How should a bank handle errors in its annual rate change notices on ARMs? If we made an error in calculating our notices and collected more than was allowed by the note are we required by Regulation Z to reimburse the customer for the overcharge, or is it a management decision based on our civil liability to our customers?

Also, if a bank makes an error on the notices and charges less than it should have is this a violation of Regulation Z? While I understand that this type of error would be to the customer's advantage, wouldn't it still be some sort of technical violation because the notice didn't accurately reflect the terms of the legal obligation required by 226.17(c)?

1. I'd be more worry about the cnsequences of a breach of contract, which it appears you have. You should contact your attorney to get advice on how to best handle this under your state laws.

2. See #1.

Dan's right--Reg. Z is not an issue here and you should get legal advice before acting. If you are violating the rate/payment change terms of your note, you will need to calculate the amount of excess interest you have collected and refund it, probably with interest (at your state's legal rate) on the refund amount.