We are doing a 2nd mortgage loan for consumer home improvement. It is an adjustable rate loan starting with 6.50% and adjust every 5 years. When preparing our Trid disclosures we are getting a warning on our application checklist (“DEEP DISCOUNT” This loan contains a deep disocuont feature. This feature is only available for adjustable rate mortgage transactions. For all other consumer loans, the variable rate example in your Truth in Lending disclosure will be incorrect. Please adjust the periodic interest rate cap to avoid creating a deep discount feature) I feel sure it is where Prime is so high. We have our rate to only adjust by no more than 1% when it adjust. Do we need to change anything? Are there particular requirements, such as payment is due on the 1st day of the month when closing the loan?
You did not provide enough information for us to determine if there is a problem. An initial rate of 6.5% is not unusual and would not seem to indicate a deep discount. If the index is 6.5% and your are adding a margin of four parentage points, the initial rate would be 10.5%. If that rate is discounted down to 3.5% that is a sizable discount, but it is not clear why the system can’t disclose the correct APR for the transaction. We suggest contacting your loan origination software provider for a better explanation of the warning.