DMS Partners Grow with the Help of Carleton's Calculation and

					          A timely digest of
        regulatory changes,
     specialized reports and
      important information
           for the consumer
            finance industry.
                                                                                                                                                                      SPRING 2011

                                      DMS Partners Grow with the Help of Carleton’s
                                      Calculation and Document Preparation Services
                                         As existing and new Dealer Manage-            president of AVAbahn. “Carleton’s compli-         PUBLISHER’S NOTEBOOK
                                      ment System (DMS) software providers             ance expertise and LoanSmart software              This is a dynamic industry. Every day
                                      begin to develop their next generation           solutions ensures that MSDMS™ will pro-        there are new technological developments
                                      internet-based solutions, they recognize         vide accurate lending and leasing compu-       that enhance speed, productivity, accuracy
                                      the importance of being able to support          tations and documents in compliance with       or service delivery. These enhancements are
                                      the calculation and document prepara-            all regulations nationwide.”                   especially valuable when they are the result of
                                      tion requirements of major captives, auto        DockMaster                                     partnership collaborations.
                                      lenders, aftermarket add-ons and state             As a leader in marine lending automation,
                                      agencies.                                                                                            The exciting news about Carleton’s
                                                                                       DockMaster recognized the importance of        partnerships with AVAbahn and Dockmaster
                                         Carleton is helping its partners grow their   having a long-term solution for provid-
                  INSIDE              business with its cost-effective compliant       ing compliant computations. DockMaster
                                                                                                                                      detailed in the story on this page clearly
                                                                                                                                      demonstrates the synergistic impact of
              THE POWER OF
              THE SCHEDULE
                                  2   calculations. Many of these partners also        Marine Management Software’s exclusive         collaboration. In both cases, our LoanSmart
                                      rely on Carleton’s seasoned SmartDocs            “Boat Sales &
   Amortization schedules are                                                                                                         software provided the ideal platform for power-
more than payment allocation          software services for producing the clos-        F&I Module”                                    ful new systems to support the dealer networks
   tools, they document that a        ing documents associated with a vehicle          provides a comprehensive retail financ-        of these companies and thus maximize sales
calculation routine has arrived       sale or lease. Carleton’s extensive library      ing software solution to marine dealers
        at the “right payment”.                                                                                                       and profit opportunities.
                                      of state documents and its ability to inte-      across the country. The robust calculation
                                      grate add-on provider’s documents gives          capabilities of Carleton’s SmartCalcs al-           We’ve also had the opportunity to
          Changes to Illinois
                                  3   its DMS partners a compliant solution that       lows the dealer additional point of sale op-   collaborate with a number of major private
                                      meets all the docu-                                                       tions that include    college lenders this past year. Our Smart
       Consumer Installment
                  Loan Act.           ment needs of their                                                       all debt protection   Calcs Student Lending software supports the
                                      dealers.                                                                  products and af-      new disclosure requirements and easily inter-
   CaRLETON’S STUDENT             4     AVAbahn       and                                                       termarket      add-   faces with a private lender’s loan origination
                                                                                       ons. “Having Carleton as a partner means       system, making the process smooth and easy.
  SmartCalcs student lending          DockMaster are two of Carleton’s newest
       software supports all                                                           that our dealer clients will not only have     (See story on page 4).
                                      partnerships taking advantage of its calcu-
         the new disclosure                                                            the security of knowing that their loan cal-        As we noted in the first sentence of this
                                      lation and document preparation support.
  computation requirements.
                                                                                       culations are accurate and compliant but       column, ours is a dynamic industry. We’re
                                      AVAbahn                                          will also make their Finance & Insurance       excited about our partnerships with so
                                         AVAbahn’s Dealer Management System
                                                                                       products more robust and saleable,” noted      many great companies and we’re looking
                                      for Microsoft Dynamics AX (MSDMS™)
                                                                                       Cam Collins, president & CEO of Exuma          forward to forging relationships with even
                                      has integrated Carleton’s SmartDocs and
                                                                                       Technologies, Inc.                             more of you. The team here at Carleton
                                      SmartCalcs software into their
                                                                                       For more information                           thrives on this dynamism and is eager to help
                                      new DMS. Carleton’s LoanSmart
                                                                                         To find out more about Carleton’s            with your needs.
