define how pre-existing conditions are covered covered, not covered, or 6/6 policy. If covered is selected, then the plan insures disabling conditions that affect the insured party at the time the policy is issued. If not covered is selected, then the plan does NOT insure disabling conditions that affect the insured party at the time the policy is issued. If 6/6 Policy is selected, then the plan covers pre-existing conditions on the basis of a 6/6 policy. Generally, this would mean that it covers all disabilities, except those that have been treated within six months before the effective date of the insurance policy or those that occur again within six months after the effective date. Debtors covered The options are single and joint. Although the insurance company may allow either debtor to be covered with single coverage, ARTA Lending will assign single coverage to the first or primary debtor. ARTA Lending will allow ARTA Lending Calculations Page 12 of 21
you to write single life insurance with joint disability insurance. However, the insurance company may have rules that govern whether this type of coverage can be written as well. Outstanding Balance disability When an outstanding balance rate is entered, values for items such as waiting period, coverage type, pre-existing conditions, and debtors covered are not entered. With outstanding balance disability, the rates can be entered in a table or as a single aggregate rate. Calculation method for non-monthly disability There are two methods that are used to determine the monthly benefit for loans with payments made more frequently than monthly. The two methods are: Average Monthly Benefit and Equivalent Monthly Benefit. The formulas are listed below. These formulas will determine the monthly benefit which will be used to calculate the premium. Average Monthly Benefit = payment amount * # of payments in one year 12 Equivalent Monthly Benefit = payments in insurance term * payment amount term of insurance in months rounded Critical Period Disability This option is available in the plan so that the user can indicate whether the plan has a critical period feature and what the associated critical period term would be. If a critical period feature is used on a disability plan, the maximum term of coverage is based on the insurance term, but a claim can be file anytime during the term of insurance. If critical period feature is chosen, an option is given to base the benefit on the critical period term. If this option is chosen, the coverage amount is determined based on the critical period term instead of the insurance term. The disability term on balloon loans is determined by The disability term on balloon loans can be defined as any of the following: the decreasing life insurance term, the full term of the loan, the term of the loan less one period, or the amortization term (only available on single premium disability insurance). Use nonweighted method for calculating premiums This option is available with outstanding balance life and disability insurance and allows the plan to be setup to either weight or not weight the premium based on the chosen accrual method. Covers the sum of remaining payments Outstanding balance disability insurance can cover the outstanding balance or the sum of remaining payments. When coverage is based on the sum of remaining payments, an option is available to calculate the premiums on the outstanding balance or the sum of remaining payments. These options are available based on the requests that were received during development of the feature. Calculation Method for Limited Insurance The calculation method for limited insurance gives the option to choose whether the limited insurance is based on level or proportional methods. With Level Limiting, the maximum insurance amount is covered until the outstanding balance falls below the maximum amount of coverage. Proportional limiting covers a ratio between the maximum amount of coverage and the original balance as the balance of the loan declines. This option is available with outstanding balance disability insurance. ARTA Lending Calculations Page 13 of 21
Allow coverage when insurance term is greater than maximum coverage term This option is available with outstanding balance life and disability insurance. When this box is checked, the insurance coverage will automatically be truncated to provide partial coverage when the insurance term is greater than the maximum coverage term. When this box is not check, coverage is NOT allowed when an insurance term is greater than the maximum coverage term. Maximum insurance term The maximum insurance term is needed for use with the allow coverage when insurance term is greater than maximum coverage term as rates are entered as individual months and not in a table with an associated maximum. Deviation factor This field allows for a percent of deviation to be entered to adjust the disability rates. If there isn t a deviation factor this field can be left blank. Some states set prima facie rates and then require their financial institutions to file reports of the gain/loss experience. Based on these reports, rate deviations are given. In the past, it was necessary to re-enter the entire table of disability rates each time the the deviation changed. However, with these fields, it will be much easier to change the deviation. Miscellaneous options Maximum coverage There are fields for Minimum Premium and Maximum Coverage (life coverage), Maximum Monthly Benefit (disability coverage), and Maximum aggregate benefit (disability coverage). If a value is entered in these fields, the respective premium is calculated with the benefit limited to the specified value. If there are values entered in both the Maximum monthly benefit and Maximum aggregate benefit, the resulting coverage should be the lower of the two values. Limit decimal accuracy for premium calculations This field allows the number of decimal places that the application will use to determine the rate to use to calculate the insurance premium to be specified. The options here are 2, 3, 4, 5, and 6. If nothing is entered, the default of 6 will be used. Insurance forms options Term to print on Credit insurance forms This will allow the plan to be set up to specify which term to print on the credit insurance form. The options are listed below. Check with your insurance company if they are unsure what value to use. To illustrate these, an example will be used. Assume that you have a 60-month installment loan with 40 days to the first payment. Options Resulting term Nearest whole month rounded, not including odd days 60 Nearest whole month rounded, including odd days 60 Whole month plus days, including odd days 60 months & 10 days Partial month rounded, including odd days 61 Partial month rounded, not including odd days 60 ARTA Lending Calculations Page 14 of 21
Disclose coverage on quarterly, semiannual, and annual payments as level insurance? This will allow payments that are made less frequently than monthly quarterly, semiannually, or annually to be specified on their credit insurance form as level insurance versus decreasing. The option is only applicable for gross coverage. This does not affect how the premium is calculated. This prompt only indicates where the premium will be displayed. Amount of insurance printed on credit insurance forms This option only applies to net payoff plans. The options are to disclose only the Loan Amount or to disclose the Loan amount plus additional months of interest/payments (Loan Amount Plus). These two will print the same value if the net payoff plan wasn t setup to insure any additional month of interest or additional payments. This selection will not affect the premium calculation. ARTA Lending Calculations Page 15 of 21
