First, this forum is a most welcome addition!

Our bank is just rolling out an employee loan program (ELP). Some employees will apply for a fixed rate mortgage loan but the ELP benefit will make it an adjustable until they leave the bank or don't occupy the property, etc. Other employees will apply for an adjustable program and will get a lower margin during their employment.

In other cases, existing fixed rate loans may be enrolled in the ELP and the djustable rate feature will be in effect during employment. Still others may have adjustable rate loans and will just get a lower margin and possibly different index. Yes, what started out sounding very simple has become a monster!

I felt we should do an ELP program disclosure because on some loans we are adding a variable feature, on others we are changing the margin and/or index. [Reg Z at 226.20, comment 20(a)3-]

Lending Department came back and feels doing a new disclosure may be overkill because the terms of the note are the worst case scenario and that is (or was) disclosed.

Any ideas?

Thanks for any feedback.

What do you mean by "the terms of the note are the worst case scenario and that is (or was) disclosed"?

Richard -

Our program is set up so the original note and deed of trust will reflect the obligation of the employee if they no longer qualify. We will use a modification to reduce the margin and/or add the adjustable feature. Under the ELP their interest rate and payments will always be lower than they would under the regular loan program, hence the statement that the regular disclosure already disclosed (discloses) the "worst case scenario."

Any other feedback?

Can you think of an example where the original note disclosures would not be the 'worst case scenario'? I would give the disclosures. Adjustable rates are complicated anyway, I would want to make sure that employees understood the loan completely.

The employee preferred rate program is not considered a variable rate plan. FDIC Page 6902.19 "Moreover, an open-end credit plan in which the employee receives a lower rate contigent upon employment is not a variable rate plan." FDIC Page 6958.02 "Preferred-rate loans where the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event, such as an employee leaving the employ of the creditor, and the note reflects the preferred rate. The disclosures under Section 226.19(b)(1) and 226.19(b)(2)(v), (viii), (ix), and (xii) are not applicable to such loans."

Therefore as long as we disclose it is a preferred rate and tell them how the rate will be adjusted we are not required to provide examples of how the "as it was coined 'worst case scenario'rate" affects the payment, APR, etc.

We disclose the preferred rate on the note as "This is a preferred rate contingent upon your employment. Upon separation of employment, your rate will be adjusted according to the preferred rate addendum." This is in the Fed Box. We then use a Preferred Rate Addendum (Banker's Systems provides this form in ARTA and Rembrandt) to disclose that your rate will increase 1% or whatever the case may be when your employement ends. That should be the extent of what is required to be disclosed.

Is your lending department arguing that disclosing a "worst case scenario" means that you don't have to give variable rate disclosures?

My concern is that "worst case" is NOT the legal obligation between the parties. As amended, the contract calls for the customer to receive the preferred rate in recognition of employment status. The TIL should be based on the preferred rate, not the "worst case"; and as others have observed, the rate increase provision should not be treated the same as an ARM.

Our employee loan contracts are disclosed with the higher rate and payment amount, we do not indicate they are variable rate. We have an addendum to the note that the employee signs stating the loan rate will be x%(includes the discount) and the payment will be $x. It also states that if the employee leaves the bank the rate and payment will revert to the contract rate effective the day the employee leaves. We have a disclaimer that if this agreement will be null and void if declared illegal under state or federal law or the regulatory agencies declare it such.

Thanks for the replies!

vaca - I agree that the possibility that the preferred terms will end upon termination of employment does not make the ELP a variable rate plan.

Ted - yes, Lending is arguing that disclosing, as they put it, "the worst case scenario," means we don't have to give any more disclosures.

Let's divide the question into two scenarios:

1. Existing fixed rate loans:
The original note is a fixed rate note and, like kcarter's bank's plan, an addendum will make the loan a variable rate loan during employment. I feel we need to give new disclosures because we are adding the variable rate feature, even if it benefits the employee.

2. The second scenario is new employee loans:
These will be written with either a variable or a fixed rate note and the variable rate ELP addendum (like kcarter) will be used. In this case I feel the disclosure should be based on the ELP variable rate program because that is the agreement (unless employment terminates.)

Last question - even though the rate change that may occur upon termination of employment does not by itself make this a variable rate plan (as noted by vaca and Ted) should the effects of employment termination be included in the disclosure that is being given anyway?

Thanks again for all your input.

In several places, the Commentary advises that:
1. amendments to the contract (such as the addendum under discussion here) must be reflected in the disclosures, and
2. an employee preferred-rate loan is a variable rate loan.

These rules require you to base the initial disclosures on the combined terms of the note plus addendum, not the "worst case." Further, as SJB observes, you are not excused from giving new disclosures if you add such a feature--the loan becomes a VR loan. Commentary to Section 226.19(b) excuses you from some, but not all, of the ARM disclosures.

We do not give the employee the rate discount on existing loans they had before being hired. The addendum is used on loans going forward. If they want the employee rate on their existing loans we would require them to refinance.

OK--so that means you are not concerned with the disclosures triggered by adding a variable rate feature to an existing loan. For those new loans, however, numbers are based on the combined effects of the note plus modification agreement. That would mean that the payment schedule, TOP, FC and APR would reflect the discounted rate, not the "worst case."

SJB: Actually, I did not make the blanket statement that an employee preferred-rate loan was not a variable rate loan. As vaca noted, the commentary to section 6(a)(2) says that in the case of open-end plans, they are not variable rate. However, the Commentary to section 19(b) lists an employee preferred-rate loan as an example of a variable-rate transaction and the Commentary to paragraph 19(b)(2)(vii) says that 19(b) applies to preferred-rate loans where the rate will increase and lists certain required disclosures.