I was reading through the Reg. and the Official Interpretation and it wasn't quite clear to me how an ARM loan would be disclosed if there was no fixed introductory period per se, but rather the initial rate is tied to an index; however, the Bank and borrower executed a lock agreement. So, if the margin moves prior to consummation, but the lock exists does the Product turn into an Introductory Rate Period, or do you still able the initial period "0." So, if you have an initial rate based on Prime that adjusts every year, you would label this a "0/1 Adjustable Rate" per the OI. If Prime increases prior to consummation, does the Product become a "1/1 Adjustable Rate?" because of the locked rate that is lower? If so, then do you have a new 3 business day waiting period if the increase in the margin took place between the initial CD and consummation?

That disclosure has nothing to with rates or margins, but with the periods. So you can have a 3/1, 5/1, 7/1, 5/3, etc. But you would never have a 3/3/ or 5/5, as that would be 0/3 and 0/,5 as there is no separately defined introductory period that occurs at a different interval period than any other period.

As to your second question, if the APR increased by more than the tolerance between the initial and final CD, yes a new 3 business day wait is triggered.

I'm assuming you are being specific to my question. Otherwise, from a general standpoint, would it not be possible to have a 3/3? This is where you had a 3 year fixed introductory period and the rate changes taking place every 3 years beginning in Year 4. But, if the answer was specific, then I'm not sure what you mean by having a 3/1, 5/1, etc.? If you are saying there is no introductory rate period, then the first part of the disclosure term would always be "0" in such transactions. The locked rate is either an introductory rate or it isn't. If it is, then you could have whatever combinations of 3/1, 5/3, or whatever as it just matters how long until the initial Change Date and then how often subsequent Change Dates occur. If it isn't then it would be 0/1, 0/3, etc. based on how often Change Dates occur.

NO INTRODUCTORY PERIOD.

If the loan product is an adjustable rate with no introductory rate, the creditor should disclose “0” where the introductory rate period would ordinarily be disclosed. For example, if the loan product is an adjustable rate that adjusts every three years with no introductory period, the disclosure required by § 1026.37(a)(10) is “0/3 Adjustable Rate.”

Thank you for your time and assistance.

If the loan product is an adjustable rate with no introductory rate "PERIOD", the creditor should disclose “0” where the introductory rate period would ordinarily be disclosed. For example, if the loan product is an adjustable rate that adjusts every three years with no introductory period, the disclosure required by § 1026.37(a)(10) is “0/3 Adjustable Rate.”

They left out a word in that sentence, which is PERIOD and it has confused a lot of people. Like I said, that disclosure has nothing with rates - it is all about periods. So, if your loan adjusts only every three or five years regardless of the rates imposed at would be a 0/3 or 0/5. There would never be a 3/3 or 5/5 as the introductory period is no different than any other adjustment period as per the last sentence in that paragraph.

Thank you. I now understand what you mean.

How is the following section of the Official Interpretation to 1026.37(b)(2) understood in the situation above where you have a loan tied to an index and then the index increases a day or two prior to consummation for instance?

[The index in effect at consummation (or the time the disclosure is delivered pursuant to § 1026.19(e)) need not be used if the contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use any index value in effect during the 45 days before consummation (or any earlier date of disclosure) in calculating the fully-indexed rate to be disclosed.]

Could you have a situation where the index increases and the creditor correspondingly increases the interest rate, but then have a Final CD that discloses the rate based on the index value originally disclosed. I know most variable rate loans have the following language “For each interest rate change, the new interest rate will be determined using the most recent Index figure available as of 45 days before the date of the scheduled interest rate change.” Does this only apply to subsequent changes after closing? Would there need to be some more specific language related to the current closing for the Official Interpretation to apply? Would the creditor be actually not able to increase the rate to the newly indexed amount if such language did exist?

Your initial rate is based on the index plus margin at the time it was locked. Therefore your rate is a fully indexed rate and it has not been discounted or had a premium added to it.

