Help.. my lenders are wanting to offer a 3 or 5 year ARM with a 12 month teaser rate.. what disclosure or other pitfalls should I be on the look-out when designing this product (if I can't convince them otherwise)?
Basically the product would be 3 years fixed (during this period the first 12 months would be at a fixed teaser rate) then at the end of 3 years or 5 depending on which they go with.. the loan will be an ARM.. Vendor says our system can disclose this but thought it might be deceptive/or misleading...UGH!!! creativity in this marketplace is killing me!

Read Comments #8 and 10 in the OSC to Section 226.17(c)(1).

First, the 3 and 5 normally means no rate change for the first 3 or 5 years. They are usually abbreviated as 3/1 or 5/1 as the rate then changes every 1 year after the 3 or 5 years.

The lenders want an ARM that adjusts at the end of year 1, then stays unchanged for 2 or 4 years, then begins an annual rate change cycle. Those are not 3/1 or 5/1 loans. Maybe 1/2/1 and 1/4/1 loans.

But I think those abbreviations would imply a maximum rate change of 1% the first rate change. I have seen an abbreviation of 5/1/5 meaning a 5/1 ARM with a maximum first adjustment of 5% (followed by the "normal" 2% per change maximum).

If they think your customers are willing to have a rate change at the end of year 1, why not just offer a 1-year ARM with a rate change every year?

Al

thank you for the feedback...
the intention is to discount the first year with a teaser rate.. then it would go up to the usual 3/1 or 5/1 ARM rate that would have been in effect had the teaser not been offered ( for years 2 & 3 or 2-5 depending on which option they decide)... and then adjust regularly after that per the standard 3/1 5/1/ ARM product in the market place..