Question & Answer

Question: An outside auditor recently criticized our ARM disclosures because they do not include the demand feature disclosure. I can't figure out how to write the disclosure because our ARMs don't have demand features, only due on sale clauses.

Answer: Just because someone has a fancy business card doesn't mean they are always right about compliance. The demand feature disclosure is one that is made only when the loan has a demand feature. In effect, the demand feature triggers the disclosure. There is no requirement to state that the loan does not have a demand feature.

The ARM disclosure requirement in section 226.19(b)(2)(xi) works on the same principle as section 226.18(i). Commentary paragraph 18(i)-2 states that a due on sale clause is not a demand feature. Your loans therefore do not trigger the demand disclosure. It sounds as though your disclosures are fine - at least with respect to demand features!

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 5, 3/96