I should know this, but just can't find a reference. Memory tells me that any index used for ARM loans must not be under the control of the creditor, but must be something independent. Am I correct? If so, can anyone point me to the citation for this?

Thanks,

From the Official Interpretation of Regulation Z, 1026.19 (Certain variable rate transactions):

Paragraph 19(b)(2)(ii)

1. Identification of index or formula. If a creditor ties interest rate changes to a particular index, this fact must be disclosed, along with a source of information about the index. For example, if a creditor uses the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity as its index, the disclosure might read, “Your index is the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year published weekly in the Wall Street Journal.” If no particular index is used, the creditor must briefly describe the formula used to calculate interest rate changes.

2. Changes at creditor's discretion. If interest rate changes are at the creditor's discretion, this fact must be disclosed. If an index is internally defined, such as by a creditor's prime rate, the creditor should either briefly describe that index or state that interest rate changes are at the creditor's discretion.

I ran across this thread:

https://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=1889100

According to this, if you are an OCC bank you cannot tie ARMs to an internal index. Furthermore, it appears you cannot sell them on the secondary market regardless of your regulator.

Does anyone know if this is still accurate? If so, does the FDIC have a regulation equivalent to the OCC?

I think you're remembering an OCC prohibition (or restriction) that applied to residential loans/lines of some type. It was issued long ago (maybe in the 80s?) and may have been withdrawn. Certainly we have users who can fill in the gaps in my vague recollection.

It is still there, except they added paragraph b in 2008.

§ 34.22 Index.
(a) In general. If a national bank makes an ARM loan to which 12 CFR 226.19(b) applies (i.e., the annual percentage rate of a loan may increase after consummation, the term exceeds one year, and the consumer's principal dwelling secures the indebtedness), the loan documents must specify an index or combination of indices to which changes in the interest rate will be linked. This index must be readily available to, and verifiable by, the borrower and beyond the control of the bank. A national bank may use as an index any measure of rates of interest that meets these requirements. The index may be either single values of the chosen measure or a moving average of the chosen measure calculated over a specified period. A national bank also may increase the interest rate in accordance with applicable loan documents specifying the amount of the increase and the times at which, or circumstances under which, it may be made. A national bank may decrease the interest rate at any time.

(b) Exception. Thirty days after filing a notice with the OCC, a national bank may use an index other than one described in paragraph (a) of this section unless, within that 30-day period, the OCC has notified the bank that the notice presents supervisory concerns or raises significant issues of law or policy. If the OCC provides such notice to the bank, the bank may not use that index unless it applies for and receives the OCC's prior written approval.