A discounted or premium rate is one that is based on something other than the fully indexed rate.

Would the creditor be actually not able to increase the rate to the newly indexed amount if such language did exist?

If you have not locked the rate, and we do not lock rates for ARMs, then you would disclose the fully indexed rate at the time you issue the CD. If the index increases and you want to pass that increase to the borrower you have to issue a revised CD and wait 3 additional business days if the APR is out of tolerance. If you don't want to pass the increase the initial rate would remain at the disclosed rate and it would not adjust until the first scheduled rate change date.

If you've locked the rate then you would have to refer to the lock agreement for what you can or cannot do if the index increases.

You are quoting 19(e), which is the LE and not the CD. If the rate is not locked, then:

Official Interpretation
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)

8. Basis of disclosures in variable-rate transactions. Except as otherwise provided in §§ 1026.18(s), 1026.37 and 1026.38, as applicable, the disclosures for a variable-rate transaction must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation.

Dan, if you made this choice, then would it not suddenly make this a discounted ARM if the index increased and it would most likely throw you out of tolerance anyway.

We can go back 45 days from the date of consummation for the index value.

If we disclosed an initial rate of 4.5% (1.5% index plus a 3% margin) on the CD today for a 12/26 closing and the index increases on 12/26 once the weekly averages are released to 1.75% and we chose to honor the 4.5% initial rate we are disclosing and applying a fully indexed rate under the terms of our note therefore it would not be a discounted rate.

Unless you have locked the rate and created a discounted or premium variable rate transaction, then you have to base the disclosure on the rates at consummation. (.17(c)(1) - Comment 8) The 45-day look back only applies to the index and margin for determining the subsequent rate on a discounted or premium variable rate transaction (.17(c)(1) - Comment 10). But I guess if you forgo the increase in the rate at the time of closing and actually book the loan at 4.5% as your beginning rate (as in your example), you get to the same place.

8. Basis of disclosures in variable-rate transactions. Except as otherwise provided in §§ 1026.18(s), 1026.37 and 1026.38, as applicable, the disclosures for a variable-rate transaction must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation.

At the time of consummation the terms of our note is the initial rate of 4.5% based on our current index plus margin at the time the CD is prepared.

Our index is based on the weekly averages that are posted in the H. 15 on Monday afternoon and the rate is effective on Tuesday. The initial rate disclosed on the CD is based on the effective rate as of the Tuesday before the CD is prepared. That rate is always honored and is always the initial rate.

Randy, the piece I quoted is the Official Interpretation for 1026.37(b)(2), which also does refer to the LE, but if you look at the explanation in 1026.38 (the CD) it says to refer back to 1026.37. The 1026.19(e) piece of it is just talking about a rate you would have provided on an initial or revised LE. I will take it out below and the language still works.

[The index in effect at consummation (or the time the disclosure is delivered pursuant to § 1026.19(e)) need not be used if the contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use any index value in effect during the 45 days before consummation (or any earlier date of disclosure) in calculating the fully-indexed rate to be disclosed.]

The index in effect at *consummation* . . . need not be used if the contract provides for a delay in the implementation of changes in an index or value. This would seem to cover the CD as well, as the CD deals with what happens at *consummation.* I think @Dan gave me the answer I was getting at, but I'm still a bit confused as to how the Official Interpretation applies to these situations where a creditor is not locking a rate in for ARMs and the rate adjusts shortly before consummation because the index moves.

It will all depend on how you actually book the loan. You can't disclose a starting rate of 4.50% and then turned around and actually book the loan for 4.75% because the rate went up.

I apologize in advance for the lengthiness of this post.


Randy,

We have vacillated back & forth with this (having one auditor saying one thing and another contradicting the first).

The explanation you provided (#2157823) is the most plausible I’ve “heard” (especially, since the title/heading for that subsection is “No introductory period.”); however, I recently received the following from another trusted source:

“An ARM with a fixed rate for 3 years that adjusts 3 years after that is a 3/3 ARM and not a 0/3 ARM. Similarly, a loan with a fixed rate for 5 years that adjusts every 3 years after that is a 5/3 ARM. '0/' should really only be used in situations where the rate initially floats, and later becomes fixed for a period of time.”

