I have been working through a number of issues with APR calculations on our mortgages - some user errors and some system errors. One spot I'm having trouble on is our ARMs.

~We do not currently lock a rate. For regulatory purposes, our stance has always been that the rate is 'set' the day we send the initial CD.
~We offer a discount and base our adjustments on the 1 year treasury index.

Our software company seems to feel that our 1 year treasury index that we base the APR off of (for the fully indexed rate) can be essentially ANY week - but I am sure that is not true. I am confident that there must be SOME sort of regulatory guidance on the index as of 'when'. Is it as of closing? Rate set date? Application date? Or is she right and whenever we last happened to update the index in our system is fine? Also - we are discussing actually locking rates. (real rate locks; with a signed agreement with the applicant.) How would this factor in? I'm assuming if we locked the rate, our index rate may need to be as of that date?

Thanks for any help!

If there was not a lock agreement when the LE was originally issued or any lock agreement has since expired, then the interest rate on the loan will float until the loan closes unless the applicants execute a new or renewed lock agreement. As such, any change in the variable rate index resulting in a change to the applicable interest rate since the point at which the last LE was issued would be reflected in the initial Closing Disclosure. There is no requirement to compare APRs for tolerance consideration between the last LE issued and the initial CD.

However, if the rate remains unlocked and the variable rate index changes and impacts the interest rate between the time at which the initial CD is issued and the loan closes, if that change in the interest rate causes a change in the APR that is more than the allowable APR tolerance (1/8 percent for a regular transaction and ¼ percent for an irregular transaction), it would trigger the delivery of a revised CD and trigger a new three business day wait period. Refer to .17(c) – Comment 8 and 1026.19(f)(2).

If the initial interest rate on a variable rate transaction is locked per an executed rate lock agreement, the implications get a little more complex.

There are two different scenarios.

(1) The first involves the situation in which the initial interest rate is locked and the locked interest rate was equal to the then current index plus margin at the time of the rate lock. In that situation, the loan is not considered to involve either a discounted or premium variable rate transaction. If that is the case, then the CD should be disclosed using the locked rate without regard to any changes in the index between the time of the rate lock and consummation. Refer to the Official Commentary .17(c) – Comment 10(vi).

(2) The second involves the situation in which the initial interest rate is locked and the locked initial interest rate is NOT equal to the then current index plus margin at the time of the rate lock. This creates a premium or discounted variable rate transaction. Refer to .17(c) – Comment 10.

Determining whether or not the change in the index rate will impact the CD disclosures will be based on timing.

This is based on the fact that the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. Refer to .17(c) – Comment 10(i).

There is one caveat to this requirement and that is the creditor can use any index that was in effect prior to consummation if the loan contract provides for a delay in the implementation of changes in an index value, such as 45 days. So, if the loan contract provides for a 45-day delay in the implementation of future rate changes, then the creditor’s CD will be deemed accurate if it used the any index rate as the basis for their disclosures that was in effect for the last 45 days.

This is helpful - thank you.

So when our software pops up and asks if we want to update the rate tables in a transaction on an ARM, the answer should be 'yes' - and we should have some sort of periodic process for updating the software with the current rate tables. (for example; every Wednesday or something.) Correct?

Our Rep from the software was saying that we SHOULDN'T update the rate tables; because it would cause APR changes from LE to initial CD. I tried to tell her that that didn't matter as long as it was good faith and that there was no tolerance for changes in that time frame, but she said she's seen banks have to give restitution based on that. That didn't sound right to me at all but I also wasn't going to argue with her about what had happened at other banks.

I have never ever seen our initial rate on an ARM be the same as the margin + index or more. It's always a discount. While keeping in mind that of course that COULD change in the future, it sounds like for right now, we would calculate the APR the same; locked or not locked, correct? We'd use the index in effect at close?

You should be adjusting your rate tables whenever the index you are using adjusts. If your rate is locked and it is at a premium or discount, you can use any rate that was in effect at consummation or that falls into the lookback period in your note.

And FYI - Your software rep. has no idea what they are talking about.