[M Cockrell]

§1026.37(a)(10)(iv) reads…

The disclosures required by paragraphs (a)(10)(i)(A) and (B) [Adjustable and Step rates], and (a)(10)(ii)(A) through (D) [Negative am, Interest only, Step and Balloon payments] of this section must each be preceded by the duration of any introductory rate or payment period, and the first adjustment period, as applicable.

The “Official Interpretations of 37(a)(10) Product” say…

1. No features. If the loan product disclosed pursuant to § 1026.37(a)(10) does not include any of the features described in § 1026.37(a)(10)(ii), only the product type and introductory and first adjustment periods, if applicable, are disclosed. For example:

i. Adjustable rate. When disclosing an adjustable rate product, the disclosure of the loan product must be preceded by the length of the introductory period and the frequency of the first adjustment period thereafter. Thus, for example, if the loan product is an adjustable rate with an introductory rate that is fixed for the first five years of the loan term and then adjusts every three years starting in year six, the disclosure required by § 1026.37(a)(10) is “5/3 Adjustable Rate.” If the first adjustment period is not the period for all adjustments under the terms of the legal obligation, the creditor should still disclose the initial adjustment period and should not disclose other adjustment periods. For example, if the loan product is an adjustable rate with an introductory rate that is fixed for the first five years of the loan term and then adjusts every three years starting in year six, and then annually starting in year fifteen, the disclosure required by § 1026.37(a)(10) would still be “5/3 Adjustable Rate.”

A. No introductory period. If the loan product is an adjustable rate with no introductory rate, the creditor should disclose “0” where the introductory rate period would ordinarily be disclosed. For example, if the loan product is an adjustable rate that adjusts every three years with no introductory period, the disclosure required by § 1026.37(a)(10) is “0/3 Adjustable Rate.”

Currently, our loan products do “NOT include any of the [37(a)(10)(ii)] features”. As such, the reg indicates we need “only [list] the product type and introductory and first adjustment periods”; however, since the “commentary” states, “If the loan product is an adjustable rate with no introductory rate, the creditor should disclose “0” where the introductory rate period would ordinarily be disclosed”, we are receiving conflicting information from a trusted compliance resource and a current third-party provider/vendor.

One is suggesting the “duration of any introductory rate or payment period” is based on the initial fixed rate period and, therefore, the only time there wouldn’t be an introductory rate or payment period would be for construction-to-perm loans where the initial rate is floating and not set until the end of the construction phase.

The other is focusing on the “duration of any introductory rate” as having to be a promotional or “teaser” rate and is of the opinion, if there is no “special” rate offered initially, there is no introductory rate. They’re also suggesting if the initial payment period does not vary from subsequent adjustment periods, there is no introductory payment period.

As “introductory rate” is not defined in the “General” definitions under “Subpart A” [§1026.2(a)] of the reg, and is only defined in “Subpart B – Open-End Credit” under “Advertising” specific “to any advertisement of an open-end credit plan”, it is difficult to accept that definition applying universally throughout the reg; especially as the reg repeatedly references something similar to “[as defined in] §1026.16(g)(2)(ii)” when “that term” is necessary to be defined.

Additionally, neither “introductory period” nor “introductory rate period” is defined within the reg at all.

So, the question is this: What is the proper way for an ARM Product Description to be disclosed?

For example, if a loan has a fixed rate for the first five years and adjusts every five years thereafter, would the correct way to describe the loan be…

“5/5 Adjustable Rate”
or
“0/5 Adjustable Rate”?

Would it make any difference if it’s a “promotional” rate?

Please advise.

Topic

[rcooper]

M cockrell,
I know this has been debated and we have answered similar questions on this issue in the past. I want to run it by our team to ensure our collective opinion is still the same – that there is no new information to consider – before responding. We will get back to you soon.

Thanks for your patience!

[rcooper]

The lack of a definition for what constitutes an introductory rate/period does create confusion and differing opinions.

From the Guide to the LE and CDP.16 https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_kbyo_guide-loan-estimate-and-closing-disclosure-forms_v2.0.pdf

“An interest rate is an Adjustable Rate if the interest rate may increase after consummation, but the rates that will apply or the periods for which they will apply are not known at consummation. (§ 1026.37(a)(10)(i)(A))
Each description must be preceded by the duration of any introductory rate or payment period, and the first adjustment period, as applicable. (§ 1026.37(a)(10)(iv)) For example, a product with an introductory rate that is fixed for the first five years and adjusts every three years starting in year 6 is a 5/3 Adjustable Rate.
When there is no introductory period for an Adjustable Rate, disclose “0.” (Comment 37(a)(10)-1.i.A) For example, a product with no introductory rate that adjusts every year after consummation is a 0/1 Adjustable Rate.”

Based on this and the commentary you mentioned above, we believe that if the introductory period differs from subsequent adjustment periods or if the rate differs from the index/margin for subsequent adjustments then that would be considered an introductory rate period. A discount/promotional rate would not be required for an introductory rate period. For example, take the 5/3 vs 0/1 ARM referenced in the commentary – both may use the same index/margin as the remainder of the loan term, but since the 5/3 is fixed for a period beyond when it would have adjusted it is considered an intro rate even though it isn’t discounted and the 0/1 isn’t considered to have an intro rate since it adjusts on time. As for your specific example, since the initial period is the same as subsequent adjustment periods (i.e. 5 years) it would depend on if the rate. If the rate is different from the index/margin rate for later adjustments then it would be considered an intro period and be disclosed 5/5. If the rate is tied to the index/margin rate (and since the initial period of 5 years is the same as the subsequent adjustment periods) it would not have an intro rate or period and would be disclosed as 0/5.

[Author]

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