I need some assistance determining what term to use for the following scenario. I have a construction-perm loan (one closing) that is a 5/1 ARM. The fixed rate for 5 years includes the 12-month, interest-only construction phase. The rate will change 4 years after the beginning of the permanent phase. The TIL disclosures all reflect 4 years until the first interest rate change. My question is, for the term on the rate spread calculator, should I enter 4 years or 5 years? I can argue it both ways, and I’m not sure which is correct.
Argument 1 – Enter 5 years because technically the first rate change will take place five years after closing.
Argument 2 – Enter 4 years because it’s the permanent piece that is HMDA reportable, and that is what I’d enter to determine if the loan is an HPML (which is the same test). The commentary in Reg Z regarding HPML and construction-perm loans makes it clear that even if I disclose the two phases as a single transaction, the blended APR must be used and compared to the APOR for a transaction that is comparable to the permanent financing (which would be 4 years). I wouldn't run the rate spread one way to determine if it's an HPML and another way for HMDA, would I?
So which is it? Thank you in advance for your help.
Don't make me say, "I told you so!" Sincerely, your friendly Compliance Officer.