                                      software services allows AVAbahn
                                      to compliantly support all the lend-             LoanSmart software and support ser-                 We’re also excited about our new offices in
                                      ing and leasing computations and                 vices, call Carleton’s sales department at     South Bend immediately across the street from
                                      documents generation related to sales or         800-433-0090 or visit our website at           the University of Notre Dame in a new complex
                                      lease transactions for their dealerships.                            called Eddy Street Commons and just down the
                                                                                                                                      block from the University’s new Center for Nano
                                        “We’re very pleased to have the oppor-
                                                                                                                                      Science and Technology. Please make note of
                                      tunity to partner with Carleton and lever-
                                                                                                                                      our new address on the back of this newsletter.
                                      age their 40 years of experience in the
                                                                                                                                      And, if you’re in town, we’d love to show you
                                      auto lending industry,” said Richard Ward,
                                                                                                                                      our new space.

                                      Serving consumer lending and credit insurance providers with full-service, one-stop solutions.
                                   The Power of the Schedule

                                  These days it seems like the vast majority of authoritative sources     pass a State Trooper camouflaged and hidden on the side of the
                                referenced to support any position come from the internet in some         road. After I exhale and let my foot off the accelerator from 62 mph,
OUT ON THE                      form or another. So when we began this article about the vir-
                                tues of the amortization schedule, we turned to the omnipresent
                                                                                                          for some reason the trooper has never followed me. Must have been
                                                                                                          distracted I guess.
STREET                          “Wikipedia” on the web. The definition of an amortization schedule          The moral is I didn’t get a ticket but I wasn’t in the right either.
                                from that source is:                                                      That may seem like a silly analogy but simply averting detection isn’t
  Carleton staff take part in      “… a table detailing each periodic payment on an amortizing loan       synonymous with being unequivocally compliant.
various conferences and an-     (typically a mortgage), as generated by an amortization calculator.”        Every lender should have the confidence and contentment of
nual meetings throughout the      Of course it is impossible to fully understand an amortization          knowing their disclosure calculations are accurate, precise, and
year. We are pleased to be      “schedule” without the definition of “amortization”:                      genuinely credible.
involved in the following:        “… the process of paying off a debt over time through regular              The one indisputable proof that a payment is correct is an
                                payments. A portion of each payment is for interest while the remain-     amortization schedule that utilizes all the rules and parameters fit-
• AFSA 15th Vehicle             ing amount is applied towards the principal balance …”                    ting the lender’s philosophy of interest earnings and accrual.
  Finance Conference              We certainly have no objections to this very basic definition but         Take the $172.54 payment stated earlier in the article. For a
  San Francisco –               restricting the value of an amortization schedule in the lending          $1,000 loan accruing interest at 12 percent annually and repaid in
  February 2011                 calculation business in such a manner is a little like confining          six consecutive equal monthly payments.
• NADA Convention & Expo        “automobile” to a “four wheeled machine that gets you from place
                                                                                                                     Payment Allocation – $172.54
  San Francisco –               to place”.
                                                                                                          Pmt. No. Beg. Bal. To Interest To Principle                End Bal.
  February 2011                 Definite Proof of “Right Payment”                                            1     $1,000.00   $10.00      $162.54                   $837.46
                                   Most in the industry view an amortization schedule as a tool to           2        837.46      8.37      164.17                    673.29
• AFSA 28th Independents
                                track the allocation of the payment each month to the attributable           3        673.29      6.73      165.81                    507.48
  Finance Conference & Expo                                                                                  4        507.48      5.07      167.47                    340.01
  Miami – April 2011                                                                 portions of inter-
                                                                                                             5        340.01      3.40      169.14                    170.87
                                                                                     est and principal.
• Credit Insurance                                                                                           6        170.87      1.71      170.83                      0.04
                                                                                     It also provides
  Association Spring Meeting                                                         a bit of a road        In a “real-world” scenario, the lender would either collect $1.67 of
  Clearwater, Florida –                                                              map of where         interest, effectively waiving the $.04, the last month or incorporate
  March 2011                                                                         a     loan/trans-    an odd final payment of $172.58 into the original calculations and
• Consumer Credit Insurance                                                          action stands at     disclosures. Either of those measures will ensure the final balance
  Association, 60th Annual                                                           any point in time    of the transaction is 0.
