Intent of 1026.20(c) ARM Notice

The model and sample forms do not show any references to floor rates. But from reading section 1026.20(c)(2)(iii), it seems clear that the intent of this section is to explain exactly how the new rate is determined. The disclosure states "We calculated your interest rate by taking a published index rate and adding a certain number of percentage points, called the margin...". We have a loan where the new rate is actually higher than this formula because of the floor rate. This is going to confuse the customer.
Is anyone else running into this and how do you argue with your Core Operator that the floor rate needs to be included in the notice?

I agree, if the floor rate is going to impact how the rate is determined, I think that qualifies as something that falls under the "amount of any adjustment to the index".

Our core operator is going to amend the ARM Notices to include the floor rate. Yea!

I have a question regarding the Interest Rate Adjustment notices. We are a "small servicing bank" in that we service less than 5000 loans. Our loans are ARM loans and therefore will require us to send a notice 210-240 days before the first initial rate change. My question is this: When I reading up on this , I saw something about if the payment was due within 210 days after consummation then we did not have to send the notice? That was a little confusion to me so if you could clarify. If we in fact do have to send the notices 210 days before, can this be an estimate since we will not know if prime will be changing in that amt of time?

The regulation says that the .20(c) notice "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."

There's nothing in there about 210 days.

On the other hand, there is something in the timing requirement for the initial rate change notice under 1026.20(d) that mentions 210 days: "If the first payment at the adjusted level is due within the first 210 days after consummation, the disclosures shall be provided at consummation." And THAT notice can be based on an estimate. In paragraph .20(d)(2), we read: "If the new interest rate (or the new payment calculated from the new interest rate) is not known as of the date of the disclosure, an estimate shall be disclosed and labeled as such. This estimate shall be based on the calculation of the index reported in the source of information described in paragraph (d)(2)(iv)(A) of this section within fifteen business days prior to the date of the disclosure."

And for whatever it's worth, your small servicer status buys you nothing with regard to these disclosures.

John,

Does this notice apply to all loans on our books or just the one originated after January 10, 2014?

Not John, but the new notice requirements are for all loans that you service.

Even if our existing contracts say different?

Yes the changes to the ARM notices (timing and content) apply to both existing loans on the books and new ARM loans originated after 1/10/14 as long as they are adjustable rate, closed-end, consumer loans secured by the consumers principal dwelling.

However, the CFPB has instituted timing exceptions for the Subsequent ARM notices for existing loans (see John's comments above).

If you read the preamble to the TILA Servicing rule you will see that the CFPB does not believe (and I tend to agree with them) that they are requiring changes to any existing loan contracts. That is why they have provided the variations on the Subsequent ARM notice timing requirements.

Thank you!

The wording of the timing portion of the requirement could be clearer, but I agree that it accommodates existing contract provisions.