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#1263176 - 10/07/09 06:23 PM ARMs - No particular index
OnTheEdge Offline
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Joined: Apr 2002
Posts: 1,677
SmallTown, USA
Well we've decided to offer ARMs.
From Reg Z Commentary
Paragraph 19(b)(2)(ii).
1. Identification of index or formula. If a creditor ties interest rate changes to a particular index, this fact must be disclosed, along with a source of information about the index. For example, if a creditor uses the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity as its index, the disclosure might read, "Your index is the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year published weekly in the Wall Street Journal." If no particular index is used, the creditor must briefly describe the formula used to calculate interest rate changes. 2. Changes at creditor's discretion. If interest rate changes are at the creditor's discretion, this fact must be disclosed. If an index is internally defined, such as by a creditor's prime rate, the creditor should either briefly describe that index or state that interest rate changes are at the creditor's discretion.

(1) Do we have to define an index?
(2) Can we simply state the rate is based on basic underwriting standards and future changes will be at the creditor's discretion? (Rates and pymts will change every 5 years)
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Lending Compliance
#1263224 - 10/07/09 07:11 PM Re: ARMs - No particular index OnTheEdge
Richard Insley Online
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Richard Insley
Joined: Oct 2000
Posts: 10,179
Toano, VA
Originally Posted By: OnTheEdge
...rate...changes will be at the creditor's discretion

Have you done the market research to confirm that lender-dominated terms like this will attract applicants? Why don't you simply pick an index from H-15 and join the pack? You can still control the initial interest rate and let the index plus margin control future adjustments.
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#1263233 - 10/07/09 07:17 PM Re: ARMs - No particular index Richard Insley
OnTheEdge Offline
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SmallTown, USA
I totally agree, but CEO does not.
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#1263331 - 10/07/09 08:48 PM Re: ARMs - No particular index OnTheEdge
OnTheEdge Offline
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Joined: Apr 2002
Posts: 1,677
SmallTown, USA
Folks,
I REALLY need some input on this. Because of some bad info we received, our original plan for HPML has been blown apart and we are needing to get ARMs implemented ASAP.
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#1263348 - 10/07/09 09:02 PM Re: ARMs - No particular index OnTheEdge
Dan Persfull Offline
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Dan Persfull
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Posts: 47,517
Bloomington, IN
The best input you can get would be to discuss your intentions with your regulator. Contrary to popular belief they are there to help you.

If you are a national bank you cannot use a lender controlled index. Rlcary has posted the appropriate cite may times but I don't remember what it is off the top of my head.
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#1263581 - 10/08/09 02:43 PM Re: ARMs - No particular index Dan Persfull
OnTheEdge Offline
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Joined: Apr 2002
Posts: 1,677
SmallTown, USA
Dan,
Thanks for your input, unfortunately, our "relationship mgr" with FDIC left about a year ago and they've not assigned anyone else to our bank. In the past 2-3 months, I have sent 3 emails. On 2 I got a response that they would be sent to someone else for review. The 3rd one has gone totally unanswered. This week I've left 3 voice-mails. Someone did return 1 of the calls. She seemed a bit annoyed and told me she would pass the quesiton along. So you can see I'm not having much luck in that arena.
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#1264622 - 10/09/09 04:07 PM Re: ARMs - No particular index OnTheEdge
Richard Insley Online
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Richard Insley
Joined: Oct 2000
Posts: 10,179
Toano, VA
The short responses to your original post are:
- no
- yes

Your biggest concern should be market response, not regulations (since you are not subject to OCC's ban). FDIC will not be able to "tell you what to do", but might be able to help indirectly by telling you the types of discretionary ARMs its examiners have seen.

You should be worried about a number of downside issues, including:
- failure of this product in a market that is saturated with competitively-priced indexed ARMs
- illiquidity of non-standard assets
- cost of administration
- possible inadequacy of your loan servicing system
- potential claims of unfairness
- TIL disclosure difficulty (if you elect to offer premium or teaser pricing as a feature of the product)
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#1264827 - 10/09/09 06:40 PM Re: ARMs - No particular index Richard Insley
OnTheEdge Offline
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Joined: Apr 2002
Posts: 1,677
SmallTown, USA
Richard thanks for your input.
I agree with most of the concerns you listed.
For some reason, mgmt is bent on going against the flow on this.
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#1264923 - 10/09/09 08:00 PM Re: ARMs - No particular index OnTheEdge
Richard Insley Online
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Richard Insley
Joined: Oct 2000
Posts: 10,179
Toano, VA
Since this product won't fit the "easy mold", keep track of the time you spend researching regulatory coverage and getting the product into compliance. Any time you get flack about the time & cost consumed by the regulatory management function, remind your critics that regulatory costs are affected by business decisions. If your business managers (up to and including the CEO) want to do squirrely things, that drives up the cost.
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