  Meeting, Tucson –                                                                  based on how           What the above illustration represents is a straight and pure
  May 2011                                                                           the loan was         amortization schedule of the loan disclosure data as an analytical
                                                                                     scheduled to be      compliance tool. The positive yet small balance of $.04 would lead
• CIMRO Annual Conference
                                paid out. While a schedule certainly does all those things, it also has   one to believe the $172.54 payment is acceptable and accurate.
  Boston –
                                a much larger purpose for those of us in the calculation business,        The common rule of thumb is that a positive balance that is less than
  June 2011
                                it serves as the one definitive proof that a calculation routine has      or equal to $.01 x the number of payments is acceptable.
• AFSA Government               arrived at the “right payment.”
  Affairs Forum, Denver                                                                                   Perform “sure-fire” test
                                  You have heard me opine many times in the past about all the              The sure-fire test is to add a penny and amortize the same data
  – June 2011                   varying parameters that can produce distinctive payments for              using a $172.55 monthly payment. The results from that adjustment
• AFSA 94th Annual Meeting      the same set of loan data. Even understanding that concept, any           yield the following schedule:
  Irving, Texas –               developer of lending software has to have a vehicle for convincing
  October 2011                  the user/lender/regulator why $172.54 represents the proper                               Payment Allocation – $172.55
                                payment for a given loan.                                                  Beg. Bal.        To Interest  To Principle              End Bal.
                                                                                                           $1,000.00         $10.00        $162.55                 $837.45
                                  When two tools produce payments of $172.54 and $172.51 for a                837.45            8.37        164.18                  673.27
                                given loan how do you tell one is correct and one is not? Is the pay-         673.27            6.73        165.82                  507.45
                                ment from whatever tool/system that has been in the office longest            507.45            5.07        167.48                  339.97
                                the “right” answer? Is the new tool always wrong? Or vice versa?              339.97            3.40        169.15                  170.82
                                                                                                              170.82            1.71        170.84                    (0.02)
                                Merely averting detection?
                                   Our customer service staff fields such questions every day. The          The negative final balance indicates an overcharge at 12
                                unifying theme for the majority of these calls is usually something       percent for $1,000 and a six-month term. Remember that this is
                                like “I get a different payment on our “XXX” system and we’ve used        the schedule as a diagnostic tool and not as a resource for the
                                that for 10 years and been audited and never had a problem.”              servicing of the loan.
                                  On the face of things, that appears to be a sound argument. How-          The negative balance is always a warning sign and indicates that
                                ever, the best analogy I can provide is the ride home from work. I am     the payment applied on the schedule is too large for the correspond-
                                usually in a hurry to get home and often find myself driving a wee bit    ing interest rate and loan balance.
                                faster than the 55 mph posted speed limit. I’ve done that regularly         These companion schedules prove that $172.54 is indeed the
                                for the 25 years I’ve worked at Carleton. On occasion, I suddenly         “right” payment for a $1,000 loan accruing interest at 12 per-
                                                                            Effective State Changes

cent annually. The $172.54 is the closest dollar and cent payment
that can be computed without overcharging. The schedule also                 ILLINOIS
prescribes to the following parameters and policies desired by                Various provisions of the Consumer Installment
the lender:                                                                 Loan Act, the Illinois Financial Services                              The following
• All payments are equal in amount (used often when payment books           Development Act, and the Payday Reform Act
                                                                            have been amended by the passage of HB 537                             information is
  are issued)
                                                                            which is effective March 21, 2011.                                     presented by the
• The interest accrues on monthly/periodic basis where the
  charge from November 1 to December 1, and all subsequently                  Consumer Installment Loan Act
                                                                                                                                                   Carleton Research
  scheduled payment dates, is 1/12 of the annual rate of                      • The maximum loan amount has been increased to $40,000.
