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ARM Loan With Demand Feature

Answered by: 
Lucy Griffin

Question: 
If you extend credit on a variablerate Demand Note for a consumer purpose and secure it with the borrower's primary residence, would it be considered an ARM loan under <a href="http://www.bankersonline.com/regs/226/22619.html">226.19(b)</a> and <a href="http://www.bankersonline.com/regs/226/22620.html">226.20(c)</a>? Since <a href="http://www.bankersonline.com/regs/226/22617.html">226.17(c)(5)</a> states that disclosures for a demand loan shall be based on an assumed maturity of 1 year, does that exempt this type of loan from the requirements of <a href="http://www.bankersonline.com/regs/226/22619.html">226.19(b)</a> and <a href="http://www.bankersonline.com/regs/226/22620.html">226.20(c)</a>?
Answer: 

The loan you describe is an ARM with a demand feature. You should make both the ARM program disclosures and your final TIL should include the demand clause information. As for the disclosure calculations, it is best to use the full term of the loan without the demand clause. This would be the alternate maturity date.

Some would try to argue that the demand feature can truncate the disclosures requred by the ARM rules. I think this would be seen as misleading and deceptive to the customer.

First published on BankersOnline.com 3/4/02

First published on 03/04/2002

Filed under: 
Compliance
Filed under compliance as: 
ARM
Disclosures
IT

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