[kowsley]

Sr. Mgt. is considering changing our “higher rate” loan product from a balloon product to an ARM product with a 10 year callable feature to offset interest rate risk. I know that demand/callable features are not available on HCM’s; however, this product wouldn’t hit the thresholds to make it a HCM. Would this callable feature be acceptable? If so, would it raise UDAAP flags as this product is typically offered to those customers that have a detrimental financial history – lower credit scores, etc.

[rcooper]

Jack and I discussed your question and here are a few points from our conversation:
• The loan is an ARM – that would seem to offset most interest rate risk, so why is there a need for a call feature?
• The loan has a variable rate and we assume it has standard default clauses. If your bank calls a loan for something other than an interest rate issue, which shouldn’t exist since it is a variable rate, or for standard default, the use of the call may be deemed unfair.
• Fair lending could arise if certain customers get the product with the call and others get it without the call.
• The call feature appears to be an unnecessary feature, but we don’t see any clear violation associated with it.

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