[kmeade]

If a loan is locked for the first 10 years (initial locked rate is equal to prime plus the margin), then tied to prime + margin is changing every 5 years, what language needs to be in the initial ARM disclosure given at application. If the notice states, “interest rate under this ARM program can change every five years,” but it does not mention the rate is locked for the first 10 years is that compliant. Does the initial notice need to reference the initial period the rate is locked for (first 10 years)?

Topic

[rcooper]

I believe you do need to reference the point when the interest rate can first change and the frequency of change thereafter.

1026.19(b):
(2) A loan program disclosure for each variable-rate program in which the consumer expresses an interest. The following disclosures, as applicable, shall be provided:…
…(vi) The frequency of interest rate and payment changes.

Official Interpretation
Paragraph 19(b)(2)(vi)
1. Frequency. The frequency of interest rate and payment adjustments must be disclosed. If interest rate changes will be imposed more frequently or at different intervals than payment changes, a creditor must disclose the frequency and timing of both types of changes. For example, in a variable-rate transaction where interest rate changes are made monthly, but payment changes occur on an annual basis, this fact must be disclosed. In certain ARM transactions, the interval between loan closing and the initial adjustment is not known and may be different from the regular interval for adjustments. In such cases, the creditor may disclose the initial adjustment period as a range of the minimum and maximum amount of time from consummation or closing. For example, the creditor might state: “The first adjustment to your interest rate and payment will occur no sooner than 6 months and no later than 18 months after closing. Subsequent adjustments may occur once each year after the first adjustment.” (See comments 19(b)(2)(viii)(A)–7 and 19(b)(2)(viii)(B)–4 for guidance on other disclosures when this alternative disclosure rule is used.)

[kmeade]

Regarding the same scenario listed above. After the initial locked period, if the rate will be based on an index plus a margin, does the initial ARM notice have to show a representative margin that the creditor has used recently?

Is it compliant if the initial ARM disclosure only states, “the interest rate is based on the Index value, plus a margin?” However, a representative margin is not listed on the disclosure (even in the “Payment Example” section)?

[rcooper]

I don’t believe the explanation of the interest rate/payment rules in 1026.19(b)(2)(iii) or the maximum interest rate/payment example rules in (viii) state that the margin needs to be disclosed.

Comment 1026.19(b)(2)(iii)-1 states:
Paragraph 19(b)(2)(iii)
1. Determination of interest rate and payment. This provision requires an explanation of how the creditor will determine the consumer’s interest rate and payment. In cases where a creditor bases its interest rate on a specific index and adjusts the index through the addition of a margin, for example, the disclosure might read, “Your interest rate is based on the index plus a margin, and your payment will be based on the interest rate, loan balance, and remaining loan term.” In transactions where paying the periodic payments will not fully amortize the outstanding balance at the end of the loan term and where the final payment will equal the periodic payment plus the remaining unpaid balance, the creditor must disclose this fact. For example, the disclosure might read, “Your periodic payments will not fully amortize your loan and you will be required to make a single payment of the periodic payment plus the remaining unpaid balance at the end of the loan term.” The creditor, however, need not reflect any irregular final payment in the historical example or in the disclosure of the initial and maximum rates and payments. If applicable, the creditor should also disclose that the rate and payment will be rounded.

19(b)(2)(iv) states you must include statement that the customer should ask about current rate and margins.

If you have more information or a specific section of the rules you’d like us to look at further, we’re happy to do that.

[kmeade]

The section listed below is what concerned me about not listing a margin in the initial disclosure.

1026.19 Certain mortgage and variable-rate transactions
1026.19(b)(2)(viii)(A)3. Selection of margin. For purposes of the disclosure required under § 1026.19(b)(2)(viii)(A), a creditor may select a representative margin that has been used during the six months preceding preparation of the disclosures, and should disclose that the margin is one that the creditor has used recently. The margin selected may be used until a creditor revises the disclosure form.

[rcooper]

If you are including the historical example I think you would include the margin and see comment (b)(viii)(A)-3. Also, see model form H-4(c) for the sample historical example.

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