Graduated Payment or Variable Rate Ad?

Answered by:

Question:

I am confused by the Truth in Lending rules and FTC Guidance (How to Advertise Consumer Credit) on how to advertise the following product: 10/1 LIBOR ARM. Repayments are "interest only" for 10 years with a fixed rate, then for the remaining 20 years (30-year loan), the rate becomes variable and the loan is amortized for principal and interest payments. At a minimum, our line of business wants to advertise the amount of the monthly payment. Is this a Graduated Payment feature loan, or a Discounted Variable Rate Plan or something else? Any real-life examples are appreciated.

Answer:

It is an ARM if the APR can increase after closing. Depending on whether the note rate is lower, higher or equal to the fully indexed rate as of the disclosure date, you have a discounted, premium, or par variable rate loan. Assuming your ads will include a trigger term, they will need to contain disclosures for a representative deal, including the APR and a complete payment schedule (not just the interest-only payment.)

First published on BankersOnline.com 7/10/06