Is our HELOC disclosure only required to be updated annually? Even if they change how the rate is calculated? For example, our rate was Prime + 0. Now, they've decided to do Prime for the first year and Prime + 1 every year thereafter. Do we need to redo the disclosure?

Yes. You now have a new plan with a discounted rate for the first 12 months.

THANK YOU Dan!

This is the first one I've had where they change the rate mid-way after the first year. They have updated the disclosure and I'm reviewing it.

Do I have to show that discount somehow in the historical table (I was thinking the first line of the historical table is supposed to show it - for example, it will show the index as prime in 1996 - 8.5, the margin as 1.0%, then the APR should be listed as 8.5 with a foot note that the rate reflects the discount used recently)? I'm just not seeing anywhere in this system generated initial disclosure where they've reflected that it's Prime the first year (discounted), then P + 1 every year thereafter. The historical table goes by P + 1 all the way down except for those years where the floor is higher, then it shows the floor with a footnote that the rate reflected the lifetime rate change cap.

Is there a definition for what is meant by a "discounted" rate? It is felt by management that the start rate is not discounted - it's Prime. The rate after the first year is not premium or discount - it's just priced differently at P + 1.

Sorry - another question....if our start rate is Prime, but due to the floor being higher than Prime, does the first rate in the table reflect what Prime is, the floor, or the P + 1? I'm sorry....I've been reading Reg. Z since this morning and now I've got myself all confused. Thought I had it down until our floor became higher than the start rate.

Add your index and margin together.
If your initial rate is below that amount it is discounted.
If it is above that amount it is premium.
If it is exactly that amount it is fully indexed.

Example - Index = 1% Margin = 3.5%

Discount = initial rate less than 4.5%
Fully indexed = 4.5%
Premium = initial rate greater than 4.5%

Year 1: Prime + 0
Year 2-10: Prime + 1
Floor, though is 5.50

(So, I guess since most of the years are Prime +1, the first year is discounted at the Index Plus Margin minus 1?).

Again, on the historical table, is my start rate at the top, the floor of 5.50 even though Prime is lower than that so that it reflects the discount and accounts for the floor?

I'm sorry I'm not getting this. I don't normally have this much trouble.

Can anyone help answer the question about how to reflect this "discount" on the historical table? The loan is set to start at Prime then go to P + 1 - BUT due to the floor of 5.50, the start rate is actually not prime but the floor rate. That start rate being the floor actually ends up even being higher than the fully indexed rate of P + 1 right now. So, would the first rate on my historical table be the 5.50 with the footnote that this is a discount that's been offered recently?

Wolter Kluwers has a very good product to calculate both your HELOC and ARM disclosures.

The following is an example showing a 1% discount with a floor of 6.5%. We ran the discount rate for 100 days to coincide with our 100th anniversary. The disclosure will reflect the discount as if it was in effect for the entire first year.

10. VARIABLE RATE FEATURES. This line of credit has a variable rate feature and the annual percentage rate (corresponding to the periodic rate) and the minimum monthly payment can change as a result. The annual percentage rate includes only interest and not other costs. The annual percentage rate is based on the value of an index. The index is the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks known as the Wall Street Journal Prime Rate and is published in the Wall Street Journal. To determine the annual percentage rate that will apply to your line of credit, we add a margin to the value of the index and then round to the nearest .125 percent. The initial annual percentage rate is discounted - it is not based on the index and margin used for later rate adjustments. The initial rate will be in effect for 100 days. Ask us for the current index value, margin, discount and annual percentage rate. After you open a line of credit, rate information will be provided on periodic statements that we send you.

11. RATE CHANGES. The annual percentage rate can change monthly after remaining fixed for 100 days. There is no limit on the amount by which the rate can change in any one year period. The maximum ANNUAL PERCENTAGE RATE that can apply during the line of credit is 21.000 percent. The minimum ANNUAL PERCENTAGE RATE that can apply during the line of credit is 6.750 percent.

12. MAXIMUM RATE AND PAYMENT EXAMPLES. If you had an outstanding balance of $10,000.00 the minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE of 21.000 percent would be $216.60. The maximum annual percentage rate could be reached in the 1st month (1 month) following an initial hold of 100 days.

13. HISTORICAL EXAMPLES. The following table shows how the annual percentage rate and the minimum payments for a single $10,000.00 credit advance would have changed based on changes in the index over the last 15 years. The index values are from the first business day of January. While only one payment amount per year is shown, payments would have varied during each year. The table assumes that no additional credit advances were taken, that only the minimum payment was made, and that the rate remained constant during each year. It does not necessarily indicate how the index or your payments would change in the future.



Year............Index....Margin....APR.........Payment
1992............6.500.....1.000....6.750(K)(L)..97.85
1993............6.000.....1.000....7.000...........95.06
1994............6.000.....1.000....7.000.......... 90.42
1995............8.500.....1.000....9.500...........103.93
1996............8.500.....1.000....9.500...........98.87
1997............8.250.....1.000....9.250...........92.42
1998............8.500.....1.000....9.500...........89.45
1999............7.750.....1.000....8.750...........80.69
2000............8.500.....1.000....9.500...........80.94
2001............9.500.....1.000 ....10.500..........82.30
2002............4.750.....1.000....6.750(K)........59.34
2003............4.250.....1.000....6.750(K)........56.43
2004............4.000.....1.000....6.750(K)........53.68
2005............5.250.....1.000....6.750(K)........51.07
2006............7.250.....1.000....8.250...........54.78

* This is a margin we have used recently; your margin may be different.
(K) This reflects a lifetime floor of 6.750 percent.
(L) This is a 1.000 percentage point discount that we have used recently, your line of credit may have a different discount amount.

Thank you, Dan! You confirmed exactly how I thought the table needs to be! I appreciate all of your help!

You are welcome.

I would highly recommend Wolter Kluwer's module (I am assuming it can still be purchased as a stand alone). I have used it for years. At my previous employer I used it as a stand alone module because they used Mortgage Ware. At my current employer we use ARTA and it is a module to it.

I'm sure there are others out there but Wolter Kluwer's product is the one I'm familiar with and as I stated I have been happy with it.

Thank you! I've put a msg into our WK rep to get more info. Our documentation software creates this, but it only comes out as good as the info going in. Info going in wasn't good, and when I reviewed the disclosure, I knew it wasn't right. Going back with dept. through the input screens, i was able to correct most of the problem, but getting the correct rate to be at the top of the historical table with the correct footnotes was proving challenging. So, I started to doubt what I knew to be true for how you complete the table! Ugh! Anyway...your confirmation/guidance have helped. Hoping the WK tool is affordable - if nothing else, it is an easy way to double check what our system outputs.

In the table above, shouldn't the rate information be more current than 2006, since it says "....over the last 15 years..."?
I would think you would start with the most recent past year and go back from there (2009 and back.)

I saw no reason to generate a current disclosure when all I had to do is copy and paste from an older disclosure. I simply gave an example of a product we offered during our 100th anniversary with similar terms (discount & floor rate) to the product being questioned.

Hey Dan-I am currently working on creating the early disclosure for our new HELOC product here at my bank. Does it matter that the historical examples are calculated based on a 360 interest base instead of the 365 that we will be using on this product?

I can't find any way to change it in ARTA.

See the Commentary to 226.5b: Paragraph 5b(d)(12)(xi)(8)

Thanks.