Credit Contracts and Consumer Finance Regulations 2004

11 Calculation of reasonable estimate of creditor’s loss if interest rate fixed for part of term

(1)

For the purposes of section 54(1)(a) of the Act, a reasonable estimate of a creditor’s loss arising from a full prepayment of a fixed rate contract may be determined in accordance with the following formula:

LRE = VFPu

where—

LRE

is the reasonable estimate of the creditor’s loss arising from the full prepayment

VFP

is the value of forgone payments calculated in accordance with subclause (2)

u

is the unpaid balance at the time of the full prepayment.

(2)

The value of forgone payments is calculated in accordance with the following formula:

formula

where—

VFP

is the value of forgone payments

p

is the amount of each payment payable under the fixed rate contract during the fixed interest period in which the contract is fully prepaid

v

is calculated in accordance with subclause (3)

n

is the number of payments yet to be made under the fixed rate contract during the fixed interest period in which the contract is fully prepaid

f

is the number of payments to be made per year under the fixed rate contract during the fixed interest period in which the contract is fully prepaid

i

is the annual fixed interest rate determined in accordance with subclauses (4) and (5) and expressed as a decimal fraction

d

is the number of days between the payment due date that immediately precedes the date of full prepayment and the date of full prepayment

EB

is the expected unpaid balance at the end of the fixed interest period in which the fixed rate contract is fully prepaid calculated in accordance with subclause (6).

(3)

The variable v is calculated in accordance with the following formula:

formula

where—

i

is the annual fixed interest rate determined in accordance with subclauses (4) and (5) and expressed as a decimal fraction

f

is the number of payments to be made per year under the fixed rate contract during the fixed interest period in which the contract is fully prepaid.

(4)

The annual fixed interest rate i is the annual fixed interest rate that at the date of full prepayment of the fixed rate contract the creditor usually offers on a fixed rate contract that—

(a)

is of the same or a similar type as the fixed rate contract that is to be fully prepaid; and

(b)

has a fixed interest period that is—

(i)

equal to the unexpired portion of the fixed interest period of the fixed rate contract that is to be fully prepaid; or

(ii)

closest to the unexpired portion of the fixed interest period of the fixed rate contract that is to be fully prepaid, whether shorter or longer (if the creditor does not offer a contract with a fixed interest period equal to the unexpired portion of the fixed interest period of the fixed rate contract that is to be fully prepaid).

(5)

If more than 1 annual fixed interest rate applies under subclause (4)(b)(ii), the annual fixed interest rate i is the higher or highest of those annual fixed interest rates.

(6)

The expected unpaid balance at the end of the fixed interest period is calculated in accordance with the following formula:

EB = u + ICTP

where—

EB

is the expected unpaid balance at the end of the fixed interest period in which the fixed rate contract is fully prepaid

u

is the unpaid balance at the time of the full prepayment

IC

is the total amount of the interest charges that would have been paid in accordance with the contract during the unexpired portion of the fixed interest period in which the fixed rate contract is fully prepaid

TP

is the total of all payments that would have been paid in accordance with the contract during the unexpired portion of the fixed interest period in which the fixed rate contract is fully prepaid.

(7)

If a reasonable estimate of a creditor’s loss arising from a full prepayment determined in accordance with the formula in subclause (1) is less than zero, then the reasonable estimate of that creditor’s loss arising from the full prepayment is zero.

Example

A debtor is advanced $5,000 under a fixed rate contract. The contract is for a term of 2 years. For the first year the interest rate is fixed at 12% and the 12 monthly payments are $235.37. For the remainder of the term a floating interest rate applies. Full prepayment of the contract is made after 6 months and 5 days (5 days since the last payment due date) when the unpaid balance is $3,865.66. At the date of full prepayment, the annual fixed interest rate that the creditor usually charges on a fixed rate contract of the same or a similar type as the fixed rate contract that is to be fully prepaid with a term of 6 months (6 months being the nearest term to the unexpired portion of the fixed interest period of the fixed rate contract that is to be fully prepaid) is 10%. During the unexpired portion of the fixed interest period of the fixed rate contract that is to be fully prepaid, total payments of $1,412.22 would have been payable ($235.37 x 6 months), including total interest charges of $195.67. Applying the above formula, a reasonable estimate of the creditor’s loss arising from the full prepayment is calculated as follows:

formula

A reasonable estimate of the creditor’s loss is $31.79.

Note: For the purpose of this example only, calculations have been rounded to 9 decimal places.

Regulation 11: substituted, on 1 April 2005, by regulation 4 of the Credit Contracts and Consumer Finance Amendment Regulations 2004 (SR 2004/359).