Calculation of APR

Context

Regulatory changes to European directives and their national transposition have provided further details regarding the methods used to calculate APR/AAR information in mortgage loan offers. The authorities have been paying particular attention to this contractual information for a number of years. An increase in customer disputes has been observed due to companies’ sometimes non-compliant practices. These disputes generate legal risk with significant financial consequences. Banks have made significant provisions to cover this risk.

Objective

In response, banks are seeking to specify the standard for calculating APR and AAR in accordance with the regulations in force, as well as the standard for presenting information to customers, and to assess the consequences of changes to these new calculation rules (costs, risks, IS impacts, etc.).

Results

Through their analyses, the Ares & Co teams were able to overhaul the method used to calculate APR/AAR through:

• Definition of the procedures for calculating APR/AAR following analysis of the regulations
• Production of a macro-plan for implementing the target method and evaluation of the associated costs and lead times based on analysis of the consequences of a modification of the calculation formula on the information systems and the publication of documents (calculation algorithms, depreciation tables, etc.)
• Production of a file presenting the opportunities involved in making changes to the calculation method and the risks involved in non-compliance

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