  12 percent.                                                                 • Imposition of a 36% annual percentage rate cap; title loans        Department. In order to
• Interest is 5/4 (near) rounded each month to a two place dollar and            are exempted from the rate cap.
                                                                                                                                                   keep our customers
  cent value                                                                  • Mandates that loan payment must be fully amortizing and
• Any specific line on the schedule can be validated by use of                   repayable in substantially equal and consecutive payments.        abreast of what is
  I=PxRxT                                                                     • Creates a “small consumer loan” section of the Act for loans
                                                                                                                                                   happening in the
  So, where does the $172.51 fit in? That payment is “right” for daily           of $4,000 or less.
interest accrual and a $1,000 loan accruing interest at 12 per cent           • The annual percentage rate cap for small consumer loans if         consumer credit and
for six months:                                                                 the loan amount does not exceed $1,500 is 99%.
                                                                                                                                                   credit insurance
            Payment Allocation – $172.51                                      • Creates a new maximum rate structure for small consumer
 Pmt. No. Beg. Bal. To Interest To Principle                 End Bal.            loans exceeding $1,500 that includes an acquisition charge        industries, the
    1     $1,000.00     $9.86     $162.65                    $837.35             and monthly handling charges based on the loan amount.
    2        837.35      8.53      163.98                     673.37                                                                               following law changes
                                                                              • The acquisition charge on a small consumer loan is only
    3        673.37      6.86      165.65                     507.72            refundable within the first 60 days of the loan term.              have been compiled
    4        505.72      4.67      167.84                     339.88
    5        330.88      3.46      169.05                     170.83          • A small consumer loan must have a minimum repayment
                                                                                term of 6 months.                                                  for your review. Please
    6        170.83      1.68      170.83                       0.00
                                                                              • Prohibits a lender from extending a small consumer loan to a       check to see if any of
  *Daily interest, accrual is dependent on specific dates. The contract          borrower if the total monthly loan payment exceeds 22.5% of
date is in November and ignores leap year when it occurs.                        the borrowers gross monthly income.                               the listed changes will
  This represents one of those rare scenarios where six equal monthly         Financial Services Development Act                                   impact your operations.
payments will cause the loan to liquidate exactly to zero. More often         • A provision added to the definition of “financial institution”
than not, without employing an odd final payment amount, the final              that lenders licensed under the Consumer Installment Act or
balance of most loans is small positive value. The general rule of              Sales Finance Agency Act are prohibited from charging an
thumb is that as long as the final balance is less than $.01 x number           annual percentage rate exceeding 36%.
of payments, it is most likely an acceptable balance. Adding a penny
                                                                              Payday Reform Act
to the disclosed payment, as we did earlier, is the one true test of
whether level payments for the loan term properly amortize the debt.          • Creates the term “installment payday loan” which is included
                                                                                 as part of the definition for the general term “payday loan”.
Credible Validation of Payment
                                                                              • An installment payday loan has a term of not less than 112
   The parameters of presumed interest accrual and corresponding
                                                                                days and not greater than 180 days.
calendar are a key component to credible validation of the payment.
It is often taken for granted as inconsequential or viewed as a generic       • An installment payday loan must be fully amortizing
component to the transaction. In reality, we regularly employ up to 10          and include payments that are substantially equal and
different calendars that affect interest accrual and the corresponding          consecutive.
payment calculated. That type of diversity in the industry dictates the       • The payments in an installment payday loan must have a
need for an empirical method of determining which payment is truly              minimum time period of 13 days and a maximum time period
“right” for the parameters and data presented.                                  of one month between scheduled due dates.
   For example, the footnote on the last schedule illustration brings to      • A prohibition on making a payday loan to a borrower if the
light the point that daily or per diem interest is date dependent. The          total of all existing payday loan payments in the first calendar
payment for the loan data with a contract date in November will differ          month of the loan excess the lesser of:
from a contract date in December. It’s the nature of the beast. Higher        a) $1,000;
balances subject to 31 days of interest early in the contract produce         or
a different interest accrual profile than a loan starting in a month that     b) 25% of gross monthly income if one or more payday loans
has 30 days. That parameter characteristic must be recognized before
                                                                              c) 22.5% of gross monthly income if one or more installment
a proper payment can be either computed or validated.