Fees Fees for Real Estate loans follow the format of the closing documents on real estate transactions. Their appropriate RESPA line number is listed with these fees. Dollar versus Percent fees Fees can be entered as a dollar amount or a percent of the loan amount. If a fee should be charged as a certain dollar amount, the amount should be entered in the value column and leave the default of $ sign in the $/% field. Likewise, if a fee should be calculated as a certain percent of the loan amount, the percent will need to be entered in the value column and a % sign in the $/% field Collected The collected field is the place where you indicate how the fee should be paid. The fee can be paid by adding it to the amount requested, subtracting it from the proceeds, or paying it in cash. POC POC stands for Paid outside of closing. This is used on real estate loans to indicate that the corresponding fee was paid before closing. HOEPA/STATE HOEPA stands for Home Ownership and Equity Protection Act. This should be selected when the fee affects the HOEPA federal fee trigger. The STATE column should be selected for fees that affect the STATE fee trigger. Misc. fees (excluded from the finance charge) Fees that are listed under the title of Misc. Fees do not affect the Annual Percentage Rate (APR). Additional finance charge Additional finance charges are fees that do affect the APR. These fees were called Prepaid fees in LP+. Pro rata charge A Pro rata charge is a charge that affects the APR and falls under Additional finance charges. This charge is always paid with each payment. The amount of the charge is divided up equally among the payments. There is an option in policy that allows the odd cents to be charged with the final payment. There are more details on this option on page 18. Other fees The section for Other Fees is a place to enter fees that were not already listed under Misc. Fees or additional finance charges. There is a column to indicate whether these fees affect the APR and how these fees are paid. The options for paying the fees are the same as those for the Misc. fees and additional finance charges. ARTA Lending Calculations Page 16 of 21
Policy There are several parts of the policy section that do not affect calculations, but will be printed on the forms. The only portion of this section that affects the calculations is labeled calculation options. This document will focus on that section. Applicable law state/document set The state chosen here will also indicate what policy items are available for your state. For example, some states do not allow minimum interest to be charged as a fee in lieu of interest. It will also affect which accrual methods are available. Calculation options Negative amortization method The options for negative amortization method are Simple (US Rule) or Compound. If Simple is chosen any unpaid interest interest that is not able to be paid by scheduled payment will be placed in a interest pool and not added to the principal balance. If Compounding is chosen, the unpaid interest is added back to the loan account balance. The default in ARTA Lending is Simple (US Rule). Payment rounding The options are to round to the nearest $.01, up to the nearest $.01, or down to the nearest $.01. The payment rounding may be helpful when trying to match the host accounting systems. If the mainframe (or host accounting) system rounds payment up or down, ARTA Lending has the option to do that as well. Minimum interest fee in lieu of interest versus prepayment penalty There are two minimum interest fields. The first field (if applicable by the state) is the fee in lieu of interest field. This field affects the calculations. If the total interest on the loan is less than the value entered into the Minimum interest (fee in lieu of interest) field, the value in the minimum interest field will be charged as interest on the loan. However, the value in the Minimum interest (prepayment penalty) field will not affect the calculations. The minimum interest (prepayment penalty) fee could be charged on the loan if the loan is paid off early and the interest collected is less than the value entered in the minimum interest (prepayment penalty) field. Split Rate Setup If the state selected allows for the use of split rate, then the split rate information may be entered in this setup area. There are fields on the screen for dollar amounts or months and the associated term for each of the three tiers. Once entered in Policy setup area, this information will not be asked for again. When split rate is chosen when entering a loan, then the split rate information from Policy will be used. The split rate information to can be edited to accommodate changes, such as regulatory changes, that may arise. ARTA Lending Calculations Page 17 of 21
Pro rata charge collect odd cents with final payment This option allows you to pay the odd cents with the final payment when the pro rata charge is not evenly divisible by the number of payments in the loan. Therefore, the total pro rata will be equal to the amount specified. If this option is not selected, the total pro rata charge may not equal the entered amount for the pro rata charge. For example: The 36-month loan has a $50 pro rata charge. If this option were selected, then the pro rata charge with the first 35 payments would be $1.38 and the pro rata charge with the final payment would be $1.70. The total pro rata charge would then be $50.00. However, if this option is not selected, each of the 36 payments would have a pro rata charge of $1.38 and the total pro rata charge would be $49.68 If the first payment is due on the last day of the month, make all subsequent payments occur on the last day of the month If the first payment occurs on the 28 th, 29 th, or 30 th of a month and that is the last day of the month, then selecting this option will cause all subsequent payments to occur on the last day of each month. If this option is not selected, the payments will always occur each month on the same day as the first payment. For example: The first payment date is February 29, 2000. If this option is selected, the following payments would occur on the last day of the month -- March 31, April 30, May 31, etc. If this option were not selected, the remaining payments would occur on the 29 th of the month. The exception here would be February where the payments could occur on the 28 th. Disclose the final payment separately for installment loans Often, the final payment on an installment loan is different than the regular payment to account for remaining interest and charges such as the pro rata charge. If this option is selected, then the final payment would be disclosed separately and show that the final payment may be slightly larger or smaller than the regular payments. If this option is not selected, then the final payment will not be listed separately and the final payment will not be disclosed differently than the regular payments. ARTA Lending Calculations Page 18 of 21