Credit Contracts and Consumer Finance Regulations 2004

9 Calculation of reasonable estimate of creditor’s loss if interest rate fixed for whole 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 = VFP − u

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

v

is calculated in accordance with subclause (3)

n

is the number of payments yet to be made under the fixed rate contract

f

is the number of payments to be made per year under the fixed rate contract

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.

(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.

(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 term that is—

(i)

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

(ii)

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

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. The annual interest rate for the whole term is 12%. Each of the 24 monthly payments is $235.37. 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 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 12 months is 10% (a 12-month fixed rate contract having an interest rate of 10% being closest in term to the 18-month unexpired portion of the term of the fixed rate contract that is to be fully prepaid). Applying the above formula, a reasonable estimate of the creditor’s loss arising from the full prepayment is calculated as follows:

p = $235.37

n = 18

f = 12

i = 0.1

d = 5

u = $3,865.66

formula

LRE = $3,924.23 − $3,865.66 = $58.57

A reasonable estimate of the creditor’s loss is $58.57.

If, however, in the above example the interest rate for fixed term contracts offered by the creditor for a term of 12 months was 15%, then variables v and VFP would be:

formula

LRE would then be calculated as follows:

LRE = $3,780.11 − $3,865.66 = − $85.55.

A reasonable estimate of the creditor’s loss in this case would be zero.

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