Carleton reminded the financial services industry that February doesn’t end until Thursday because it’s Leap Year.

While sales personnel might see the extra day as an opportunity to lift performance, the provider of compliant financial calculations and lending document generation software addressed some complications that can arise when Feb. 29 is included on the calendar.

“While most people consider February 29th to be a ‘free’ day we get every four years, compliance officials and loan calculation software providers know that it can actually be more troublesome than most people would even realize,” Carleton said in a post on its website.

“In the consumer lending industry, the various effects of Leap Day on loan origination, loan servicing systems, and the compliant implementation of proper loan software parameters are quietly downplayed. That shouldn’t be the case,” Carleton continued.

To help finance companies, Carleton raised three questions most often asked when this situation arises every four years.

Does interest accrue on the balance at 1/366 of the annual interest rate? Or 1/365?

“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 for that month than any identical transaction originated the following three years on the exact same date and time. That does not seem fair or just,” Carleton said.

Does a finance company or lender’s servicing system collect the actual interest agreed to by contract?

Carleton acknowledged, “If a 1/365 annual interest rate is used to calculate daily charge, does the creditor intend to collect interest on February 29th 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 — 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 2/29/24?

Carleton wondered, “For banks and institutions that ignore Leap Year altogether and have coded their loan origination and loan servicing software systems to do the same, what actually happens when a payment occurs on Leap Day? Seems like it would make posting a payment on February 29th very problematic. This may seem extreme, but should that bank even be open on February 29th?

“While this may seem like it’s all simply an academic exercise, for many lenders Leap Year does indeed impact the nuts and bolts of calculating principal and interest. It is also critical that Leap Year is properly accounted for between front- and back-end systems to ensure compliance with state and federal regulations,” Carleton went on to say.

For more assistance with these matters, Carleton directed finance companies to this portion of its website.