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#1994726 - 02/09/15 10:58 PM Loan Estimate - "Product" field - Adjustable Rate
awilli Offline
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We're working on building our default fields for the Loan Estimate, and I'm trying to determine what to put for an adjustable rate. (I can't find the answer in 1026.37)

Scenario: Our loan is tied to WSJ Prime rate, and it will adjust when prime rate changes. There is no introductory rate, and there is no defined adjustment period. If it had a defined adjustment period every 1 year, then I would put "0/1 Adjustable Rate". But since the adjustment period is unknown, should I put "0/0 Adjustable Rate"? Or just "Adjustable Rate"?
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#1994799 - 02/10/15 02:47 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
Dan Persfull Offline
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there is no defined adjustment period . . . .But since the adjustment period is unknown

How is this possible? How can you meet the timing requirement of 1026.20(d).

From 1026.19(b):

(2) A loan program disclosure for each variable-rate program in which the consumer expresses an interest. The following disclosures, as applicable, shall be provided:

(vi) The frequency of interest rate and payment changes.

And from the Commentary:

Paragraph 19(b)(2)(vi)

1. Frequency. The frequency of interest rate and payment adjustments must be disclosed. If interest rate changes will be imposed more frequently or at different intervals than payment changes, a creditor must disclose the frequency and timing of both types of changes. For example, in a variable-rate transaction where interest rate changes are made monthly, but payment changes occur on an annual basis, this fact must be disclosed. In certain ARM transactions, the interval between loan closing and the initial adjustment is not known and may be different from the regular interval for adjustments. In such cases, the creditor may disclose the initial adjustment period as a range of the minimum and maximum amount of time from consummation or closing. For example, the creditor might state: “The first adjustment to your interest rate and payment will occur no sooner than 6 months and no later than 18 months after closing. Subsequent adjustments may occur once each year after the first adjustment.” (See comments 19(b)(2)(viii)(A)–7 and 19(b)(2)(viii)(B)–4 for guidance on other disclosures when this alternative disclosure rule is used.)

From 1026.18:

(2) If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures:

(i) The fact that the transaction contains a variable-rate feature.

(ii) A statement that variable-rate disclosures have been provided earlier.

(3) Information provided in accordance with §§1026.18(f)(2) and 1026.19(b) may be substituted for the disclosures required by paragraph (f)(1) of this section.
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#1994805 - 02/10/15 02:55 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
Rocky P Offline
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Also, if applicable, "post consummation" adjustments.
1026.20(c) (2) Timing and content. Except as otherwise provided in paragraph (c)(2) of this section, the disclosures required by this paragraph (c) shall be provided to consumers at least 60, but no more than 120, days before the first payment at the adjusted level is due. The disclosures shall be provided to consumers at least 25, but no more than 120, days before the first payment at the adjusted level is due for ARMs with uniformly scheduled interest rate adjustments occurring every 60 days or more frequently and for ARMs originated prior to January 10, 2015 in which the loan contract requires the adjusted interest rate and payment to be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date. The disclosures shall be provided to consumers as soon as practicable, but not less than 25 days before the first payment at the adjusted level is due, for the first adjustment to an ARM if it occurs within 60 days of consummation and the new interest rate disclosed at consummation pursuant to § 1026.20(d) was an estimate.
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#1994807 - 02/10/15 03:01 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
Richard Insley Offline
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Originally Posted By: awilli
Our loan is tied to WSJ Prime rate, and it will adjust when prime rate changes.
Please give us more product details, beginning with an explanation of "it."
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#1995100 - 02/10/15 10:13 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
awilli Offline
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"it" = interest rate on the loan

Thanks for the responses so far. I'm visiting with the business line management to find out more product details. I'll follow up later if needed.
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#1995495 - 02/11/15 10:45 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
awilli Offline
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Here are some details about the loan products:

1) 12 month construction non-revolving LOC (interest only payments); and 12 month interest only bridge loan: Both loan products are tied to WSJ Prime interest rate. The rate on the loan will change on the date that Prime rate changes – Change Date of Change (CDOC). Actual accrued interest is due monthly.

2) Residential Lot Loan: 2-year interest only period converting to a 10-year amortization. The repayment structure during the 10-year amortization period is principal PLUS interest. So the principal payments are fixed during the 10-year amortization, but the interest payment portion will be actual accrued interest. The rate on the loan will also be tied to WSJ Prime interest rate, and the rate on the loan will change on the date that Prime rate changes. Actual accrued interest due monthly throughout the term of the loan.

Any feedback?
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#1996517 - 02/17/15 10:56 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
awilli Offline
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Any feedback from my last post?
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#1996558 - 02/18/15 03:15 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
John Burnett Offline
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From the hip: Could it be that the TILA/RESPA Integrated Disclosure rule will actually prevent the type of consumer mortgage financing that you are describing?
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#1997348 - 02/20/15 06:25 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
awilli Offline
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I guess that's a possibility, but it seems like having a floating rate should be allowed, especially for temporary financing (i.e. construction and bridge loans)
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#1997564 - 02/23/15 04:48 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
RR Joker Offline
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My thoughts are why are you making floating rates on temporary loans...it's not like you are hedging any type of interest rate risk...it's probably more trouble than it's worth.
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#1998160 - 02/25/15 05:59 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
awilli Offline
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But if they keep the floating rate product, I would assume that I just use "Adjustable Rate" in the Product section of the Loan Estimate, and not reference any periods.

