DILEMMA FOR ARMs WITH NO LOOK BACK PERIOD

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.

No 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. Until January 10, 2015 the rate change notice for such accounts 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

Look Back Period

Loans originated on or after January 10, 2015 will need to have a 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. 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

I have been encouraging creditors to revise contracts on existing ARM loans by January 10, 2015 to add a look back period. Based on a conversation with an associate, later confirmed with the Consumer Financial Protection Bureau, it appears that it is not necessary to revise existing contracts to add a look back period, unless you want all ARM loans (those existing prior to January 10, 2015 and those originated on or after that date) to be treated consistently. For ARMs originated prior to January 10, 2015 without a look back period you may continue to use the 25-day notice period indefinitely. For new ARMs originated on or after January 10, 2015 the contract must include a look back period in order to meet the 60-day notice period.

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