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Must We Have a Rate "Cap" on This Loan?

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Question: 
Is a rate cap applicable to a 10-year consumer mortgage, when we approve it as a fixed-rate for the first five years, and then a floating-rate for the next five years? An extreme example would be like a 10% jump in prime after the first five years. Could the rate jump the 10% at one shot? Currently our commitment indicates a floor only. Are we as a lender required to indicate a rate cap and a max rate, when it is to an individual for the purpose of purchasing an investment property?
Answer: 

You have an ARM product and need to review Regulation Z's 226.19 and its Official Staff Commentary. All applicable ARM disclosures will apply.

Paragraph 19(b)(2)(vii):

1. Rate and payment caps. The creditor must disclose limits on changes (increases or decreases) in the interest rate or payment. If an initial discount is not taken into account in applying overall or periodic rate limitations, that fact must be disclosed. If separate overall or periodic limitations apply to interest rate increases resulting from other events, such as the exercise of a fixed-rate conversion option or leaving the creditor's employ, those limitations must also be stated. Limitations do not include legal limits in the nature of usury or rate ceilings under state or federal statutes or regulations. (See Section 226.30 for the rule requiring that a maximum interest rate be included in certain variable-rate transactions.) The creditor need not disclose each periodic or overall rate limitation that is currently available. As an alternative, the creditor may disclose the range of the lowest and highest periodic and overall rate limitations that may be applicable to the creditor's ARM transactions. For example, the creditor might state: "The limitation on increases to your interest rate at each adjustment will be set at an amount in the following range: Between 1 and 2 percentage points at each adjustment. The limitation on increases to your interest rate over the term of the loan will be set at an amount in the following range: between 4 and 7 percentage points above the initial interest rate." A creditor using this alternative rule must include a statement in its program disclosures suggesting that the consumer ask about the overall rate limitations currently offered for the creditor's ARM programs. (See comments 19(b)(2)(viii)(A)-6 and 19(b)(2)(viii)(B)-3 for an explanation of the additional requirements for a creditor using this alternative rule for disclosure of periodic and overall rate limitations.)

First published on BankersOnline.com 3/7/05

First published on 03/07/2005

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