We are introducing a new product for bank employees. They receive a .5% interest rate deduction on each loan. If they leave the bank the interest rate goes up .5%.

If one of these loans is secured by a primary dwelling with a term greater than one year, is an early ARM disclosure required.

1026.19(b)

5. Examples of variable-rate transactions. i. The following transactions, if they have a term greater than one year and are secured by the consumer's principal dwelling, constitute variable-rate transactions subject to the disclosure requirements of §1026.19(b).

B. 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 §§1026.19(b)(1) and 1026.19(b)(2)(v), (viii), (ix), and (xii) are not applicable to such loans.

Yes, a variable rate consumer loan secured by a dwelling would be an ARM which would require the CHARM booklet and an early ARM disclosure for whatever ARM program loan you offer.

.19(b)(1) is the CHARM booklet. The official interpretation says, among other things, that the CHARM booklet is not required.

Also keep in mind, it's only considered a variable rate product if the note reflects the "preferred" rate. We disclose the higher rate and just use an addendum that spells out the applicable requirements.

What if the rate will not increase if the employee leaves? Would we only list the lower rate and not worry about disclosing the "Preferred rate feature"?

What would trigger an increase? If nothing does, then you have a fixed-rate loan and nothing here is applicable.