Our bank attorney is telling us to make all our home equity loans as 1-year adjustables. Has anyone else heard about this?

I believe the thinking behind it is to insure the loan amortizes over the original term if property taxes or hazard insurance are added.

When our 3 and 5 year adjustables reprice, the new payment takes the increased principal into account.

I don't understand your last statement and I have no idea why an attorney would make such a recommendation. Setting pricing is an ALM issue and not one for the legal department to be involved in.

"When our 3 and 5 year adjustables reprice, the new payment takes the increased principal into account."

For instance, if property taxes had to be added to the loan, increasing the principal in the second year after the last adjustment on a 3 year ARM- when the new payment is calculated at the adjustment date, the then current principal would be amortized over the remaining term of the note.

So, you add amounts to principal without re-amortizing? I would say that is a flaw in your loan agreement and it has nothing to do with pricing.

It is an event of default. Work out the default. Capitalize the amounts added. Modify the loan. Reamortize. (Watch the Carrington case in the Supreme Court carefully. If the SC doesn't make the correct decision, it could be a big problem for home equity loans.)