Skip to content

Are ARM "Caps" Required?

Answered by: 

Question: 
On an ARM loan, do you have to have a periodic AND lifetime cap? We currently use 2% (annual) and 6% lifetime cap. Can you simply disclose that the rate will adjust annually with a 18% lifetime cap?
Answer: 

You are asking two questions: must you have caps, and, must they be disclosed.

Unless your state's laws require change caps (unlikely) the business decision is based on investor requirements (if applicable) or the dictates of the market. Early ARM products lacking change caps did not sell because consumers feared payment shock. When lenders addressed this product weakness (by adding rate change caps), ARMs became an acceptable mainstream product. The market has spoken.

With regard to the need for disclosure, Regulation Z has spoken. Section 226.19(b) requires you to deliver a "program disclosure" to each ARM applicant, listing many features of the plan, including "Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amortization, and interest rate carryover."

First published on BankersOnline.com 11/07/05

First published on 11/07/2005

Filed under: 
Filed under lending as: 

Banker Store View All

From training, policies, forms, and publications, to office products and occasional gifts, it’s available here:

Banker Store

hot right now

image description

Looking for effective, convenient training on a particular subject?

BOL Learning Connect offers more than 200 courses ON-DEMAND or on CD ROM from AML to Reg Z and every topic in between.

Search Topics