Carleton, Inc.
Consumer Lending Software

Is It Really a 360 Day Year?

Whenever, in the discussion of consumer credit calculations, I hear someone say "Well, that's a 360 day year,"  I ask myself "Is it really?" and "Why would you want to craft your disclosure calculations to conform to that in the 21st century".  The concept of the "360 day year" is a bit like the energizer bunny:  No matter its age, it goes...and it goes...and...  well, you get the idea.
 
In this day and age when your cell phone most likely has more processing power, memory and storage than most mainframe computers of 35 years ago, why would anyone want to build a system that ties the compliance of their calculations with a method that, in its purest form, creates an artificial 29th and 30th of February most years?

I think one component of this frame of mind is the erroneous belief that Appendix J of Regulation Z "prescribes a 360 day year" to properly compute an APR. Not so. The language in Appendix J merely states that "All months shall be considered equal". There are no instructions to skip the 31st of a month when it happens or to create two days in February.

This would appear to be a danger zone for many origination calculations in light of the CFPB's professed intent to ensure front end origination calculations conform to, and are consistent with, the back end servicing/processing calculations.  The practical implication of servicing the artificial machinations of the “360 day year” is quite significant.

If that's the case, consumers will get an interest accrual holiday during servicing seven times a year and pay interest for two non-existent days each February. Does this really seem like the core of a sound cutting edge compliance program?

Posted on Dec 07, 2012