Additionally, the source stated, “The only situation where we see ARMs use ‘0/’ with any regularity is for construction-to-perm loans were the initial construction phase rate floats. So, for example, if you’ve got an ARM where the rate floats during the first 12 months (construction phase), and then is fixed at year 1 when the loan goes to perm, then adjusts in year 6 and every year after that until year 31, the proper way to disclose it for TRID would be ‘0/1 Adjustable Rate’. 0 would cover the float for the first year, and 1 would cover when the rate gets fixed for the first time after the construction phase. (You’d leave any future adjustments, like the one in year 6 and beyond, off the description per the guidance in the commentary.)”


Based on the verbiage in the reg [§1026.37(a)(10)(iv)], “The disclosures required by paragraphs (a)(10)(i)(A) and (B), and (a)(10)(ii)(A) through (D) of this section must each be preceded by the duration of any introductory rate or payment period, and the first adjustment period, as applicable.”

If the “introductory rate or payment period” (or, if you prefer, “introductory rate...period”) begins with a rate which is set (i.e. introduced) for a fixed period of time, how can you have a "duration" of "0"?

You, yourself said...


Having an “introductory period [which] is no different than any other adjustment period” is not the same as having “NO INTRODUCTORY PERIOD” at all.

So, even if an introductory period is the same as an adjustment period, it’s still a distinct and separate time-frame established for a particular “duration” before a rate change could be made and should be disclosed as such.

Please advise.

As with all things TRID, opinions change. There are certain areas in the TRID regulations that leaves a little bit of a desire for further clarification. The CFPB did a pretty good job in many of these areas with TRID 2.0 and 3.0, but there are still areas that are not exceedingly clear.

The area of the regulation that has caused the fervor over when an ARM that has a fixed rate for three years and then adjusts every three years after that and whether and when it should be disclosed as a 0/3 or a 3/3 is this:

1026.37(a)(10)(iv) The disclosures required by paragraphs (a)(10)(i)(A) and (B), and (a)(10)(ii)(A), (B), (C), and (D) of this section must each be preceded by the duration of any introductory rate or payment period, and the first adjustment period, as applicable.

Then further in the commentary you have Comment 1(i)(A) No introductory period. If the loan product is an adjustable rate with no introductory rate, the creditor should disclose “0” where the introductory rate period would ordinarily be disclosed. For example, if the loan product is an adjustable rate that adjusts every three years with no introductory period, the disclosure required by § 1026.37(a)(10) is “0/3 Adjustable Rate.”

After discussion with the CFPB, the focus in this area is in the passage: "the duration of any introductory rate or payment period".

So if your fixed rate payment period is different than future payment periods, such as a 1/3, 1/5, or 3/5 ARM - it is the difference in payment period that drives the two numbers in this disclosure.

If you have an ARM and the fixed rate period is three years and all future rate adjustments happen every three years, then the focus turns to the interest rate. If your starting rate is equal to the then current interest rate plus margin at consummation, there is no introductory rate period and the ARM would be disclosed as a 0/3 ARM. If the starting rate is not equal to the then current index plus margin, then you have an introductory rate period and the disclosure would be a 3/3 ARM.

This is also supported by the above commentary.

I agree that this has cause a lot of confusion in the industry and not all LOS systems will handle this disclosure appropriately.

I really don’t mean to belabor this, but I’m still struggling with it.


How is an “introductory rate” defined?

The phrase is not defined in the general definitions and rules of construction under Subpart A §1026.2. As a matter of fact, the only place I find it defined is in §1026.16(g)(2)(ii), which is specific to advertising under open-end credit for not home-secured plans.

Additionally, where that definition would apply, the reg clearly and repeatedly states, “as that term is defined in §1026.16(g)(2)(ii)”, but that particular statement is omitted from §1026.37(a)(10)(iv).

