With interest rates rising and short term interest rates outpacing long-term interest rates, my institution is concerned that some of our ARM rates may accidentally become "teaser rates". I'm not sure what triggers a rate becoming a "teaser rate", but I think we need to address our control measures to detect this potential problem. Does any one have any thoughts or guidance???

Thanks in advance.

A teaser rate is a lower rate offered for a limited time. I don't see how your ARM rates would accidently become teaser rates. The initial rate is based on an index and margin and the change terms are spelled out as to when the rate will change.

I also have a question about teaser rates. Our banks have been working on a promotion where they are wanting to offer a 3 year fixed rate HELOC and then the rate goes to variable at the end of that term. Rates are tied to WSJ prime. When we are doing teaser rates, do we have to include verbiate about the teaser rates in the initial plan disclosure? Thank you.

Your initial rate is fixed for a certain period before the rate changes. The period of time until the first rate change must be disclosed in the plan disclosure and your historical example must also reflect the rate as being fixed for the first 3 years.

I'm confused, our banks have several standard HELOC plans and disclosures for those plans. However during certain promotions they have offered teaser rates previously and we have never had verbiage in our initial plan disclosures. Our verbiage is included either as an addendum to the agreement (if it is variable) or is included in the agreement for a fixed teaser to a variable. I've been told that our plan disclosures are the "worst" case situation and that providing a teaser is beneficial to the customer so we shouldn't have an issue with putting information in the plan disclosure. Could you provide me a little more guidance or reference? Thank you.

Your question asked about HELOCs, you do not have the worst case scenario option for HELOCs as you do ARMs. You must provide the 15 year historical example for your HELOC plans.

A teaser rate involves a discount from the market rate which is usually an index rate plus a margin. These discount rates must be dislosed. Review 226.19 and 226.5b and their Commentaries.

Are you sure about 226.19? The OSC 226.19(a)(1) states that "to be covered by this section, a transaction must be BOTH a residential mortage transaction under section 226.2(a)AND a federally related mortage loan under RESPA." I can see where it meets the RESPA definition but the HELOC doesn't meet the definition of a residential mortgage transaction or am I overlooking something? Thanks!

There's two sections to 226.19. Look to 226.19(b,). The Reg. Z disclosures for 226.19(b) and .5b are required for all loans secured by 1-4 dwellings that fall within the scope of that specific section. They also have different initial disclosure requirements. But the presence of a discount, or a premium, constitutes separate programs under both sections.

Help me, I am obviously missing something. 226.19(b) covers "closed-end" variable rate transactions secured by a dwelling and have a term greater than 1 year (i.e. ARMs). Our HELOC is an open-end transaction so just don't see how that section applies. I'll go back through .5b though.

226.19(b) applies to all closed-end variable rate loans. There are specific sections of .19(b) that deals with dwelling secured variable rate loans. You need to refer to .19(b) and its Commentary for ARM disclosure requirements and other variable rate loan disclosure requirements.

226.5b deals with HELOCs. You need to refer to .5b and its Commentary for the HELOC disclosure requirements.

I referred to .19(b) because of your following statement:

I've been told that our plan disclosures are the "worst" case situation and that providing a teaser is beneficial to the customer so we shouldn't have an issue with putting information in the plan disclosure.

Under .19(b) for closed-end ARM loans you have the option to disclose the historical example or the worst case scenario. For open-end HELOC loans you do not have this option. You must disclose the 15 year historical example in the plan disclosure, and the plan disclosure must reflect the terms of the plan, i.e. a discount rate and the duration of that discount rate.

The following is from .5b(d):

(vi) A statement that the initial annual percentage rate is not based on the index and margin used to make later rate adjustments, and the period of time such initial rate will be in effect.

Thank you for clarifying and I apologize as it was me who confused you. My question is really just about the HELOCs. You stated previously "your historical example must also reflect the rate as being fixed for the first 3 years". So if the teaser rate is fixed at 6.75% for the first 3 years and then is variable in accordance with the index, the historical example would show 6.75 with no index or margin for 1991, 1992 and 1993? Is this different from an introductory rate (i.e. where the bank offers 6.75% for 6 months) and then the rate changes?

If the initial rate is not established by the index plus margin that must be disclosed in the plan disclosure and the historical example must reflect the duration the rate is in effect. See the Commentary to 226.5b(d)(12)(xi)(4).