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# ATR/Calculating D2I using "fully indexed" rate

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• #6273

I have an ATR question…TILA 1026.43(c)(5)(i) says we must use the “fully indexed rate” or any introductory rate, whichever is greater, to get the payment amount (for the current transaction) that we will use in calculating the borrower’s debt to income.

So…if we have an ARM with a life of loan cap at 6%, is that considered the fully indexed rate? And the initial rate + 6% is what we will use when calculating debt to income?

If the answer is what I think it is….we may have been doing it all wrong. =/

The older I get the worse my memory (and apparently my comprehension) is……can I get an amen??? Blah.

#6274

PCorder,

Fully indexed rate means the interest rate calculated using the index or formula that will apply after recast (when your introductory period/rate will expire), as determined at the time of consummation, and the maximum margin that can apply at any time during the loan term.

Here is an example:
Intro rate = 5% for first 5 years
Index that will apply after recast (value of index at consummation) = 5%
Margin = 3%
Interest Rate Adjustment Cap = 2%
Lifetime Interest Rate Cap = 7.5%

The fully indexed rate would be 8% (5% index + 3% margin). The fully indexed rate is higher than the introductory rate in this example, so you would use the fully indexed rate to calculate payments rather than the introductory rate. In my example there is a rate adjustment cap; if the rate adjustment cap would prevent the rate from changing to the fully indexed rate you can’t consider the adjustment cap when calculating the fully indexed rate (e.g. because of the 2% adjustment cap, the rate at recast would be limited to 7% but the calculated fully indexed rate is 8% – you can not limit the fully indexed rated calculation based on the rate adjustment cap). However, at your discretion, you can take a lifetime cap into consideration when determining the fully indexed rate. Based on this example, the lifetime interest rate cap of 7.5% is lower than the fully indexed rate of 8%, so you can use the 7.5% lifetime interest rate cap at your discretion.

The commentary gives this example:
Assume an adjustable-rate mortgage has an initial fixed rate of 5 percent for the first three years of the loan, after which the rate will adjust annually to a specified index plus a margin of 3 percent. The loan agreement provides for a 2 percent annual interest rate adjustment cap and a lifetime maximum interest rate of 7 percent. The index value in effect at consummation is 4.5 percent; under the generally applicable rule, the fully indexed rate is 7.5 percent (4.5 percent plus 3 percent). Nevertheless, the creditor may choose to use the lifetime maximum interest rate of 7 percent as the fully indexed rate, rather than 7.5 percent, for purposes of § 1026.43(b)(3). Furthermore, if the creditor chooses to use the lifetime maximum interest rate and the loan agreement provides a range for the maximum interest rate, then the creditor complies by using the highest rate in that range as the maximum interest rate for purposes of § 1026.43(b)(3).

#6280

Thanks so much for your help rcooper,

We do not offer an introductory rate (or teaser rate) on our ARMs. The initial rate is the index (at origination) + margin.

I did a little more digging and the Federal home loan bank has defined the “fully-indexed rate” on an adjustable-rate mortgage loan as the calculation adding the margin to an index level at the time the loan is made. [Fully-indexed rate-Index (at the time the loan is made) + Margin (established at the time the loan is made)]

We use the “Small Creditor QM Portfolio Loans” exemption (1026.43(e)(5), so we must calculate D2I using the maximum interest rate during the 1st 5 years (including any rate cap effect) after the 1st regular periodic payment due date…thankfully, that’s what we are doing.

But that brings another question to mind…if we use the “inflated” debt to income figure in our ATR calculation and their current D2I is within our policy limits, but the “inflated” is not, should the officer submit a request for an approval to an exception to loan policy?

It just gets better and better…

Thanks for your input, always! 🙂

#6282

Pcorder, I know exactly what you mean…better all the time.

This is a good question. I don’t think you should have two separate DTI calculations for one loan – one that is used for policy purposes and one that is used for complying with Reg Z. If the DTI calculation per Reg Z is over your policy DTI limit then I would send a request for a policy exception.

#6283

Well rcooper, that is not what I wanted to hear, but I suppose I will accept it (reluctantly). LOL

Thanks again! 🙂

#6287

Hi rcooper, we are a large bank only using the general ATR rule (no QMs at all) and offer ARMs of varying amortization periods depending on how many years the customer needs for the equal payments, where the rate adjusts either every 5 years, 3 years or 1 year for the term of the ARM. The rate is Prime + margin for the entire term, no cap at each adjustment. Lifetime cap increase is 6% so for a moargin of 1.35 the initial rate would be 4.55 with a lifetime cap of 10.55. No initial discount or premium. My question as well is what is the “fully indexed rate”? My understanding is it would be the actual initial rate of Prime of 3.25% + 1.35 for 4.55%. on a 5 year ARM. Is that correct? And would that be the same for the 1 or 3 year ARMs?

#6292

I agree, if you do not have any introductory or premium rate then that won’t be a factor and you would use the fully indexed rate, which is your index (value at consummation) plus your margin.

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