45-DAY LOOK BACK PERIOD FOR ARMs – ARE YOU SET?

Effective on January 10, 2014 Section 1026.20 of Regulation Z requires, when a rate change accompanied by a payment change occurs on an ARM, a notice to be sent to the consumer at least 60, but no more than 120, days before the first payment at the adjusted level is due. However a different timing rule (at least 25, but no more than 120, days before the first payment at the adjusted level is due) applies to ARMs originated prior to January 10, 2015 in which the loan contract requires the adjusted interest rate and payment to be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date.

This issue was resolved last January if your contracts have always had a 45-day look back period. If a shorter look back period or no look back period has been used in the past, action is needed by January 10, 2015.

No or Short Look Back Period

Some lenders originate ARMs with contract provisions that stipulate that the new rate on any rate change date is determined using the index value as of the rate change date. In that situation the creditor is able to determine the new rate and payment amount 30 days prior to the first payment at the adjusted level. Other lenders have a look back period, but a period of less than 45 days.

The rate change notice for accounts with no look back period or a short look back period, that are originated prior to January 10, 2015, can be sent 25 days prior to the first payment at the adjusted level. Sending the notice 25 days prior to the first payment at the adjusted level is fine when the new rate and payment are known 30 days prior to the first payment at the adjusted level. It would be impossible to send the notice 60 days prior to the first payment at the adjusted level without a look back period.

Mandatory Look Back Period

Loans originated on or after January 10, 2015 must have at least a 45-day look back period. For example contract provisions might stipulate that the new rate on any rate change date is determined using the index value in effect 45 days before the rate change date. In that situation the creditor is able to determine the new rate and payment amount 75 days prior to the first payment at the adjusted level. For loans originated on or after January 10, 2015 the rate change notice must be sent at least 60 days prior to the first payment at the adjusted level. The 60-day time period is not a problem when the new rate and payment are known 75 days in advance.

Existing Loans

For ARMs originated prior to January 10, 2015 with no or a short look back period the creditor may continue to use the 25-day notice period indefinitely. For new ARMs originated on or after January 10, 2015 the contract must include at least a 45-day look back period in order to meet the 60-day notice period.

Adding/Revising a Look Back Period

The contract (note, mortgage or deed of trust) should define the terms of the adjustable rate, including the presence and the term of any look back period. If the contract includes a look back period but the term of the period needs adjustment, then the terms of the contract for loans originated on or after January 10, 2015 are changed to reflect the new term (i.e.; Adjust the note or mortgage to change the look back period of thirty days to forty-five days.) This may involve a minor change within your loan origination software (LOS).

Adding a look back period where none exists is more involved but follows the same process. Most LOS systems contain documents or terminology for ARMS with no look back period or with varying look back periods. Designing or selecting a new form with the appropriate look back period should be easily accomplished with support from your LOS vendor.

Following is sample look back language from a FNMA form: Beginning with the first Change Date, my adjustable interest rate will be based on an Index.  The “Index” is the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board.  The most recent Index figure available as of the date 45 days before each Change Date is called the “Current Index.” Before each Change Date, the Note Holder will calculate my new interest rate by adding _______________ percentage points (___________%) to the Current Index.

Be sure that the terms of all documents are synchronized once the revisions are complete. A number of problems arise if one document has a particular look back period and another has no or a different look back period.

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