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We are having trouble interpreting 1026.17(c)(10) and have been going back and forth with our vendor when trying to verify TIP calculations.
For ARM loans with an introductory rate that is not based on the index and margin that future adjustments are based on and for which there is an adjustment cap – if the first adjustment does not bring us to the fully indexed rate plus margin at time of consummation, do we continue to adjust until that rate is reached or do we only adjust once for the calculation?Consider the following scenario:
3/1 ARM
Intro rate of 1% (not based on the index)
After 3 years, rate is Prime + 4%
Currently, Prime is 3.25%
Adjustment cap is 2%Amort schedule and TIP calc show 1% for first three years, and at the beginning of year 4 it adjusts to 3% due to 2% adjustment cap. However, fully indexed rate plus margin at time of consummation is 7.25%. Do we show a second adjustment at the beginning of year 5 to 5%, a third at the beginning of year 6 to 7%, and then a fourth and final at the beginning of year 7 to max out at 7.25% for the remainder of the loan term? Or would we not adjust again and keep the rate at 3% for the remainder of the loan term?
Again, our basic question is are we required to adjust more than once for the calculation?
Do we show a second adjustment at the beginning of year 5 to 5%, a third at the beginning of year 6 to 7%, and then a fourth and final at the beginning of year 7 to max out at 7.25% for the remainder of the loan term? Yes
In an ARM transaction the regulation says to use the composite rate when calculating the TIP rate. The composite rate according to 1026.17C(c)(1)-10 says the composite rate should factor in the initial rate for as long as it is charged and the rate that would have been applied using the index or formula at consummation for the remaining term. It also says if there are rate caps that those caps should be reflected in the composite rate.
There are some good examples in the commentary – see page 1664: https://files.consumerfinance.gov/f/201311_cfpb_final-rule-commentary_integrated-mortgage-disclosures.pdf
Also here’s the excerpt from the commentary to 1026.17(c)(1)-10:
When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use any index value in effect during the 45 day period before consummation in calculating a composite annual percentage rate.ii. The effect of the multiple rates must also be reflected in the calculation and disclosure of the finance charge, total of payments, and the disclosures required under §§ 1026.18(g) and (s), 1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5), as applicable.
iii. If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the first adjustment, from changing to the rate determined by the index or formula at consummation, the effect of that rate or payment cap should be reflected in the disclosures.
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