I could use some help sorting thru the reg as it pertains to Ability to Repay, based on our current ARM notes. In determining ATR, I understand we are required to stress the payment using the Fully Indexed Rate as defined in 1026.43(b)(3). In reading the commentary, specifically paragraph 3, it reads the creditor must not give any effect to the rate cap when determining the fully indexed rate.

Our note has a current fixed rate of 2.75% fixed for 5 years. Our note goes on to describe the ARM changes as:
The interest rate at the first change date will not be greater than 4.75% or less than 2.75%. The interest rate will never increase or decrease on a single change date by more than 2%.
Calculation of new rate is: Index plus 2.75%.

What is the rate that should be used for the fully indexed rate? Is it the Index plus 2.75% OR 4.75% (as that is the highest the rate can be at the next rate change)?

Thank you.

Index plus 2.75% and stepping up using the caps.

THANK YOU!
Am I overthinking this portion of the definition for Fully Indexed? Because of this detail below, would I consider the caps?


3.Interest rate adjustment caps.
If the terms of the legal obligation contain a periodic interest rate adjustment cap that would prevent the initial rate, at the time of the first adjustment, from changing to the rate determined using the index or formula value at consummation (i.e., the fully indexed rate), the creditor must not give any effect to that rate cap when determining the fully indexed rate. That is, a creditor must determine the fully indexed rate without taking into account any periodic interest rate adjustment cap that may limit how quickly the fully indexed rate may be reached at any time during the loan term under the terms of the legal obligation. To illustrate, assume an adjustable-rate mortgage has an initial fixed rate of 5 percent for the first three years of the loan, after which the rate will adjust annually to a specified index plus a margin of 3 percent. The loan agreement provides for a 2 percent annual interest rate adjustment cap, and a lifetime maximum interest rate of 10 percent. The index value in effect at consummation is 4.5 percent; the fully indexed rate is 7.5 percent (4.5 percent plus 3 percent), regardless of the 2 percent annual interest rate adjustment cap that would limit when the fully indexed rate would take effect under the terms of the legal obligation.