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Is an Initial ARM Disclosure required to have a floor rate (the promissory note has the floor and ceiling rate)? Reviewing 1026.19(b)(2)(vii) and 1026.30(8) (requirements for the credit contract), I see a requirement for a ceiling (maximum interest rate), but I do not see a requirement for a floor. Am I overlooking something, please advise!
Under 1026.19(b)(2)(iii) you’re required to give “an explanation of how the interest rate and payment will be determined, including an explanation of how the index is adjusted, such as by the addition of a margin.”
also:
(vii) Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amortization, and interest rate carryover.Official Interpretation
Paragraph 19(b)(2)(vii)
1. Rate and payment caps. The creditor must disclose limits on changes (increases or decreases) in the interest rate or payment.Does that help?
If the Initial ARM disclosure list the margin, index the loans is tied to, how often the rate can change, initial interest rate, the rate max increase/increase at one time, the rate ceiling, a payment example based on $10,000 at the initial rate, and a payment example based on the maximum interest rate, in your opinion, would this be compliant?
In the past, I always understood the initial ARM disclosure was an estimate, but recently it seems they are expected to match exactly. If the floor in the initial ARM disclosure is less than the floor in the contract (promissory note), I have heard of cases where the examiners are making banks remove or adjust the floor to match the initial ARM disclosure in these situations.I think you’d need the floor, but it has been a while since I’ve looked closely at ARM disclosures. I’ll ask Jack to weigh in.
The full list of the content of the ARM application disclosure is contained in Section 1026.19(b)(2). Section 1026.19(b)(2)vii requires the disclosure of rules including rate and payment limitations, both increases and decreases and ceilings and floors.
The application disclosure is a representative example. If the ceilings or floors are the same for all borrowers then the disclosure reflects those caps. If different borrowers have different rate caps then the disclosure can reflect a range of caps. The disclosures must be updated annually, but can be updated more frequently if the terms of the program change.
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