Is your mortgage interest calculated daily?

A major purpose of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted after the financial crisis, was to create the Consumer Financial Protection Bureau. One of the new agency’s major goals was to be an improved system of mandatory disclosures to mortgage borrowers.

Now in its eighth year, the CFPB has yet to recognize, let alone fix, the insidious mortgage lending practice of charging interest daily instead of monthly while not disclosing this in any way that a borrower would understand.

In a recent column on this subject, I pointed out that borrowers who had daily interest mortgages but didn’t realize it can easily find that their loan payoff date keeps moving further and further away. Neither the CFPB’s new Loan Estimate disclosure, designed for shoppers, nor its Closing Disclosure for borrowers reveals whether interest is calculated daily or monthly.

This festering sore of the mortgage system must be fixed. Here’s how to do it:

On new loans, both the aforementioned disclosures should indicate whether the loan accrues interest daily or monthly. If it is daily, the disclosure should include the daily rate, an illustration of how it is calculated, an explanation of how the monthly payment is allocated between interest and principal, and an explanation of the interest deficit account. In addition, both disclosures should have a table that shows when the daily rate loan will be paid off if the borrower consistently pays one, three and five days late, and one, three and five days early.

It is possible that these disclosure requirements will mean that no more daily interest mortgages will be written. If the only rationale for these mortgages is that they allow borrowers to be hoodwinked, that is what we should expect to happen. However, some borrowers can make good use of daily interest mortgages and would select them if given the choice. This is why the preferred remedy for abuse is disclosure rather than prohibition.

Existing daily interest mortgages present a very different problem because the damage already done can’t be undone. However, further damage can be limited by mandated changes in servicing system disclosures. The core requirement should be that the daily interest accrual feature should be made obvious rather than obfuscated. Showing total interest for the month without any indication of how it is calculated is obfuscation and should not be permitted.

Since the prospects are not bright for a public policy fix anytime soon, existing borrowers with daily interest mortgages are on their own. To help them, I have a daily interest spreadsheet on my website. It is called Monitoring Amortization of a Simple Interest Loan. Borrowers can use it to reproduce the day-today history of their mortgage, or they can proceed as if the loan is a new one by using the most recent balance as the loan amount. If they elect that option, the payment amount would remain as it was. In entering future payments, users must take care to enter them on the day they are posted by the lender, not the day they were sent.

The CFPB has yet to recognize the insidious mortgage practice of charging interest daily.