Recently we have received a number of inquiries from DocMagic customers requesting confirmation that the DocMagic software's treatment of negative prepaid (also known variously as "odd-days" or "per diem") interest for Countrywide-specific loan plans is consistent with Countrywide's policies. In short, the answer is "yes."

In August 2006, Countrywide announced to their correspondents that an "interest credit" should never be used to reduce finance charges because the interest credit was a credit toward the first payment. We confirmed with Countrywide that by "interest credit," they meant negative odd-days or per diem interest. A loan with negative odd-days interest occurs almost exclusively when a loan is "funded into the month" preceding the month in which the first payment is due. For example, if a loan closes on February 26, 2007 with a first payment due on April 1, 2007, normally the lender will collect 3 days interest at closing. However, if the loan closing is delayed for whatever reason until March 2, 2007, and the first payment date remains April 1, 2007, the lender will credit back the equivalent of one (1) day's per diem interest at the closing.

Normally, the DocMagic software operates such that if there is a credit to the borrower of some amount of odd-days interest, there is a corresponding reduction in prepaid finance charges by the amount of the credit, which in turn results in a lower stated APR. Countrywide's policy, however, is for the crediting of odd-days interest to the borrower to have no effect on prepaid finance charges or the loan APR calculations. In effect, a credit of odd-days interest to the borrower is ignored for finance charge and APR calculation purposes. Please note that both approaches are generally permissible under Regulation Z. (See 12 CFR 226.17(c)(4) and the Official Staff Commentary thereto.)

The necessary programming changes to comply with Countrywide's announced policy have been in effect for quite some time now. So long as you select a Countrywide-specific loan plan, if a loan has negative odd-days interest, no deduction is made from finance charges, nor is the negative odd-days interest amount taken into account for APR calculation purposes. Please note, however, that the amount of the negative odd-days interest will continue to appear in the Itemization of Amount Financed, the HUD-1 and any other documents that normally display per diem interest (e.g., closing instructions, funding worksheets and the like).

Please feel free to contact the DocMagic Compliance Department if you have any questions regarding the content of this article.