Here, the reg seems to recognize an introductory rate as any rate introduced for a set duration of time, irrespective of whether or not it’s a “teaser”/promotional rate or starter/initial/introductory rate.


I wondering what I’m missing. Where does the reg indicate the product description/disclosure is about a difference in the initial/introductory fixed rate payment period and future payment periods? And, why would the focus change just because the fixed rate period is the same as future rate adjustments?

As you quoted §1026.37(a)(10)(iv)…


To further clarify this statement, the commentary [in 1(i)], just prior to what you quoted in 1(i)(A), reads: “When disclosing an adjustable rate product, the disclosure of the loan product must be preceded by the length of the introductory period and the frequency of the first adjustment period thereafter.”

What I’m concluding from this is:

1. Any time there is a fixed rated for an initial period of time, there IS an introductory rate established for a identified duration and the product description should be disclosed as whatever that time period may be and the first adjustment period.
2. Only when there is no fixed rate period (i.e. the rate simply floats) is there “no introductory rate” and only then should “0” be used.

Did the CFPB offer any further clarification (e.g., a written response)?

An introductory rate is an ARM that involves a start rate that includes either a premium or a discount.

So, an introductory rate can only be one which is a premium or discounted rate?

Where can I find this definition in the reg?

Directly, not sure if you are going to find a specific reference. You have to dig into the preamble to the final regulations for a more direct reference. For example:

With respect to the commenters that believed the proposal would have required
disclosure of the fully-indexed rate in all circumstances, the Bureau did not intend to require
disclosure of the fully-indexed rate in all circumstances. The Bureau notes that the language in
proposed § 1026.37(b)(2) requiring disclosure of the “initial interest rate” is identical to that in
the existing RESPA GFE instructions in Regulation X. See 12 CFR part 1024, app. C. The
Bureau’s intent in the proposal was to require disclosure of the fully-indexed rate only if the
initial interest rate may adjust based on an index. In other words, the intent of proposed
§ 1026.37(b)(2) was to require disclosure of the fully-indexed rate where the initial rate at
consummation was not known at the time of the disclosure because it depended on an external
index, i.e., where there was no introductory rate period.

Randy, I truly thank you for exercising patience with me. I promise I'm not trying to cause you grief...I'm just a little (okay, a whole lot) thick-skulled.

I do understand having to reference the preamble occasionally for further clarification, but I fail to see how disclosure of the initial interest rate affects the product description disclosure which calls for a duration of time for which that rate will be applicable.

Again, I'm sorry it's taken so many posts to even get this far. Right now, I feel like a four-year-old scribbling all over the page and failing to connect the dots to see the intended picture.

OK - let's beak this down a little more.

The regulation: must each be preceded by the duration of any introductory rate or payment period.

So you have two choices here for the first number - introductory rate period or payment period.

So, if you have an ARM that adjusts every three years, you do not have an introductory payment period as the first and every successive periods are three years in the length.

You next go to the commentary. We have already established that there is no introductory payment period, so you are left with determining whether or not there is an introductory rate period.

So next you go to the commentary: "If the loan product is an adjustable rate with no introductory rate, the creditor should disclose “0” where the introductory rate period would ordinarily be disclosed."

So the question becomes what is an introductory rate and that goes to the section in the preamble that I provided. "fully-indexed rate where the initial rate at consummation was not known at the time of the disclosure because it depended on an external index, i.e., where there was no introductory rate period."

Here that indicates that if the start rate is based on the index and margin, there is no introductory rate and thus no introductory rate period. Conversely, if there is a discount or margin, i.e. start rate is not based on the under lying index plus margin, then you do have a introductory rate period.

It is similar to how you would calculate the APR on an ARM loan. If the start rate is not at index plus margin, then you would step the interest rate up or down based on the current index plus margin taking into consideration any caps to order to develop your amortization schedule in order to calculate the APR.