I have a question on the ARM subsequent notice. I am looking at a notice for a 7/1 ARM that was originated in 2003. In 2010, the rate adjusted to the floor rate and has remained there since. Now with the new notice format I am reviewing the first notice generated since the January changes. The ARM adjustment notice indicates there was a 4 year period during which the interest rate stayed the same.

The rate adjusted to the floor in 2010 and stayed there so the rate did not change in 4 years. Should the notice indicate 1 year or 4 years?

I believe that 4 years would be correct, however, I'm not sure where 1 year would come into play in your scenario. Are you thinking about 1 year because that's when the new format of the ARM notice went into effect? (If so, I think 4 years is still correct.)

This issue arose during an independent audit. According the the auditor, the notice should time period should be 1 year because the rate is set to adjust every year since it is a 7/1 ARM but in our case the rate did not change.

1026.20(c)(2)(i)(A):
2) Timing and content. Except as otherwise provided in paragraph (c)(2) of this section, the disclosures required by this paragraph (c) shall be provided to consumers at least 60, but no more than 120, days before the first payment at the adjusted level is due. The disclosures shall be provided to consumers at least 25, but no more than 120, days before the first payment at the adjusted level is due for ARMs with uniformly scheduled interest rate adjustments occurring every 60 days or more frequently and for ARMs originated prior to January 10, 2015 in which the loan contract requires the adjusted interest rate and payment to be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date. The disclosures shall be provided to consumers as soon as practicable, but not less than 25 days before the first payment at the adjusted level is due, for the first adjustment to an ARM if it occurs within 60 days of consummation and the new interest rate disclosed at consummation pursuant to § 1026.20(d) was an estimate. The disclosures required by this paragraph (c) shall include:

(i) A statement providing:

(A) An explanation that under the terms of the consumer's adjustable-rate mortgage, the specific time period in which the current interest rate has been in effect is ending and the interest rate and mortgage payment will change;[i][/i]

Well, that sounds like a question for your institutions legal counsel then.

To me, "the time period in which the current interest rate has been in effect" is talking about the time period since the last time the interest rate was something different. Since you have a floor and the rate has stayed the same, you include the entire period, though it is certainly up for debate. My interpretation seems consistent to me with how a consumer would read the ARM notice. This would be especially true because you would not be providing the consumer with an ARM notice unless the payment changes, so a consumer getting the notice would be confused as to why they didn't get the notice each of the past four years, but again, question for your legal counsel.

I am with you GTS! This is my way of thinking. I have provided some information to the auditor explaining the rate was at the floor, etc. I will see what response I get from them.

I think you could make a pretty good logical argument for both cases. I have always interpreted that sentence to refer to the period of time between "possible" rate changes. In your 7/1 example, the rate could have changed a year ago.

It may be 'thin support' but there are some other references to section 20(c). For example, this commentary on section 17(c) says.

1. Legal obligation. The disclosures shall reflect the credit terms to which the parties are legally bound as of the outset of the transaction. In the case of disclosures required under § 1026.20(c) and (d), the disclosures shall reflect the credit terms to which the parties are legally bound when the disclosures are provided.

In a changing rate environment the terms of the note specify a one year adjustable time period between rate changes after the end of the initial seven year fixed rate time period.

I agree that the customer has not seen a change in the last four year due to the low rate environment. I agree that it could be confusing. However, if they look at their loan terms, they will see that the time period between rate adjustments is one year. Perhaps CFPB will provide some future guidance on this. I could see an examiner opinion falling on either side of the question.

I agree, it really can go either way. I have sent a request into our core system to research it and how that field is determined from the system.

Interesting point SteveD, but wouldn't the loan documents also tell the customer that there is a floor on the rate below which the rate cannot fall? So, I think you would still be following the terms to which the parties are legally bound.

Ahkcompliance - I think, given that it can certainly be interpreted either way, the key no matter what is to be consistent. Pick one approach and stick with it and you should be able to explain that to an examiner in the future in the question ever arises.