Typical preferred-rate loans might include a fixed-rate mortgage loan that carries a preferred rate as long as the borrower remains an employee of the financial institution or as long as a deposit account remains open. This loan type raises several issues under TRID rules including, which product description should be used.
The product description, explained in §1026.37, must classify the rate as “Adjustable Rate,” “Step Rate,” or “Fixed Rate.”
- For an “Adjustable Rate” the rates that will apply after consummation or the periods for which they will apply are not known at consummation. For a preferred rate loan the new rate is known, but the period is not known.
- For a “Step Rate” the rates that will apply after consummation or the periods for which they will apply are known at consummation. For a preferred rate loan the new rate is known, but the period is not known.
- If the loan product is not an Adjustable Rate or a Step Rate, the creditor shall disclose the loan product as a “Fixed Rate.”
Based on these definitions the product appears to be “Fixed-Rate.”
The Commentary to §1026.17 (General Disclosure Requirements) and §1026.19 (ARM Disclosures) has long clarified that preferred-rate loans are ARMs subject to the disclosure requirements of §1026.19, with some modifications. Numerous banks have been cited over the years for failure to deliver ARM disclosures for a preferred-rate loan.
Unless clarification is forthcoming from the CFPB, it appears that in the future we will provide ARM disclosures on a product identified as a fixed-rate loan.