Let’s say you are doing a mailer or webpage ad promoting a 5-1 LIBOR ARM product that your company offers mortgage clients. What disclosures under Regulation Z do you need to add? Is there more than one right way to do make the disclosures? What do the rules under Reg Z say you need to do a minimum?
ARM Loan Disclosure Rules are Complex and Detailed.
I always found ARM products to be the most complicated of all mortgage products to advertise. We know we need to let the consumer know that their interest rate on the loan is not fixed and that it can change. Do we need to tell them how much it can change? Do we need to explain the index? Do we need to explain what the margin is? Do we have to tell them what LIBOR stands for and how to find out what the current Libor value is? Do we need to estimate how much the payment might be after the initial five year fixed period ends? How can we possibly know what that payment will be today at the origination of the loan? How do Compliance Officers get this right? Do we just look at what our competitors are doing in their ads? Are they doing it right? Lots of questions …. Where we do start?
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What does Regulation Z Say about Advertising ARMs?
Let’s start with Regulation Z Advertising Rules in Section 1026.24. There’s a lot of advertising rules in Section 1026.4 starting with paragraph (a) and ending with paragraph (i) in that section of Regulation Z.
Section (i) Rules – Be careful about using the words “Fixed Rate” in your ARM Loan
Let’s start with paragraph (i) of 1026.24. Paragraph (i) states that you cannot engage in certain prohibited acts or practices advertisements for credit secured by a dwelling. The first prohibition discussed in that section involves “misleading advertising of ‘fixed’ rates and payments”. This rule goes on to say that you can’t discuss a fixed payment period of the ARM product before you first identify the loan product you are promoting as an ARM product.
Disclosure of Rates – What else needs to be disclosed about ARMs? The rules talk about disclosures of rates and these rules provide that specific disclosures about payments need to be made where more than one simple annual rate of interest will apply over the term of the advertised loan For ARM loans, this section states that the advertising lender must disclose:
- A rate determined by adding an index and margin and this rate shall be disclosed based on a reasonably current index and margin.
- The period of time during which each simple annual rate of interest will apply, and
- The Annual Percentage Rate (APR) applicable to the particular loan scenario shown in the advertisement.
Disclosure of Payments – If an ARM ad discloses the amount of any payment, the ad must also disclose:
- The amount of each payment that will apply over the term of the loan, including any balloon payment.
- In variable-rate transactions, payments that will be determined based on the application of the sum of an index and margin shall be disclosed based on a reasonably current index and margin;
- The period of time during which each payment will apply; and
- For first lien ARMs, the fact that the payments do not include amounts for taxes and insurance premiums, if applicable, and that the actual payment obligation will be greater.
Here’s how one internet lender handles the ARM disclosure on its website: 5-1 ARM 2.650% Interest Rate at 0 points, 2.782% APR
Here’s the Disclosure:
$300,000 for $1245/month
- The advertised loan is a 5/1 ARM (Adjustable Rate Mortgage) with a 30-year fully amortizing term from actual offers posted to consumers by Network Lenders.
- The initial interest rate is 2.88% for 60 months. The disclosed APR is based on 1 discount points, 995% origination fee and $0 in additional prepaid finance charges which will be due at closing. First adjusted payment will likely increase to approximately $1819.
- For a $300,000 loan, there is a 2.98% APR with an initial monthly principal and interest payment of $1245 for the first 60 months.
- After the initial period, the variable interest rate and payment will adjust every year and equal the total of the 12-month LIBOR index (0.60% as of December 19, 2014) plus a margin of 2.27%.
- The maximum periodic change in the interest rate is 2% with a maximum rate increase of 5.5% above the initial interest rate.
- If the interest rate adjusted to the maximum rate (which could not occur until after the fifth year), the maximum monthly payment would be $2096 for $300,000.
- There is no prepayment penalty.
- The Annual Percentage Rate (APR) is variable and is subject to increase or decrease, so your payments may increase or decrease each year after the initial period.
- Disclosure Assumptions
- Interest rate quoted assumes a FICO score of 720 with a maximum loan-to-value ratio of 80% on a primary residence
- The actual interest rate, APR and payment may vary based on the specific terms of the loan selected, verification of information, your credit history, the location and type of property, and other factors as determined by Lenders.
- Interest rate and APR are variable and subject to increase
- Not available in all states.
- Rates are subject to change daily without notice.
- Payment amounts shown do not include taxes or insurance.
Final Comment about the above disclosure made by this bank:
This Lender does a good job at complying with the various requirements and showing the consumer all the important information needed to help better understand this Adjustable Mortgage Rate product.