Quoting APRs on ARM Guidelines

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Question:

I'm working on a matrix for quoting APRs and I need to know what the guidelines are for quoting APRs on ARMs. I've checked [Bank name withheld] website and for a 5.75% rate their APR is 7.026% on $145M, 1pt, 30 yr, $2000 prepaids, 5/1/5ARM. Are they just using what the max could be at first adjustment? I can't see where the Reg discusses APRs on adjustable mortgages.

Answer:

Answer by Dan Persfull:Any interest rate quoted regardless if it's an auto loan, unsecured loan, fixed rate mortgage or adjustable rate mortgage must be quoted as an Annual Percentage Rate. For ARM loans, the initial APR is based on the effective rate at the time of consummation. Without running an APR check I will assume the above bank is quoting an APR based on a representative example of their loan product.

Answer:

Answer by Richard Insley:Loan rate advertising is one of the most popular ways to violate Reg Z in spite of the fact that the rules are the same for ALL calculations of the APR. The only difference for an advertisement is that the payment schedule and Prepaid Finance Charges must be representative of the product advertised. If the loan is teaser-priced, then the payment schedule will have one or more steps to achieve the fully-indexed rate. A proper ad must show all the steps AND include an APR reflecting them.

First published on BankersOnline.com 2/12/07