1026.37(a)(10)(i)(A):
Adjustable rate. If the interest rate may increase after consummation, but the rates that will apply or the periods for which they will apply are not known at consummation, the creditor shall disclose the loan product as an “Adjustable Rate.”
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#1998901 - 02/27/15 07:32 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
Jerod Moyer Offline
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Sioux Falls, SD
Originally Posted By: awilli
We're working on building our default fields for the Loan Estimate, and I'm trying to determine what to put for an adjustable rate. (I can't find the answer in 1026.37)

Scenario: Our loan is tied to WSJ Prime rate, and it will adjust when prime rate changes. There is no introductory rate, and there is no defined adjustment period. If it had a defined adjustment period every 1 year, then I would put "0/1 Adjustable Rate". But since the adjustment period is unknown, should I put "0/0 Adjustable Rate"? Or just "Adjustable Rate"?


Based on the following [OSC 37(a)(10) #3(iii)]:

iii. Adjustments more frequent than monthly. For adjustment periods that change more frequently than monthly, § 1026.37(a)(10) requires disclosure of the applicable unit-period, such as daily, weekly, or bi-weekly. For example, for an adjustable rate construction loan with no introductory fixed rate period where the interest rate adjusts every seven days, the disclosure required by § 1026.37(a)(10) is “0/Weekly Adjustable Rate.”

I think the answer in your scenario is "0/Daily Adjustable Rate".
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#1999110 - 03/02/15 02:49 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
awilli Offline
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I think you're correct! Thank you very much!!!
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#2088147 - 07/15/16 12:07 AM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
iheartcompliance Offline
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I would like to tag onto this post for further clarification. The loan request I received today includes a variable rate product on a long term loan. The variable rate has a 2% cap. Any suggestions on how to show this on the Loan Estimate? I.e product, term, payment information.

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#2088150 - 07/15/16 01:45 AM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
rlcarey Online
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Caps would be covered in the loan contact and reflected in the Projected Payments section.
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#2088159 - 07/15/16 02:23 AM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
iheartcompliance Offline
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I am not sure what you mean by "loan contact".

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#2088174 - 07/15/16 12:31 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
rlcarey Online
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Sorry - contract/note.
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#2088192 - 07/15/16 01:03 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
iheartcompliance Offline
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That makes sense. So how would we label the adjustment period? The interest rate should be shown at the cap amount, correct? Same for the payment schedule?


Anybody else have these types of loans?

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#2088207 - 07/15/16 01:55 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
rlcarey Online
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Almost all ARMs that I see have caps. Your adjustment period would be reflected in the Product description and any impact of rate caps would be reflected in the projected payments. You would also complete the AIR table disclosing the caps and the adjustment periods.
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#2088208 - 07/15/16 02:00 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
iheartcompliance Offline
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There isn't really an actual set adjustment period. Our pricing is based off our average costs of funds, which is typically adjusted monthly. But with saying that, our variable rate typically does not get adjusted at all. That is where my confusion begins; I don't know what to put for the adjustment period. It isn't an actual ARM. The rate is variable for the entire life of the loan.

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#2088229 - 07/15/16 02:31 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
rlcarey Online
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Your disclosures have to reflect the legal obligation of the customer. If you cannot determine what the legal obligation is, then you should set down with your legal counsel and your mortgage notes to make that determination. It has been twenty-five years since I heard of a bank tying an adjustable rate consumer mortgage to an internal index.
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#2088242 - 07/15/16 02:47 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
iheartcompliance Offline
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I appreciate the feedback. It sounds like this will be interesting to even attempt to figure out.

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#2088338 - 07/15/16 05:59 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
awilli Offline
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Thought I would respond since I initiated this thread. Per Jerod's previous post, we reflect our adjustable rate as "0/Daily Adjustable Rate", since our rate is tied to prime and "can" adjust daily.

We have a 1-year construction loan, adjustable rate tied to prime. The Product section of our LE is reflected as "11 mo. Interest Only, 0/Daily Adjustable Rate".

We also have a lot loan product, adjustable rate tied to prime, that is on a 2-year interest only period then converts to a 10-year amortization. The Product section of the LE is reflected as "2 Year Interest Only, 0/Daily Adjustable Rate".

If your rate "can" adjust monthly, and not more often than monthly, you might reflect the adjustable rate as "0/Monthly Adjustable Rate".

With that said, I also haven't heard of tying an adjustable rate consumer mortgage to an internal index.
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#2088394 - 07/15/16 07:56 PM Re: Loan Estimate - "Product" field - Adjustable Rate awilli
iheartcompliance Offline
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awilli, thanks for your reply. That is how I determined that we would show it. Now I am moving on to attempt to figure out the projected payments table.

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