Our ARM Disclosure states "The minimum rate we will charge at any time is 6%, or the initial interest rate if lower."
Now that rates have gone above 6%, I've found that we are using the initial rate (higher than 6%) as the floor rate when doing the loan.

How do we fix this for the loans that have been done at a higher rate than 6%? Or is it not an issue?
Thanks.

It does not appear that your disclosure is wrong, is it?

"The minimum rate we will charge at any time is 6%, or the initial interest rate if lower."

Actually Randy I think it is wrong since the initial rate is not lower than 6%.

Obi - I assume there have been no rate changes so you should be able to go into your system and maintenance the floor rate to the 6%.

Ah - yes Dan, I read that the wrong way. That is a problem.

Sorry, I wasn't very clear with my question. Our ARM disclosure says the floor is "6%, or the initial rate if lower".
We recently done ARM loans with an initial rate of 6.5 or 7%, and the loan processors have used a floor of that initial rate (6.5 or 7%) instead of a floor of 6%.

Can we send a letter to the customer saying there was an error on the note and the floor on their loan is 6% and then change the floor in our system to 6%, to agree with the ARM disclosure?

That is what I would do to avoid any sort of UDAP issue.

Thank you Randy and Dan!

You also need to know that the error has not adversely impacted any of these borrowers and I would bring that to their attention - "you have not paid any greater interest because of this." If that isn't the case, do some math and issue some refunds.

I don't see why notification to the customer is required. I would just change the floor in your system to 6%. The statement "6%, or the initial rate if lower" is still accurate, the second part just doesn't apply. If the initial rate is 6.5%, and you update your system to show a 6% floor, your disclosure is accurate.

I wouldn't send anything to the customer unless the ARM disclosure or LE/CD showed the higher floor rate.

TMatt - I think it is because they appear to have a conflict between the early disclosure and the actual note - which represents the legal obligation.

Would not a rate lock agreement with an LE noting the rate lock and, if applicable, the new ceiling and floor, be controlling in these instances where the early ARM disclosure reflects a lower ceiling and floor?

A different floor and/or ceiling is a different ARM program and you would have to provide them a new early ARM disclosure.

Official Interpretation
Paragraph 19(b)(2)

2. Variable-rate loan program defined. i. Generally, if the identification, the presence or absence, or the exact value of a loan feature must be disclosed under this section, variable-rate loans that differ as to such features constitute separate loan programs. For example, separate loan programs would exist based on differences in any of the following loan features:


B. The rules relating to changes in the index value, interest rate, payments, and loan balance.

C. The presence or absence of, and the amount of, rate or payment caps.

Well done, Mr. Carey.