OK, all you smarty pants, I have an interesting question sidelining me today. I just can't think straight, so help a gal out...

Scenario:

- 5/5 ARM
- 15 year term
- Initial Rate 5.25%
- Initial and subsequent periodic rate caps of 2%
- Lifetime cap 10.25%

These caps work great for a 30 year loan, but create an interesting disclosure issue on a 15 year term. To illustrate, here's how out it plays out:

- 5.25% initial rate
- first adjustment at month 61: 7.25% (5.25 +2)
- second adjustment month at 121: 9.25% (7.25 + 2)

That's it. No more adjustments, because the loan matures in 180 months. Therefore, the normal 10.25% lifetime cap is not possible. But that is what the contractual note is hard-wired to state.

OK, so what is disclosed in the LE / CD AIR table for the max rate? 1026.37(j) says to disclose "the maximum interest rate permitted under the terms of the legal obligation." So 10.25%?

Then, what is disclosed on page 1 for the Loan Terms Interest Rate table disclosure? The software wants to say "Can go as high as 10.25% in year 11, See AIR Table on page 4 for details". But 10.25% just flat-out isn't possible. What is possible is only 9.25%, but that is not the "maximum rate" as shown in the AIR table.

Ugh. It's been a hot minute since ARMs were a big thing, and I don't remember this conundrum before. Maybe because 15 year ARMs aren't common?

Anyway, I need help, y'all. Thanks!

Take a breath Rebekah.

You cannot use a hard coded note that says 10.25% is the maximum interest rate possible when it is not possible under the remaining terms of the legal obligation. That is your first problem.

Your LE and CD must reflect a maximum rate of 9.25%, because that is the maximum under the terms of the loan agreement (legal obligation).

This is flat out not true: "Can go as high as 10.25% in year 11. Your AIR table is wrong also.

If the note is hard coded, don't you still have to enter the appropriate parameters into your doc prep system for the LE/CD generation? THen you just have to deal with the note.

Thanks Randy!

You've confirmed every single one of my thoughts, and stopped me from second guessing myself. You are awesome.

Truth be told... this is what has been disclosed to me on my own personal home loan from a VERY large national lender who should know better. They are a prominent credit union with whom I've been a member since my hubby was a lowly deck seaman. That should give a clue as to who (achoooo-nfcu-oooo) it is.

Anyway, I thought they were wrong wrong wrong, and told them so, but they are pushing back like a bunch of schmucks. Just goes to show, folks, that the big boys sometimes don't know what they are doing, even when they talk a good game.

I'll get more forceful. It is interesting being the consumer in this scenario.

LOL - Well nothing against credit unions, but their compliance examiners are virtually non-existent, whether State or Federal. I did compliance audits for a couple of them and eventually just gave up and would not take on any other CU clients. Some have some very good people, and they do a good job, but without a comprehensive examination team, many of them slide on the slippery slope. Might be time for a formal complaint to the NCUA just to test the waters and see if they bite.

We hope to make it up to Montana next year - you never know where we might show up . Keep your eyes open.

Former coworker of mine took a CCO job at a largish credit union. The extent of their HMDA data validation exam was requesting evidence the HMDA LAR had been filed on time.