Given the current interest rate environment the note rate on an ARM is likely going to be higher than the fully indexed rate. If I'm doing a 3/1 ARM today I assume I choose the HR 15 rate for the 1-yr Treasury Constant Maturity and can choose the Week Ending August 14 value of 0.49. Our margain is 2.75 so a fully indexed rate would be 3.24%. Our note rate will be 5.oo%. Will the only payment stream on the TIL be 360 payments at the fully indexed rate of 3.24% or will I disclose 36 payments at the initial note rate of 5% and then the remaining 324 payments at the fully indexed rate of 3.24%? Our Note calls for rounding so will be payments be disclosed to the nearest 1/8 which would be 3.25%? Thank you.

disclose 36 payments at the initial note rate of 5% and then the remaining 324 payments at the fully indexed rate of 3.24%? Our Note calls for rounding so will be payments be disclosed to the nearest 1/8 which would be 3.25%?

This approach.

A floor rate, if any, would also have to be factored into your calculations.

I am reviewing a TIL prior to the January 31, 2011 change. I thought if you had a premium start rate you would only list one payment stream because the rate is over the fully index rate.

Look at comment 10 of the OSC to section 226.17(c)(1) of Reg. Z for a discussion of premium and discounted ARMs. http://www.bankersonline.com/regs/226/suppi226-17.html

If you have a 30 year 1/1 ARM that is priced at PAR, you can show one payment stream of 360 payments based on the PAR rate. For premium or discounted ARMs, you have to consider the fully indexed rate and whether any periodic interest rate caps would prevent the rate from adjusting from the start rate to the fully indexed rate.

Reads Regs -- so if the fully indexed rate is 3.75% and the premium rate is 6.0%. Do I add the annual cap of 2.00% to the 3.75%. That would still be under the fully indexed rate so just one payment stream is disclosed? Not sure I am understanding the commentary.

Please help.

Thanks.

Let's say the information you provided relates to a 3/1 ARM with a 30 year term, I would say you would disclose the following:

36 payments based on 6.00% (premium rate)
12 payments based on 4.00% (2% periodic cap)
312 payments based on 3.75% your fully indexed rate.

Your software would then compute a composite APR taking these rates, payment streams, and the finance charges into consideration.

Reads Regs Sorry we have a floor of 6.00% So how would I disclose? Thanks.

bump

A floor rate would not be considered a premium if it is greater than the index plus margin. Your disclosure will show the one payment stream at the fully indexed rate which in this case will be 6%.

Your fully index formula is - index + margin or 6% whichever is greater.