Are Employee Loans ARMs?

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Question:

Regarding (possible) ARM loan disclosures and terms, we effectively give employees a lower rate on their loan while they are employed here. What we do is disclose the fixed contract rate and they pay those scheduled payments. The system however, is programmed with the lower discounted employee rate and the loan just prepays and when paid long enough, pays off early. If the borrower leaves our bank, we remove the discount from the system and revert to the contractual rate. The payment never changes except for the final payment which may then be less than scheduled. Would this be considered an adjustable rate mortgage? Is this an acceptable way to handle employee loans?

Answer:

I have never seen these loans structured that way but these would be preferred rate loans.

From 1026.19(b)

5. Examples of variable-rate transactions. i. The following transactions, if they have a term greater than one year and are secured by the consumer's principal dwelling, constitute variable-rate transactions subject to the disclosure requirements of §1026.19(b).

B. Preferred-rate loans where the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event, such as an employee leaving the employ of the creditor, and the note reflects the preferred rate. The disclosures under §§1026.19(b)(1) and 1026.19(b)(2)(v), (viii), (ix), and (xii) are not applicable to such loans.

You also want to review 1026.17(c) and its Official Interpretations.

i. If the creditor offers a preferential rate, such as an employee preferred rate, the disclosures should reflect the terms of the legal obligation. (See the commentary to §1026.19(b) for an example of a preferred-rate transaction that is a variable-rate transaction.)

iii. Preferred-rate loans where the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event, such as an employee leaving the employ of the creditor, and the note reflects the preferred rate. The disclosures are to be based on the preferred rate.