A bank looks at making loans with a rate tied to prime, but the payment is not adjusted but once a year, and is not changed unless the payment amount should increase over $10.

What are the disclosures that would be required, both upon the loan origination and in the future. I would assume that early disclosures, along with annual dislcosures would be required,as well as a notice each time the rate was adjusted due to a prime change?

Some disclosures would be tricky since the payment amount may or may not change on an annual basis?

Also, concern may arise with a negative amortization if rates increased during the year without a payment change occurring but once a year.

Yes, you would need early ARM disclosures and initial disclosures. You also need your annual disclosure, however, there is no requirement to notify the customer each time the interest rate changes. That would be done in the annual disclosure. The possibility of negative amortization will have to be addressed.

IMHO - I'm not sure with all the focus on subprime loans and these types of non-conventional pricing scenarios, why a bank would want to create this type of product. Disclosure and servicing is going to be vastly different than a standard mortgage and will be fraught with potential pitfalls.

I'm also not sure with the public focus on the dangers of these types of hybrid products what type of market you expect to reach. I would be suggesting to management that a review of the product marketing analysis be performed to make sure that the cost benefit analysis properly takes into consideration all the true start up and development costs this product is going to require.

This has a few of the features of the "Wachovia Plan" VR mortgages which were the first ARMs (circa 1979.) Be absolutely sure you can service these deals before offering them. Nobody needs a manually serviced portfolio of anything.

There are no unusual TIL disclosures, however the discloseable payment streams could easily exceed the capability of your loan documentation software if you allow teaser or premium pricing.