ARM Loans

Are all ARM Loans Considered irregular loans for the .25 tolerance of APR?

Thank you

I just did some research on this for a friend of my at another "institution" and the answer is no. If you will post your email address, or email me at dpersfull@peoples-bank.com, I will send you the cites. My email to him is lenghty and would take up to much room on the post.

You don't have to go into too long of an explanation. If you look at the commentary in 226.22(a)(3) under Irregular Transactions it indicates:

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.

Also look at the Reg. Z Commentary on 226.17 for what constitutes an irregular transaction.

However, the irregular payment definition covered in 226.17 does not have any bearing on whether the loan qualifies as a irregular transaction which allows an increase in the APR tolerence to .25%.

I read this that if the intitial rate was discounted, or had a premium, then the "irregualr transaction" rule would apply. Did I interpret it wrong? Dan

I stand corrected - after further review, a discounted variable rate transaction is considered an irregular transaction for tolerence purposes. So I guess the answer to the original question would be it depends on whether the original rate was at a discount or premium. Thanks Dan - that's why I love this stuff!!!!

The concept of "irregular" transactions was created because certain creditors were using the Board's APR tables, "Volume I" and "Volume II." Volume I can handle loans with a single advance and no more than the following irregularities in the payment schedule: odd first period, odd first payment amount, odd final payment amount. Any loan with terms that are more complex requires the use of Volume II. The .125% and .25% tolerances are tied directly to these two levels of calculation complexity.

ARMs priced at par (no premium and no discount), are "regular" because you must disclose a single P+I level (with the possible exception of a slightly odd final payment to make up for rounding differences earlier in the schedule.)

When premium or discount pricing is added, you must disclose multiple streams of P+I payments to show the steps up or down in the rate/payment. Because the extra stream(s) of P+I payments exceeds the "odd first or final payment" threshhold, premium and discounted ARMs become "irregular", allowing more tolerance.

If you want generalizations for ARMS, you have:
- .125% tolerance applies to par-priced ARMS with no PMI renewal premiums.
- .25% tolerance applies to everything else.

rclarey, over the years I've stood corrected so many times, that I don't know if I could stand anymore. I love this forum also, it has been a great help.

I thought premium arms acted as fixed rated loans on the TIL?

Premium ARMs are the mirror image of discounted ARMs. As the introductory rate gives way to formula-driven rates, payments will fall instead of rise.

So the payments in the payment stream will actually show a payment going down rather than up and a lower APR than the start rate.

That would be correct.

It's also possible to have the payments going down but the APR goes up because of PMI and lots of PPFCs.

Regarding tolerances of .25 on irregular loans, where does the $100.00 cap for understating the finance charge come in to play. Also, where can I get a "user friendly calculator" to test our system's apr calculations. What would be the cost of this calculator.

Colleen, the best calculator that I've seen is from the business in the post right above yours.

I'll second that! I got one at ABA compliance school long ago. I still use it all the time. It's passed many OCC reviews of it's calculations.

Thanks David & Lisa for the testimonials. I've distributed roughly 4,000 during the past 18 years & have helped countless bankers stay out of TIL trouble. Compliments of the Massachusetts Bankers Assn's annual Compliance Academy, another batch of calculators are on their way into action this week!