For someone with more experience with ARM loans, could you advise if my thinking process is accurate?

"The General QM final rule replaces the 43% debt-to-income (DTI) ratio limit with the QM Priced-Based (rate) limits. Further, if a loan's interest rate can change in the first five years after date on which the first regular periodic payment will be due, the creditor must treat the highest interest rate that may apply during that five years as the loan's interest rate for the entire loan term when calculating the APR for purposes of the QM Price-Based Limit."

We have a 5/6 ARM - interest rate is 5.625% fixed for first five years, then adjusts every 6 months thereafter for remaining 25 years
The 5.625% is an undiscounted rate. Increases capped at 2%
When calculating for QM and APR, would it not be that the first 60 months are at 5.625% for the fully indexed rate because the first rate change is not within the first 5 years, but at 61st payment.

I appreciate input and guidance -

if a loan's interest rate can change in the first five years after date on which the first regular periodic payment will be due,

You would base it on 7.625%.

4. First five years after the date on which the first regular periodic payment will be due. Under § 1026.43(e)(2)(iv)(A), the creditor must underwrite the loan using the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due. To illustrate, assume an adjustable-rate mortgage with an initial fixed interest rate of 5 percent for the first five years, measured from the first day of the first full calendar month following consummation, after which the interest rate will adjust annually to the specified index plus a margin of 6 percent, subject to a 2 percent annual interest rate adjustment cap. The index value in effect at consummation is 5.5 percent. The loan consummates on September 15, 2014, and the first monthly payment is due on November 1, 2014. The first rate adjustment to no more than 7 percent (5 percent plus 2 percent annual interest rate adjustment cap) occurs on the due date of the 60th monthly payment, which is October 1, 2019, and therefore, the rate adjustment occurs during the first five years after the date on which the first regular periodic payment will be due. To meet the definition of qualified mortgage under § 1026.43(e)(2), the creditor must underwrite the loan using a monthly payment of principal and interest based on an interest rate of 7 percent.

Thank you Dan! I just was having a mental block with this. With an anticipated increase to ARM loans I wanted to be sure I fully understood moving forward.

On a 5/6 ARM, the interest rate changes on the first day of the 61st month and it would NOT be subject to this rule.

If the first payment is 7/1/22 and first rate change is on 6/1/27 (60 months from the loan date) effective 7/1/27 would that not be within 60 months of the first payment?

What am I missing?

You know Dan, I think you have better calendars than I do.

I withdraw my previous statement.

I know this is old but I'm hearing conflicting info and I am not sure Encompass is calculating correctly (could be due to what we have entered) and am concerned we need to adjust our ARMS. So on a 5/1 ARM we should be using the max interest rate to qualify? Even though their payment itself is fixed for 5 years and changes on the 61st month - the interest rate changes on the 60th?

Not the maximum interest rate for the life of the loan, as that might not be the same as the maximum interest rate that might apply in the first 60 months.

Sorry I didn't mean max interest rate, as its a 2% cap. I guess I'm just unsure if the 5/1's are part of this or if they are not because their payment is fixed for the first 60 months.....it doesn't change until the 61st month. But based on the wording I was not sure if it meant the interest rate change within 5 years as the interest rate could/would change on the 60th month, then be in effect for the 61st payment.

I guess I'm just unsure if the 5/1's are part of this or if they are not because their payment is fixed for the first 60 months.....it doesn't change until the 61st month.?

It appears you are counting from the note date and not the date of first payment. See my above posts - #2271757 & #2271766.

For purposes of a qualified mortgage under paragraph (e)(2) of this section, for a loan for which the interest rate may or will change within the first five years after the date on which the first regular periodic payment will be due, the creditor must determine the annual percentage rate for purposes of this paragraph (b)(4) by treating the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan.

One a 5/1 ARM, the interest rate changes 59 months after the date that the first regular periodic payment will be due.

We are in the process of rolling out a new 5/1 product, so I am having to refresh on this topic. We used to rely on the GSE QM because we used desktop underwriter, but that is now gone.

The section of the regulation Randy refers to appears to be for "HPML covered transactions" (12 CFR §1026.43(b)(4). Am I missing something in this discussion?

Say we have 5/1 ARMs that are not HPML's. Do we still have to underwrite with the first adjusted payment?

1026.43(b)(4) is the definition for a Higher Priced Covered Transaction and the corresponding thresholds that qualify them as a HPCT. The ATR is still calculated under 1026.43(e)(2) and its OI - comment 4.

That's what I needed - a more specific citations. Thank you, Dan!

12 CFR §§1026.43(e)(2)(iv)(A) & 1026.43(e)(2)(iv)-3

Bump on this thread, as I have a question on the first regular periodic payment; for a 5/6 ARM on a construction permanent transaction, with a 9-month construction period, is the first regular periodic payment inclusive or exclusive of the interest only 9-month construction period?

If you do not ignore the construction period, then it would not be a 5/6 ARM, it would be a 5.75/6 ARM and it would not meet any QM category, as it would have an interest only period.

That was my thought as well, but just didn't see it covered clearly in the commentary to 1026.43(e).

Thanks Randy