Topic: Adjustable Rate Mortgage (ARM)
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We are processing a commercial adjustable-rate mortgage (ARM) loan in our LaserPro system. The loan is to two individuals to purchase an investment property. The system is giving us a critical warning that states “this loan contains a deep discount feature. Please adjust the periodic interest rate cap to avoid creating a deep discount feature.” Is there an Illinois rule concerning deep discounts when it comes to ARM loans?
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We are not aware of any federal or Illinois law prohibiting “deep discount features” for commercial ARM loans. We recommend reaching out to LaserPro for an explanation of the error. The Illinois Banking Act permits banks to charge any “interest, fees, and other charges . . . subject only to the provisions of [subsection 4(1)]…
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A borrower has asked if we can increase the maximum loan limit on a maturing HELOC to save them the time and fees associated with obtaining a new loan. The borrower also would like to extend the maturity date and change the interest rate from variable to fixed. Is this possible?
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Yes, we believe it is possible to modify the terms of an existing HELOC before maturity to increase the loan limit, extend the maturity date, and change the interest rate from a variable rate to a fixed rate — provided the borrower signs a modification agreement reflecting these terms and they receive a notice of…
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Due to a change in vendor, we may have to change our 5/1 adjustable-rate mortgage (ARM) to a 5/5 ARM. Our 5/1 ARMs set maximum percentage amounts for the initial rate change and rate change over the life of loan. If we switch to a 5/5 ARM, can we raise the initial rate change and life of loan rate change caps for future loans?
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We believe that your bank may charge a higher initial rate and raise the life of loan cap on the interest rate of your adjustable-rate mortgages. Of course, if the rate is raised too high, it may be considered a high risk home loan or a high-cost or higher-priced mortgage, subject to additional requirements and…
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We recently discovered that we overcharged interest at various times during the term of an adjustable rate mortgage (ARM) loan originated over 25 years ago. Our system shows an interest rate floor for the ARM, but the note does not establish a minimum rate. As a result, we have charged interest at a higher rate (the floor shown in our system) rather than the rate agreed to by the customer in the note. How far back must we look when calculating the amount of overcharged interest to reimburse the customer? Is it in our best interest to reimburse the customer for overcharges that occurred outside of the three-year record retention period and our current exam cycle?
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We recommend consulting with your bank counsel for advice in calculating restitution for your customer and crafting the best response for your bank. We have found some case law (discussed below) suggesting that your potential liability may be limited to the past ten years of overcharged interest, but this situation also requires consideration of regulatory…
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We are modifying an adjustable rate mortgage (ARM) loan. Do we need to make new disclosures? The first interest rate and principal and interest (P&I) adjustments are due for 2023. We would like to reduce the interest rate margin and push the first interest rate and P&I adjustments to 2030. We are keeping the loan in our portfolio and have not sold it to an investor.
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Yes, we believe that this ARM loan modification adds new variable-rate features to the loan and will require new disclosures. Whether Regulation Z requires new disclosures for an ARM loan modification depends on whether the proposed modification is a “refinancing” (as defined by Regulation Z) and whether the modification will result in a new variable-rate…
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We heard the CFPB is revising the Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet). When will the revision take place?
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The CFPB recently issued its June 2020 update of the CHARM booklet, and we have included a link in the resources below. You may begin using the new CHARM booklet immediately, or you may first exhaust your existing supply of CHARM booklets. For resources related to our guidance, please see: CFPB, CHARM Booklet (June 2020)…
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With respect to Illinois law, please offer any insights into granting borrowers’ requests to skip monthly payments on adjustable rate mortgages (ARMs) with thirty-year terms or monthly interest payments on home equity lines of credit (HELOCs). For the ARMs, the skipped payments would be added to the end of the scheduled loan payments, and for the HELOCs, the skipped interest-only payments would be spread over a few months to avoid the borrower being hit with one large interest payment.
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Illinois law does not expressly address mutually agreed-upon skipped payments — whether offered by the bank as a “skip-a-payment” program or when requested by the borrower. However, such arrangements are permissible in Illinois. It is important that your “skip-a-payment” agreement does not have the effect of canceling the original loan and substituting it for a…
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We have consumer mortgage loans secured by balloon notes that will be converted to adjustable rate notes prior to maturity. Under Regulation Z, these transactions must be disclosed as refinances. Some of the borrowers have large second mortgages, and we are concerned that these transactions could result in the loss of our priority lien position. The amounts of the loans will not be increasing, and the original mortgages will not be released, but we will be entering into new notes with the borrowers. Under Illinois law, can we replace an original note with a new note without extinguishing the original mortgage lien? Must we record a new mortgage with a new note, or can we record a modification of mortgage instead?
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Yes, a lender may replace an original note with a new note without extinguishing the lender’s original lien — but the facts in each case and the language in the loan documents are crucial. Consequently, irrespective of our general guidance here, we recommend consulting with your bank counsel to determine how these refinancings can be…
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We want to raise the ceiling rate on our HELOCs and ARMs. Does Illinois have a maximum interest rate? We saw that the Interest Act appears to set a 9% maximum interest rate.
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The Illinois Interest Act’s general maximum interest rate of 9% does not apply to banks. Section 4 of the Interest Act generally sets a ceiling of 9% on interest rates, but this provision has many exceptions, including one for banks. The Illinois Banking Act permits banks to charge any “interest, fees, and other charges .…
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Due to a technical issue, we failed to send initial rate adjustment notices for some of our adjustable rate mortgage (ARM) loans. We are now sending the initial ARM notices and will not change the payment amount until the 210 day notification period has passed. Are we required to also delay the rate adjustment, even though the date of the rate adjustment was disclosed in our loan agreement?
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Yes, we recommend delaying the rate change as well as the payment adjustments. The initial ARM notice must be provided at least 210 days “before the first payment at the adjusted level is due” (or at the loan consummation, if the first adjustment is scheduled to occur within the first 210 days after consummation). The…