Question: Why does Exec-amort's APR results differ from Laser Pro?

Date: 10/26/2004

Reply:

Dear Chris:

I ran your sample loan results through the APR Calculator program supplied by the Office of the Comptroller of the Currency and Exec-amort matches their compliance model exactly.

As to the LASER PRO APR result of 7.049%, their answer does not match the APR Calculator results as supplied by the Office of the Comptroller of the Currency. In this example, Exec-amort produces the exact same answer as the APR Calculator program as supplied by the Office of the Comptroller of the Currency.

The APR Calculator program supplied by the Office of the Comptroller of the Currency calculates APR as defined in Regulation Z, Appendix J. This is the defacto standard for APR calculations as Appendix J defines how to calculate the APR using the "actuarial method". Appendix J also states that the APR can be calculated using the US Rule method but Appendix J does not define how to do this.

The US Rule method of calculating the APR differs from the actuarial method only when the periodic payment is less than the period's interest charge. For most loans where the periodic payment exceeds the interest charge for that period, the APR calculated using the US Rule method and APR calculated using the actuarial method would return the same APR value. I am not aware of any formula or method provided by the Office of the Comptroller of the Currency on how to calculate the APR using the US Rule method. As it only would apply to a limited class of negative amortization or reverse loans, I know of no known implementation of the US Rule method of calculating the APR.

In the sample you provided, the monthly payments equal the interest charged so the APR can be calculated by either the US Rule method or the actuarial method and should return the same identical answer of 7.0244%. The LASER PRO's APR result of 7.049% is within the allowed tolerance permitted in APR disclosures but does not come close to the results as provided by the APR Calculator supplied by the Office of the Comptroller of the Currency.

You will have to ask the makers of Laser Pro why their APR result is significantly different than that provided by the Office of the Comptroller. I tried various means to reproduce their answer and was unable to determine an explanation that would account for their discrepancy.

Other items of note:

1. In your table you have a line titled BASIS and it states 365/365 under the LASER PRO heading but the interest calculated is based on a 366 day year (this year is leap year). Execamort's actual/365 method will calculate the interest on a true 365 day year basis. Exec-amort also has actual/actual method to cover the case where an institution collects interest based on a 366 day year during leap years and 365 day year in non leap years.
2. In your table you have a line titled CALCULATION METHOD and it states that Execamort is using the ACTUARY method. This is not correct. Execamort's out of box default is to calculate periodic interest charge based on the US Rules method of interest calculation. Our program also supports the Actuarial Method if you select Interest on Interest.

To recap: Exec-amort can produce an amortization report using either the US Rule method of handling interest payments or can be switched into the Actuarial Method. The way the amortization report handles interest calculation payments is independent of the APR calculations. The APR calculations in Exec-amort adhere to Regulation Z, Appendix J standards.  Appendix J clearly documents the method of calculating the APR based on the Actuarial Method of determining the APR. The method by which the APR is determined is independent of the method by which the amortization report uses to determine the interest charge and the method by which the interest charge is applied against the note. The APR is simply a time-value analysis of the cash flows as defined by the amortization report.

Please let me know if you any further questions.

Sincerely,
David Barker
President