Premium ARM and calculating the APR

I've read 1026 until my eyes have started to cross. Can someone point me in the right direction as to where I can locate guidance on how to accurately calculate our APR for an ARM if we use a premium rate. Do we calculate based on the worse-case adjustments over the maximum 5 year period? HELP!

Don't confuse the payments that you disclose in the payment table on the TIL disclosure with the payment streams you use to calculate the APR.

On a premium ARM, the first payment stream will be based on the initial rate and subsequent payment streams will be based on the current index plus margin and adjusting according to the note until the fully indexed rate is reached (may be more than one if the current index and margin is farther away from the initial rate than the periodic caps).

For example 5/1 ARM

Initial rate 7% - 60 payments at that rate.

Current index and margin 1.50 + 1.50 = 3.00%. 2% annual change cap.

2nd stream - 12 payments @ 5%

Remaining payments @ 3%

Ahhh! So then what is used in the APR calculation? Just that initial premium rate over the life of the loan?

No, you figure it out how I explained it above.

The payment table on the TIL is going to be based on a worst case scenario.

Since almost every loan documentation system calculated this all automatically, why not just look at an amortization schedule for one of these loans that goes along with the TIL disclosure and I'm sure you can figure it out. This is not really something anyone does by hand anymore.

Unfortunately, it appears as though our LOS system isn't set up correctly. That's my issue. It's almost like we had a user at one point who could create certain programming behind the scenes and that is causing us problems. I've been asked to look into this and give them a clarifying documented answer as to how it truly should be. The LOS isn't offering any support on what their "default" parameter set up would be.

Well, what you are asking is a little hard to explain in one paragraph answers. If you think that your loan documentation software has not been calculating the APRs correctly on ARM loans, then that could be a very serious and very costly problem.

You might want to be looking for some professional help at this point.

For 29 years, the answer has been spelled out in the Official Interpretations of Section 1026.17(c)(1), Comments #8 - 10.