ARMs - rate used for ATR vs QM

Can someone help me understand the difference between the rate used to calculate the payment for an ARM if you are following the general ATR rule, the non-standard to standard exception, or the QM safe harbor/presumption of compliance? I'm wicked confused!

Here is a simple 3/1 example:

Intro rate: 2%
Index: .5%
Margin: 3%
Caps: 2/2/6

For a QM, I'm thinking the rate would be 7%
For the ATR and NS to S, I'm thinking 8%, or would it be 3.5%?

Thanks!

Here is what is confusing me, when I think of a fully indexed rate, I think index+margin, rounded. The definition in 1026.43(b) isn't different than that, is it? So, for the ATR and NS to S, the rate that should be used is the greater of the intro rate and the fully indexed rate.

Our vendor is calculating the rate for the ATR rule as the greater of the fully indexed rate or the initial rate plus the lifetime cap. That doesn't seem right to me.

For general ATR in your example you would use the fully indexed rate (3.5%) as it is greater than the Intro rate (2%).

JMHO, but I think you have to take your adjustments out for 5 years. 1st adjustment at end of 3yrs, 2nd adjustment at end of 4th yr, and 3rd adjustment at end of 5th yr. You would need to use 5.5%.

But their adjustment cap is 2% so for QM you would need to use 7.5% (Fully indexed rate 3.5% + fourth year 2% adjustment + fifth year 2% adjustment).

For standard ATR it owuld be only the 3.5% fully indexed rate.

I should not try to add/subtract without calculator. Thanks for catch CB.

For a QM would it not be:

year 1-3 @ the 2% intro rate
year 4 @ 4% (intro plus max increase)
year 5 @ 6% (4 plus max increase)

So underwrite using 6%.

CB, wouldn't it be 6% for a QM (intro rate of 2% + fourth year 2% adjustment + fifth year 2% adjustment)? If my rate increased from the 2% intro rate to 5.5% after the first adjustment, wouldn't the 2% first adjustment cap limit the rate in the fourth year to 4%?

From 1026.43(e)(2):

(A) The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due;

Based on the intro rate and the periodic caps the maximum rate within the first 5 years in this example would be 8%.

Month 37 - 2% intro + 2% cap = 4%
Month 49 - 4% + 2% = 6%
Month 61 - 6% + 2% = 8%

Thanks, Dan. I had forgotten about the "first payment due" bit.

Post by Dan Persfull:

"From 1026.43(e)(2):

(A) The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due;

Based on the intro rate and the periodic caps the maximum rate within the first 5 years in this example would be 8%.

Month 37 - 2% intro + 2% cap = 4%
Month 49 - 4% + 2% = 6%
Month 61 - 6% + 2% = 8%
_________________________
The opinions expressed are mine and they are not to be taken as legal advice."


My question, is, what if the intro rate in this case is 4.0%, therefore, it is HIGHER than the index + margin. For a 5/1 ARM, would the qualifying rate on a QM, GENERAL and/or SMALL CREDITOR be based on whichever is HIGHER, or is it always INTRO/START rate +2.0%, assuming that 2% is the annual cap?

For General ATR you would use 4% in your example as it is greater than the fully indexed rate.

For QM you still use whatever the highest possible payment is during the 5 year period after the first payment.

My understanding is that we figure the payment at the higher rate based on the full loan amount. Is that correct? As I was explaining this at our bank, someone said that we should be using the balance as of the 61st payment.

Right or wrong: the only way we "use" the max rate in the 1st 5 years for QM purposes is in underwriting the loan, specifically calculating the DTI ratio.

Either one.

Underwrite using-

(A) The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due; and

(B) Periodic payments of principal and interest that will repay either:

(1) The outstanding principal balance over the remaining term of the loan as of the date the interest rate adjusts to the maximum interest rate set forth in paragraph (e)(2)(iv)(A) of this section, assuming the consumer will have made all required payments as due prior to that date; or

(2) The loan amount over the loan term;