Q: What interest rate is disclosed when the creditor does not know the rate that will apply to the permanent phase?
A: Because the permanent phase may begin months after a creditor is required to provide disclosures, the creditor may not know at the time the disclosures are provided what interest rate will apply to the permanent phase. To disclose the interest rate on the Loan Estimate for the permanent phase when the loan is disclosed as two separate transactions, the creditor must determine if the permanent phase has an adjustable rate or a fixed rate.
If the permanent phase has an adjustable rate and the interest rate that will apply at consummation is not known when the Loan Estimate is provided, the creditor is required to disclose the fully indexed rate, which is the interest rate calculated using the index value and margin at the time of consummation. If the index value and margin that will be in effect at consummation must be provided, the fully-indexed rate disclosed may be based on the index in effect at the time the disclosure is delivered. (§ 1026.37(b)(2); Comment 37(b)(2)-1)
If the construction-permanent loan is secured by the consumer’s principal dwelling, and if the permanent phase interest rate is unknown at consummation because the rate will be set or modified upon conversion from the construction phase, (making the loan an adjustable rate product), creditors are required to provide ARM Payment Change disclosure in § 1026.20(c) (required for products converting from an adjusting rate to a fixed rate) at least 60 days and no more than 120 before the first payment for the permanent phase is due.
If the permanent phase interest rate is unknown at consummation because the creditor reserves the right to modify the permanent phase interest rate upon conversion from the construction phase, the loan product is an adjustable rate product because the interest rate may increase after consummation, and the interest rate is disclosed as such. For more information on how to disclose the loan product information for this type of loan, see above in section 14.8 (§ 1026.37(a)(10)(i)(A); Comment app D-7.iii)