Question & Answer

Question: If we make an employee a mortgage loan at a preferred rate, but will raise the rate when and if the employee leaves, does this become a variable rate loan? How should we make disclosures?

Answer: Yes. This is a variable rate loan because it meets the provision in ?226.18(f) of a loan for which "the annual percentage rate may increase after consummation."

This means that you do have to give variable rate disclosures to your employees. The disclosure must explain the provisions set out in ?226.28(f): the circumstances under which the rate may increase, any limitations on the increase, the effect of an increase, and an example of payment terms resulting from an increase.

If the loan is secured by the consumer's principle dwelling and is for a term of more than one year, the loan would be an adjustable rate mortgage subject to the additional disclosure requirements of ?226.19(b). Note, however, that according to Commentary paragraph 19(b)-5, some of the ARM program disclosures are not required. These include the booklet ("CHARM" booklet), an interest rate discount statement and explanation, the historical example and related explanation of how to use it, the worst case disclosure, and a statement that other ARM program disclosures are available upon request.

Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 16, 12/99