Q: Will the LIBOR transition affect ARM loan program origination disclosures?
A: Yes, for some loan programs. Regulation Z, 12 CFR § 1026.19(b) requires, among other things, that a creditor provide ARM loan program origination disclosures in a transaction secured by the consumer's principal dwelling where the loan term is greater than one year. Such disclosures related to the index include, as applicable, the index or formula used, explanations of how the interest rate and payment will be determined, and rules relating to changes in the index or interest rate (among other loan terms), such as an explanation of interest rate limitations. 12 CFR § 1026.19(b)(2).
Additionally, the creditor must disclose a loan program example illustrating the effect of interest rate changes. 12 CFR § 1026.19(b)(2)(viii). At the option of the creditor, this disclosure may be either (or both):
Historical Example: A historical example, based on a $10,000 loan amount, illustrating the interest rate impacts on the payments and loan balance for the most recent 15 years of index values for the consumer’s loan program terms (12 CFR § 1026.19(b)(2)(viii)(A));
Initial and Maximum Example: The initial and maximum interest rates and payments based on a $10,000 loan amount and a statement that the payment may increase or decrease substantially depending on rate changes (12 CFR § 1026.19(b)(2)(viii)(B)).
The LIBOR transition may impact the loan program example disclosure, depending on which index the creditor selects for new accounts. For more information on the potential impact, see LIBOR Adjustable-Rate Mortgage FAQ 2, below.