Now that interest rates are beginning to move up, many bankers are blowing the dust off their adjustablerate mortgage (ARM) loan offerings. Interest rates for fixed-rate loans have been so low for quite some time, which made them much more appealing to mortgage loan customers. But now, with rates starting to increase, the lower initial rates of ARM loans are beginning to look more appealing, at least to some borrowers. The problem is that many of us are so out of practice making ARMs that we need a refresher to remind us what to do. This article serves as a primer to help us re-learn how to meet disclosure requirements for ARM loans. Different types of ARMs When we think of an adjustable-rate mortgage, the first thing that comes to mind is likely the classic loan with an interest rate that can change at some regular interval based on the movement of some external index. There is a wide variety of initial periods for which the rate is fixed and later intervals for rate changes over the life of the loan. Common initial fixed periods are one, three, five, seven, or 10 years, while probably the most common interval for later rate changes is one year. But that is not where the variety of ARMs ends. The Official Staff Commentary on Regulation Z discusses a number of other loan structures considered variable-rate transactions subject to the ARM disclosure requirements. These additional loan structures are: • Renewable balloon-payment loans where the creditor is both unconditionally obligated to renew the balloonpayment loan at the consumer’s option (or is obligated to renew subject to conditions within the consumer’s control) and has the option of increasing the interest rate at the time of renewal. • 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 (e.g., an employee leaving the employ of the creditor or an automatic payment arrangement being ended) and the note reflects the preferred rate (though a number of the ARM disclosures are not required for preferred-rate loans). • “Price-level-adjusted mortgages” or other indexed mortgages that have a fixed rate of interest but provide periodic adjustments to payments, and the loan balance reflects changes in an index measuring prices or inflation (again, a number of the ARM disclosures are not required for pricelevel-adjusted loans). It is important to note that graduated-payment mortgages and step-rate transactions without a variable-rate feature are not considered variable-rate transactions under Regulation Z. This is likely because changes over the loan are known at the outset — specified payment and/or interest rate increases. Application disclosures Two ARM disclosures must be given to applicants for such loans when an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier. There is an exception that allows the disclosures to be delivered or placed in the mail no later than three business days following receipt of a consumer’s application when the application reaches the creditor by telephone or through an intermediary agent or broker. For an application accessed by the consumer in electronic form — including an online application portal — the required ARM disclosures may be provided to the consumer in electronic form on or with the application. These two early ARM disclosures are: • The booklet titled Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet), or a suitable substitute; and • A loan program disclosure for each variable-rate program in which the consumer expresses an interest (each comprised of 12 specified pieces of information about the ARM program). TRID disclosures The Loan Estimate (LE) and Closing Disclosure (CD) require additional disclosures for ARMs. The LE must be provided to an applicant no later than the third business day after their application is received by the lender, while the CD must be provided no later than three business days before consummation. BY WILLIAM J. SHOWALTER, CRCM, CRP, SENIOR CONSULTANT YOUNG & ASSOCIATES, INC. BRUSHING UP ON DISCLOSURES FOR ARMs Associate Member cbak.com 10 In Touch
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