[Mary Frances]

We are in the process of creating a new rate sheet which will have certain criteria where the rate could be lower or ever higher depending on the criteria. For example: Our 1 year ARM has a rate of 4.25%, 2/6 caps, Margin of Prime +1% and a floor of 4.25% so if we have a borrower and the LTV on the loan is between 50% – 65% then we will decrease their rate by .10 basis points to 4.15% which will make their floor rate 4.15% as well and the caps will remain the same and so will the margin.

For our Early ARM Disclosure would we need to have a disclosure for every rate scenario on our rate sheet? Right now our 1 year ARM Disclosure is based on term because the rate, margin, floor and caps are the same so we have 1yr ARM for 5 – 10yr term, 1yr ARM for 11 – 20yr term and 1yr ARM for 21 – 30yr term. Would we need to have an Early ARM Disclosure showing the lower rate of 4.15% as in the example above? Or could we do a worst case scenario and show the highest rate based on our rate sheet?

I have read the commentary for 1026.19(b)(2)(iv) which says “Because the disclosures can be prepared in advance, the interest rate and margin may be several months old when the disclosures are delivered. A Statement is required alerting consumers that they should inquire about the current margin value applied to the index and the current interest rate. For example, the disclosure might state “Ask for our current interst rate and margin”.

Any help would be appreciated

[rcooper]

You don’t need a separate disclosure for each rate, but you do for each program. Take a look at commentary 1026.19(b)(2) 1 & 2 to determine if you need a new program disclosure.

[Mary Frances]

We have gone back and read the commentary for 1026.19(b)(2) 1 & 2 and we are still confused. We have a Rate Sheet Matrix that will allow a decrease or increase of the rate. Since we do not need a separate disclosure for each rate then what rate would we use in the ARM Disclosure? Would we use the highest rate possible after adjustments per our Rate Sheet Matrix?

[rcooper]

If I’m understanding correctly, it sounds like you will have discounts and/or premiums which would constitute separate programs and separate disclosures. The amount of discounts don’t constitute a separate program.

10 CFR 1026.19, OSC Paragraph 19(b)(2)(v) states:

1. Discounted and premium interest rate. In some variable-rate transactions, creditors may set an initial interest rate that is not determined by the index or formula used to make later interest rate adjustments. Typically, this initial rate charged to consumers is lower than the rate would be if it were calculated using the index or formula. However, in some cases the initial rate may be higher. If the initial interest rate will be a discount or a premium rate, creditors must alert the consumer to this fact. For example, if a creditor discounted a consumer’s initial rate, the disclosure might state, “Your initial interest rate is not based on the index used to make later adjustments.” (See the commentary to §1026.17(c)(1) for a further discussion of discounted and premium variable-rate transactions.) In addition, the disclosure must suggest that consumers inquire about the amount that the program is currently discounted. For example, the disclosure might state, “Ask us for the amount our adjustable rate mortgages are currently discounted.” In a transaction with a consumer buydown or with a third-party buydown that will be incorporated in the legal obligation, the creditor should disclose the program as a discounted variable-rate transaction, but need not disclose additional information regarding the buydown in its program disclosures. (See the commentary to §1026.19(b)(2)(viii) for a discussion of how to reflect the discount or premium in the historical example or the maximum rate and payment disclosure).

Let’s see if Jack has any other thoughts on this.

[jholzknecht]

WHen you lower the customer’s rate from 4.25 to 4.15 are you reducing the margin for the entire life of the loan or are you just discounting the initial rate for a period of time, such as one year?

If you are discounting the rate, as stated above, the presence of the discount constitutes a different program, but the amount of the discount does not. A reduced margin does not constitute a different program. For the margin you use a representative example, an actual margin you used recently.

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