For an HPML 5/1 ARM, in calculating the pmt stream for the 7th yr for presumption of compliance/ability to repay, if the ARM has periodic caps, don't we have to use these to calculate the pmt stream to the 7th year vs just using the fully indexed rate?

See the Commentary to 226.34(a)(4)(iii)(B). It has a good illustration for a discounted 5/1 ARM.

I looked at that, but the example doesn't take into account floors or periodic limitations. Currently the index we use is 1.14 with a margin of 2.00. We have a floor of 5.95 with 1% periodic caps. The pmt in the 7th yr is not based on the index & margin.

Paragraph 34(a)(4)(iii)(B).

1. Determination of payment schedule. To retain a presumption of compliance under Sec. 226.34(a)(4)(iii), a creditor must determine the consumer's ability to pay the principal and interest obligation based on the maximum scheduled payment in the first seven years following consummation. In general, a creditor should determine a payment schedule for purposes of Sec. 226.34(a)(4)(iii)(B) based on the guidance in the staff commentary to Sec. 226.17(c)(1). [initial disclosure calculations which use rate and pmt caps]

Your rate at consummation appears to be fully indexed based on your formula which is index + 2% with a minimum of X. Caps only come into play for discounted rates to show when the payment is fully indexed. This affects your payment stream and APR.

You should maintain the presumption of compliance by basing your ability to repay on the 5.95 rate at consummation.

Thanks Dan. I guess the words in blue (from the the preamble) were throwing me off.

From the preamble: (pg 110 or 44549 in the Fed Register version, middle column)

As discussed, the final rule does not contain this proposed presumption of violation. Instead, it provides that a creditor will have a presumption of compliance if, among other things, the creditor uses the largest scheduled payment of principal and interest in the first seven years. This payment could be higher, or lower, than the payment determined according to the fully-indexed rate and fully-amortizing payment. The Board believes that the final rule is clearer and simpler than the proposal. It incorporates long-established principles in Regulation Z for determining a payment schedule when rates or payments can change, which should facilitate compliance. See comment 34(a)(4)(iii)(B)-1. The final rule is also more flexible than the proposal. Instead of requiring the creditor to use a particular payment, it provides the creditor who uses the largest scheduled payment in seven years a presumption of compliance.

The key word to focus on in the above section is "scheduled", as in the payment schedule disclosed on the TIL Disclosure.

In the 5/1 ARM example in the Commentary the highest scheduled payment was $727. In the 7/1 example the highest scheduled payment in the first 7 years was $674. The FI retains the presumption of compliance using the $727 and $674 payments to calculate the ability to repay.

If the rate is fully indexed at consummation then the disclosed payment at consummation will be the highest scheduled payment in the first 7 years.

Premium rate - my starting rate is 5.5. The floor is 5.95. The fully indexed rate is (index 3.14 + margin 2.00) = 5.14. You would use the floor?

Discount rate - my starting rate is 4.0. The floor is 4.0. The fully indexed rate is 6.25. (4.25 + 2) 1% cap on adj. I'd use the pmt in yr 7, correct?

A floor rate is not a premium rate.

Whether you use the payment in year 7 depends when the first rate adjustment occurs and the highest scheduled payment in that payment stream. Assuming the first rate change is after 36 payments and every 12 payments thereafter with the first payment due 10/1/11. Using the information above you would have:

36 X A beginning 10/1/11
12 X B beginning 10/1/14
12 X C beginning 10/1/15
300 X D beginning 10/1/16

You use D as your payment for the presumption of compliance.

Dan, You stated that we should focus on the "scheduled" payment disclose on TIL disclosure to calculate HPML. How will you handle a loan that has a rate reduction because the customer selected to have their payments deducted from their checking account (.25%). To calculate HPML, will you use the rate before the rate reduction is taken (because this could be the maximum rate for the this loan) or the rate used to at closing with the rate reduction?