                                                                                  payday loans.
  The concept of using an amortization schedule as a validation tool can
                                                                              d) 22.5% of gross monthly income if a payday loan combined
be extended into other hard to grasp concepts such as credit insurance
                                                                                  with an installment payday loan.
premiums. Since a schedule tracks the scheduled out-standing principal
                                                     Continued on page 4                                                    Continued on page 4
 Carleton’s Student Lending Software Helps
 Private Lenders Comply With appendix H
    Effective February 14, 2010, private lenders were required      loans, deferred payments, interest only and/or equal princi-
 to provide more complex disclosures when making private            pal and interest payments, graduated payments, and optional
 educational loans. Title X of the Higher Education Opportunity     capitalization of deferred interest, either quarterly, annually or at
 Act (HEOA) amended the Truth-in-Lending Act and Regulation         the end of the grace period. The SmartCalcs software can quickly
 Z and will require lenders to display a more detailed itemiza-     and easily interface to a private lender loan origination system
 tion of the Amount Financed and a more complex Estimated           and perform all the required computations in compliance.
                                        Repayment Schedule &           Iowa Student Loan, College Foundation Inc, and Campus
                                        Terms. The Itemization      Partners are just some of the
                                        of the Amount Financed      private lenders and service pro-
                                        must disclose the mul-      viders that are using Carleton’s
                                        tiple cash advances         SmartCalcs Student Lending Software to meet
                                        (Disbursements) and         their disclosure requirements. Walter
                                        all upfront fees . The      Witthoff, senior vIce president, from Iowa
                                        Estimated Repayment         Student Loan states, “We have relied on Carleton
 Schedule & Terms must disclose the interest accrued during the     over the years for compliance support.
 deferment period and the payment schedules based on the quot-      When faced with this new disclosure requirement,
 ed rate and highest possible rate. Lenders will be required to     we turned to Carleton for their financial computa-
 provide the new loan disclosure when the loan request has been     tional expertise. We easily integrated SmartCalcs into our loan
 approved and again when the student accepts the final loan.        origination system and met the Appendix H disclosures
    Carleton’s SmartCalcs Student Lending Software support          requirements.” To learn more about SmartCalcs, contact Ken
 sall the new disclosure computation requirements illustrated in    Solnoky at Carleton at 574-243-6040 ext. 241.
 Appendix H including multiple disbursements, grace periods,
 origination and miscellaneous fees, fixed and variable rate

                                                       The Power of the Schedule
   Effective State Changes                             Continued from page 3
   Continued from page 3                                                                                                                              Street-smart,
    • If pre-paid in full, the interest                 balance profile, single premium net payoff credit life can be illustrated by                       software
      refund must be by the actuarial                   applying the monthly life rate to each outstanding principal balance. The sum             1251 N. Eddy St.
      method. The Rule of 78ths is                      of those monthly premiums is the correct single premium charge.                                   Suite 202
      prohibited.                                                                                                                             South Bend, IN 46617
                                                          For most of us, it is much easier to view such illustrations in a dollar and
    The amendments became law as                                                                                                                     800-433-0090
                                                        cent form than to try and revisit our high school algebra skills to understand           Fax 574-243-6060
  PA 96-0936 after being signed by
                                                        where a premium comes from.                                                         www. arletonin .com
  the Governor on June 21, 2010. The
  effective date is 9 months following                    Like so many other issues in the consumer finance industry, the
  becoming law.                                         details surrounding the composition of loan calculations and
                                                        disclosures are often taken for granted. But, to paraphrase a favorite saying
                                                        “the devil is indeed in the details.”
                                                          At the proverbial “end of the day” whether a payment matches
                                                        another system is not necessarily a validation of accuracy and
                                                        precision. Understanding the characteristics that drive the parameters adher-
                                                        ing to a particular lender’s policies and goals is essential to evaluating any
                                                        calculation disclosure. The amortization schedule is a powerful tool that can
                                                        assist in assessing whether desired objectives are being met.

Serving consumer lending and credit insurance providers with full-service, one-stop solutions.

Shared By: