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#2271362 - 06/08/22 03:17 PM Are ARM loans irregular transactions?
Jason Ellis Offline
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I am confused whether a typical ARM loan, e.g. 7/6 ARM (fixed rate for 7 years then adjusts every 6 months, is considered an irregular transaction for APR tolerance purposes. §1026.22(a)(3) says an irregular transaction includes a transaction with "irregular payment amounts...".

The official interpretation for §1026.22(a)(3)-1 says the 1/4% tolerance for irregular transactions "does not apply, however, to loans with variable rate features where the initial disclosures are based on a regular amortization schedule over the life of the loan, even though payments may later change because of the variable rate feature."

I have always considered that interpretation to mean that what I would call typical ARM loans would only have 1/8% tolerance as long as the initial disclosures are based on an amortization schedule over the life of the loan. But I have seen interpretations that say ARM loans are irregular transactions unless the "initial rate equals the fully indexed rate, therefore, would be disclosed as having a single payment level (ignoring first and final payments)".

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#2271367 - 06/08/22 03:39 PM Re: Are ARM loans irregular transactions? Jason Ellis
rlcarey Offline
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"But I have seen interpretations that say ARM loans are irregular transactions unless the "initial rate equals the fully indexed rate, therefore, would be disclosed as having a single payment level (ignoring first and final payments)"."

Those interpretations are dead wrong.
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#2271372 - 06/08/22 05:09 PM Re: Are ARM loans irregular transactions? rlcarey
Jason Ellis Offline
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Thanks Randy. I am getting push-back from correspondent lenders. They are claiming that their disclosures DO NOT show a regular amortization schedule because the note rate does not equal the fully indexed rate, therefore, there is a change in the amortization schedule and the loan is considered irregular. I have not been able to find a definition of "regular amortization schedule" but I don't interpret that to mean there can be no change in the payment.

One of the supporting documents for their argument they sent me is an article from Ballard Spahr from 2015 that in part says:

"The guidance indicates that the 1/8 of 1 percent tolerance for regular transactions applies to fixed rate loans, and that the ¼ of 1 percent tolerance for irregular transactions applies to adjustable rate loans. While often that will be the case, it many situations it will not. One of the factors that classifies a transaction as an irregular transaction is if there are irregular payment amounts, other than an irregular first or final payment. A fixed rate loan that has an interest only feature for a period of time or a graduated payment feature would have multiple payment levels and, thus, would be an irregular transaction and qualify for the ¼ of 1 percent tolerance. An adjustable rate loan with an initial rate that equals the fully indexed rate would be disclosed as having a single payment level (ignoring the first and final payments) and, thus, would be a regular transaction and qualify for the 1/8 of 1 percent tolerance."

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#2271411 - 06/09/22 11:40 AM Re: Are ARM loans irregular transactions? Jason Ellis
rlcarey Offline
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Well, I for one would really like to hear Richard Insley's opinion on this as to whether or not a fulling amortizing ARM loan that has a premium or discount rate as the initial interest rate is an irregular transaction. Such a transaction in my experience with the regulators has always been a regular transaction.

Not sure who wrote that opinion for Ballard, but it sounds like they went to the same school as Cordray when he was the director of the CFPB and stupidly said during a May 12, 2015 speech (coincidence on the timing??) at the National Association of Realtors conference in Washington, D.C. CFPB:

"On the contrary, we listened carefully to your concerns and limited the reasons for closing delays to only three narrow sets of circumstances:

Any increases to the APR by more than 1/8 of a percent for fixed-rate loans or more than 1/4 of a percent for variable-rate loans......"
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#2271421 - 06/09/22 01:12 PM Re: Are ARM loans irregular transactions? Jason Ellis
Dan Persfull Offline
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I too would like to hear Richard's opinion but FWIW I agree with Randy.

ARMs, whether 1/1, 3/1, 3/3, 5/1, 5/5 etc. have regularly scheduled periodic payments. I'm not sure how one would justify that being an irregular transaction.
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#2271457 - 06/09/22 06:17 PM Re: Are ARM loans irregular transactions? Dan Persfull
Jason Ellis Offline
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The article the correspondents are referencing was written by Rich Andreano in 2015. Here is the link:

https://www.consumerfinancemonitor....-misses-mark-in-waiting-period-guidance/

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#2271461 - 06/09/22 07:14 PM Re: Are ARM loans irregular transactions? Jason Ellis
rlcarey Offline
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Don't you love it when people refer to a seven-year-old internet article written by some attorney and treat it as gospel. Where is their own attorney opinion letter that comes with 5 million dollars of errors and omissions coverage? Have you talked to your EIC about it or e-mailed the CFPB?
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#2271462 - 06/09/22 07:21 PM Re: Are ARM loans irregular transactions? Jason Ellis
Dan Persfull Offline
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Unfortunately, this guidance is not legally accurate, suggesting that the CFPB does not understand the intricate nature of the TRID rule and corresponding Regulation Z provisions.

A very interesting statement. Kidna goes with what Randy said about Cordray.

One of the factors that classifies a transaction as an irregular transaction is if there are irregular payment amounts, other than an irregular first or final payment.

ARMs do not have irregular payment amounts. They have regularly scheduled periodic payments.

You are going to have to produce something a whole lot more concrete than this article to change my mind that simply because a loan is an ARM it is automatically an irregular transaction.
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#2271463 - 06/09/22 07:30 PM Re: Are ARM loans irregular transactions? Jason Ellis
rlcarey Offline
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Well, I will be damned. Even old dogs learn new tricks. This is not found in 1026.22 but it is buried in the commentary to 1026.17(c). See comment 10(iv)

10. Discounted and premium variable-rate transactions. In some variable-rate transactions, creditors may set an initial interest rate that is not determined by the index or formula used to make later interest rate adjustments. Typically, this initial rate charged to consumers is lower than the rate would be if it were calculated using the index or formula. However, in some cases the initial rate may be higher. In a discounted transaction, for example, a creditor may calculate interest rates according to a formula using the six-month Treasury bill rate plus a 2 percent margin. If the Treasury bill rate at consummation is 10 percent, the creditor may forgo the 2 percent spread and charge only 10 percent for a limited time, instead of setting an initial rate of 12 percent.

i. When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a 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 day period before consummation in calculating a composite annual percentage rate.

ii. The effect of the multiple rates must also be reflected in the calculation and disclosure of the finance charge, total of payments, and the disclosures required under §§ 1026.18(g) and (s), 1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5), as applicable.

iii. If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the first adjustment, from changing to the rate determined by the index or formula at consummation, the effect of that rate or payment cap should be reflected in the disclosures.

iv. Because these transactions involve irregular payment amounts, an annual percentage rate tolerance of ¼ of 1 percent applies, in accordance with §1026.22(a)(3).
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#2271464 - 06/09/22 07:33 PM Re: Are ARM loans irregular transactions? Jason Ellis
Richard Insley Offline
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For those who have never seen copies, this is "Volume 1" - http://aprsystems.com/Volume1.jpg and this is "Volume 2" - http://aprsystems.com/Volume2.jpg

The answer to the question posed by the OP is found here:
Section 1026.22(b) Computation tools.
(1) The Regulation Z Annual Percentage Rate Tables produced by the Bureau may be used to determine the annual percentage rate, and any rate determined from those tables in accordance with the accompanying instructions complies with the requirements of this section. Volume I of the tables applies to single advance transactions involving up to 480 monthly payments or 104 weekly payments. It may be used for regular transactions and for transactions with any of the following irregularities: an irregular first period, an irregular first payment, and an irregular final payment.

Volume 1 allows you to calculate APRs manually with a #2 pencil, a pad of paper, and the math skills possessed by most 6th graders in 1969 when Volumes 1 and 2 were devised. (Today, the necessary skills MIGHT be possessed by a typical high school graduate, but I wouldn't bet on it.) Volume 1 is used for "regular" transactions and Volume 2 must be used for "irregular" transactions.

APR disclosure tolerances (and the related enforcement policy tolerances) apply equally to Volumes 1 and 2 and all other calculation tools, and are higher for "irregular" transactions because Volume 2 is less precise and MUCH more complex than Volume 1. That's it! "Regular" vs "irregular" had nothing to do with product types or terms, only the following determinations:
1. If the note calls for multiple advances (construction loans, for example), then the "irregular" tolerance applies.
2. If the schedule of payment due dates includes more than 1 occurrence of "odd days", then the "irregular" tolerance applies.
3. Ignoring the first payment period, if "odd days" occur anywhere in the disclosed schedule of payment due dates, then the "irregular" tolerance applies.
4. Ignoring the dollar amount of the first and final payments, if ALL the disclosed payments are not equal (exactly equal) in dollar amount, then the "irregular" tolerance applies.

When I use terms like "schedule of payments," I mean the exact schedule--every cash flow that includes repayment of the Amount Financed or payment of any portion of the Finance Charge. Although condensed or summarized versions of this exact schedule may be disclosed in lieu of the exact schedule, they are NOT to be used for calculation of the FC or APR.

When the Fed added the calculation and disclosure rules for ARMs (the last time inflation went through the roof), it became necessary (see Section 1026.17(c)(1), Official Interpretations # 8 and 10) to disclose the "$teps" in the payment schedule necessary to get from an ARM's initial interest rate up (or down) to the fully-indexed rate. Whenever this exact payment schedule contains one or more of these adjustment "steps," the APR tolerance is governed by my Regular/Irregular determination #4 above.

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#2271468 - 06/09/22 08:09 PM Re: Are ARM loans irregular transactions? Jason Ellis
rlcarey Offline
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Richard - As always, your continued contribution to this site enriches us all. I for one, appreciate the depth of knowledge and history that you are willing to share with us all.

Thanks smile
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#2271479 - 06/09/22 08:49 PM Re: Are ARM loans irregular transactions? Jason Ellis
Dan Persfull Offline
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Thank you Randy. As you said us old dogs can learn new tricks. And like you I appreciate Richard continued sharing of his wealth of knowledge when it comes to Reg. Z.

My first introduction to Richard was at the 1995 ABA Truth in Lending School in Norman, OK. I still use his APR Examiner Sharp PC-1270 that I received at that school.
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#2271485 - 06/09/22 09:10 PM Re: Are ARM loans irregular transactions? Jason Ellis
rlcarey Offline
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I still have mine also from the inaugural session of the ABA TILA school in Norman in 1991. I am really not sure how many years that school actually existed.
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#2271486 - 06/09/22 09:11 PM Re: Are ARM loans irregular transactions? Jason Ellis
raitchjay Offline
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Well i was born in Norman, Oklahoma once upon a time. smile But sadly i wasn't around (in banking...i was around on this earth) in 1991 to attend one of Richard's sessions...i missed out on that.
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#2271491 - 06/09/22 11:39 PM Re: Are ARM loans irregular transactions? raitchjay
Jason Ellis Offline
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I have never been to Norman, Oklahoma but I really appreciate the input from all of you! It has been extremely educational.

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#2271492 - 06/10/22 12:05 AM Re: Are ARM loans irregular transactions? Jason Ellis
Richard Insley Offline
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I had A LOT of experience with this topic--but most of the scars are now gone! :-)

In 1980, I wrote my Stonier Graduate School of Banking thesis ("How True is Truth in Lending?") on the huge APR tolerance "slop factor" in "old Reg. Z." During the time I was researching and writing, the Fed changed the rules into what we've had since "new Reg. Z" was approved. That meant I had to perform MANY manual calculations to rebuild exhibits and rewrite everything...and that was before the days of PCs, spreadsheets, and word processing.

When the Fed proposed the ARM rules that are embodied in Interpretations 8, 9, and 10, I had just switched from being a regulator to the calculation support expert for my bank's "Wachovia plan" ARM loan product that was being developed when I arrived. I argued with my old friends at the Fed (unsuccessfully) against the entire concept...on the basis that it departed from the bedrock TIL principle of disclosing the terms of the legal obligation.

The more blood a topic draws, the longer you remember it!
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#2271498 - 06/10/22 01:15 PM Re: Are ARM loans irregular transactions? Jason Ellis
Dan Persfull Offline
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Richard's contribution to Reg. Z and his insight to E-sign is an invaluable contribution to BOL.

I actually still have the Regulation Z Truth in Lending booklet 12 CFR 226, Effective July 1, 1969: amended to April 1, 1981 (just realized that was April fool's day) and the Truth In Lending Simplification and Reform Act booklet published by the Commerce Clearing House out of Chicago.

Our EVP & CFO still have binders in his office that have the tissue thin pages the regs use to be printed on. I'm certainly glad I no longer have to thumb through those binders to research a topic.
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#2271504 - 06/10/22 02:08 PM Re: Are ARM loans irregular transactions? Dan Persfull
Jason Ellis Offline
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I appreciate all of you sharing your great wealth and depth of knowledge on BOL! If §1026.22(a)(3) would have just referenced back to §1026.17(C)(1)-10 it would save a lot of confusion!

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#2271570 - 06/13/22 03:49 PM Re: Are ARM loans irregular transactions? Jason Ellis
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So, I am wondering if this thread has come about due to the SOFR increasing so rapidly over the past month, tied to the increases to the Fed Funds Rate...?

And we have an anticipated increase tomorrow of at least 50 bps, possibly even 75 bps - I think a lot of additional 3 day waiting periods are going to be necessary!

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#2271580 - 06/13/22 06:00 PM Re: Are ARM loans irregular transactions? Jason Ellis
rlcarey Offline
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Not really sure what a discussion on tolerance has to do with rising rates? But hard to say.

Calculating APRs on ARM loans in a rapidly changing interest rate environment based on whether or not the rate was locked and whether it was locked at the then prevailing index plus margin is going to create some issues for those people that are not familiar with the rules.

Welcome to the 80s' and a volatile interest rate environment that "some of us" have lived through before.

I wonder how many of those lenders that have said, we do not officially lock interest rates, but we will "always" honor whatever rate would have applied on the date of application? I have a feeling that more than a few of those lenders are rethinking that approach.
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#2271720 - 06/15/22 07:30 PM Re: Are ARM loans irregular transactions? Jason Ellis
trying_to_comply Offline
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Using the SOFR rate as an example, it has risen 50bps since early May (and likely will jump again as a result of today's FOMC meeting), so the APR being generated for disclosures will be increasing. The tolerance, and identifying if the loan is regular or irregular, may help with avoiding the additional 3 day window, if you have an irregular transaction.

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#2272869 - 07/14/22 08:53 PM Re: Are ARM loans irregular transactions? Jason Ellis
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So, if there is no discount or premium feature for the ARM, then is it a "regular" loan. Let's say there is a 10/1 ARM with a starting rate of 4.5% and the index & margin is Prime + 1%, which is currently equal to 4.5%. This is a regular transaction, but if the starting rate was 4% with the same set of facts, then it would be an irregular transaction?

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#2272870 - 07/14/22 09:03 PM Re: Are ARM loans irregular transactions? Jason Ellis
rainman Offline
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Assuming that the payments only vary with the interest rate, you are correct. However, if the same loan has PMI with monthly payments, it will be irregular because the payments will vary when the PMI comes off.
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#2272890 - 07/15/22 01:11 PM Re: Are ARM loans irregular transactions? rainman
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Originally Posted by rainman
Assuming that the payments only vary with the interest rate, you are correct. However, if the same loan has PMI with monthly payments, it will be irregular because the payments will vary when the PMI comes off.

Seems like that would apply to fixed rate loans with PMI also. If so, I am wondering if a lot of secondary market loan sales are going down incorrectly, as I don't believe I have seen this discussed in the mortgage world as a hot topic.

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#2273091 - 07/20/22 01:25 PM Re: Are ARM loans irregular transactions? Compliance NABW
Richard Insley Offline
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Originally Posted by Compliance NABW
Seems like that would apply to fixed rate loans with PMI also.
Yes, this is true.
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