We have a 30-year, 7/1 ARM transaction where the initial interest rate is fixed @ 6.50%, and adjusts after the 84th payment to the index for One-Year LIBOR + 2.25%.

For purposes of determing an APR tolerance under Regulation Z, would this be considered a 'regular' transaction or an 'irregular' transaction.

Please see Regulation Z guidance below:
Regulation Z — Truth in Lending
Sec. 226.22 Determination of annual percentage rate.

(a)(3) In an irregular transaction, the annual percentage rate shall be considered accurate if it is not more than \1/4\ of 1 percentage point above or below the annual percentage rate determined in accordance with paragraph (a)(1) of this section.46
46 For purposes of paragraph (a)(3) of this section, an irregular transaction is one that includes one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts (other than an irregular first period or an irregular first or final payment).

Supplement I to Part 226—Official Staff Interpretations
Paragraph 22(a)(3).
1. Irregular transactions. The annual percentage rate for an irregular transaction is considered accurate if it varies in either direction by not more than1/4of 1 percentage point from the actual annual percentage rate. This tolerance is intended for more complex transactions that do not call for a single advance and a regular series of equal payments at equal intervals. The1/4of 1 percentage point tolerance may be used, for example, in a construction loan where advances are made as construction progresses or in a transaction where payments vary to reflect the consumer's seasonal income. It may also be used in transactions with graduated payment schedules where the contract commits the consumer to several series of payments in different amounts. It 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.

It's irregular.

A variable rate transaction is "regular" if there is no discount/premium initial rate and the payments (for TILA purposes) are assumed to remain constant throughout the loan life because the initial rate is fully indexed.

A 7/1 ARM is not an irregular transaction of and within itself, nor does the presence of a discount or a premium make it an irregular transaction.

Per the description given DonnaS's product does not include multiple advances, irregular payment periods, or irregular payment amounts.

IMO, this product, as described, is a regular transaction.

Dan,

Thanks. The payment amount does change after the 84th payment for the remainder of the loan term. Would that be 'irregular payment amount' as described in Reg Z? Donna S

Not IMO. Your loan is a single advance loan with regular payments at regular intervals. I see nothing irregular about this loan at all for APR purposes.

Have you seen this discussion thread from 2002? http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Board=1&Number=32327

See Richard Insley's post.

What I posted then is still valid.

In other words, it's irregular, because the disclosed payment schedule includes two different payment levels. The initial rate here is a premium rate, so for TILA disclosure purposes, the payments are constant for 84 months, then will be reduced based on the lower fully indexed rate.

A loan with a payment schedule that is 84 @ $$$ followed by 276 @ $$$$ is irregular, but you can't say it's because there are two payment levels. There could be as many as three different payment levels (1 @ $$, 358 @ $$$ & 1 @ $$$$) and the loan would still be regular. Your loan is irregular because it involves more than an odd first and/or final payment.

Maybe I'm missing something in this loan. As I read this, this is a 7/1 ARM with the first adjustment in 7 years and then it adjusts every year thereafter. What am I missing? I have never considered ARM loans to be irregular transactions.

This is from the commentary 226.14(c)(4) Determination of APR. I am not sure if this will help you.
Paragraph 17(c)(4).

1. Payment schedule irregularities. When one or more payments in a transaction differ from the others because of a long or short first period, the variations may be ignored in disclosing the payment schedule, finance charge, annual percentage rate, and other terms. For example:

It's the premium initial rate, which for this loan results in a disclosed payment schedule that looks like this:

84 x $xxx.xx
276 x $yyy.yy

(or, as Richard points out, 84 x $xxx.xx, 275 x $yyy.yy and 1 x $zzz.zz).

Absent the change in payments at month 85, this would not be an irregular loan (for instance, if the note indicated that rate changes would affect the number of payments rather than the amount).

Thanks rainman. A light bulb just came on. The following didn't sink in when I first read it:

payment amount does change after the 84th payment for the remainder of the loan term.

Recapping this frequent discussion for the benefit of future inquirers, here's how this plays out.

Footnote 46 is the ONLY rule affecting the APR calculation tolerance for closed-end credit. Other, more generous, tolerances apply when you are calculating reimbursements, but that's not what we're discussing here. Footnote 46 says, in relevant part, "...an irregular transaction is one that includes one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts (other than an irregular first period or an irregular first or final payment)." Breaking this down and including loan types and features, we have:
- multiple advances: construction loans and certain alternative student loans
- irregular payment periods: loans with more than one scheduled occurrence of odd days and loans with scheduled "skips" ("school teacher plans, for example)
- irregular payment amounts: periodic MI renewal premiums, graduated payments (partial buydowns, ARM step-ups or step-downs due to discount or premium pricing, negative amortization, etc.)

Footnote 46's limitations are based on the capabilities of the Fed's APR tables, Volume I and Volume II. Volume I can handle loans with single advances, odd first periods, and odd first and final payment amounts. For everything else, there's Volume II. Although computers have rendered these tables obsolete, many lenders still used them in 1981 when the Fed changed the tolerance concepts and added Footnote 46.

Bringing this back up due to the reg z changes effective 7-30. When discussing what constitutes an "irregular" payment amount...where would interest-only (which will vary depending on days in month) fall...or would you actually only be looking at the final balloon a year or so down the road?

For argument's sake, let's say this loan will not fall under a "temporary financing" exemption. Or, actually, we may now have loans that will fall under eTIL's and not under RESPA! Oh..the plot thickens now! Oh! and what about construction loans without the lot purchase! oh boy...I just took this way further than "irregular" transactions!

fresh look this am...only applies if RESPA applies, so that answered this part of the equasion! My mind is reeling, I think!