Friday is Feb. 28, but it’s not the last day of February as 2020 is a Leap Year, adding an extra day in the second month of the year.
To help finance companies consider an array of potential issues stemming from this circumstance that happens every four years, Carleton compliance associate Brian Kelly addressed three important questions.
“As compliance officials and loan calculation software providers know, Leap Day isn’t a free day. In fact, it can be more troublesome than many would care to discover,” Kelly wrote in posting on Carleton’s website.
Kelly then addressed those three questions.
Does interest accrue on the balance at 1/366 of the annual interest rate? Or 1/365?
Kelly responded by asking another question, “Is it ‘fair’ for the creditor to get a lesser charge all year long when Leap Day only occurs in February?
“An illustration: a consumer loan or retail installment sales contract originated in December of a Leap Year involving simple interest at 1/366 daily rate will always receive less charge than any identical transaction originated the following three years on the exact same date and time,” he continued. “That does not seem fair or just.”
Does a finance company or lender’s servicing system collect the actual interest agreed to by contract?
That question prompted Kelly to ask yet another question, “If a 1/365 annual interest rate is used to calculate daily charge, does the creditor intend to collect interest on Feb. 29 or not? If the consumer lending organization does charge interest on Leap Day, does that align with their contractual disclosures?
“Frankly, these are questions that may even be too advanced,” Kelly acknowledged. “Do all servicing systems even have the capability of accounting for Leap Day?”
If a payment is received and posted on Leap Day, is it recognized as 2/29/20?
For banks and institutions that ignore Leap Year altogether and have coded their loan origination and loan servicing software systems to do the same, Kelly pondered what actually occurs on Leap Day.
“Seems like it would make posting a payment on Feb. 29 very problematic,” he said. “This may seem tongue-in-cheek, but should that bank even be open on Feb. 29?”
Kelly reiterated that Carleton offers a variety of tools that can help finance companies with Leap Year and other compliance matters.
“These are just a few of the types of questions that intrigue me now regarding our free day,” Kelly said.
“My largest wonder is whether it’s all simply an academic exercise or does Leap Year indeed impact the nuts and bolts of principal and interest? Either way, there definitely are ramifications for having a year which is 365 days, 5 hours, 48 minutes and 46 seconds long,” he concluded.