Part 3 of a 3 Part Series
In our last article we recapped items necessary to comply with the Ability-to-Repay (ATR) and Qualified Mortgage (QM) requirements when underwriting the loan. Compliance with Regulation Z does not stop at origination. This article recaps the servicing requirements for ARM loans.
Loan Servicing and The Bank’s Core System
ARMs are a little more complicated with more moving parts. Unlike a fixed rate loan, you can’t “set it and forget it.” Data entry in the Bank’s core system is more complicated, and like the LOS there are items that require ongoing maintenance to ensure that ARM Adjustment notices are produced correctly.
Check your set-up sheets and make sure that there is a Quality Control (QC) process. A Quality Control process should be implemented to ensure that data has been correctly onboarded into the core.
During the onboarding or “booking” process, the index referenced in the Note should be an index that is available and maintained in the core for the purpose of ARM adjustments. If the specific index referenced in the Note is NOT available in the core, you will have to establish procedures to add an additional index to the core along with procedures for the ongoing maintenance of the index.
The most frequent problem with ARM adjustments is that the index is incorrect, causing the fully indexed rate to be incorrect. Just like in the LOS, the correct index tied to the loan must be maintained in the system on a timely basis. Make sure someone is maintaining the index, and a Quality Control process should be implemented to review the index for accuracy. We recommend that you check the index maintenance procedures for the following:
- The index is being maintained on a timely basis.
- The correct index data is being pulled and entered into the core.
- There are assigned back-up personnel to maintain the index. Determine who will maintain the index when the assigned personnel are on vacation on medical leave.
- A QC process is in place to ensure the index data maintenance is correct.
Bank staff should be validating the information on the ARM Adjustment Notices prior to the Notice being sent to the customer. An incorrect ARM adjustment notice can result in an incorrect rate based on the terms of the note. If this rate is too high, it could result in restitution to the borrower.
ARM notices should be reviewed and compared to the terms of the Note, prior to sending the ARM Adjustment Notice to the borrower. As there is a 210 to 240 day window for a first adjustment notice and 60-120 day window for a subsequent adjustment notice, there is plenty of time to look at those notices and make any necessary corrections, before they are sent to the borrower.
In addition to the index data, the notice should be checked to ensure that the following is correct:
- Notices must contain the information and, in the format, defined under §1026.20(c) (Subsequent Notice) and §1026.20(d) Initial Notice.
- The Notice was produced timely. The Notice must be provided 210 to 240 days for a first adjustment, and 60-120 days for ongoing/subsequent interest rate adjustments.
- Due Date of the first payment at the Adjusted Level
- Initial Payment Period
- Margin
- New fully indexed rate
- Rate Limits (Rate Caps)
- Remaining Balance
- Remaining Term
- New Payment
Tips to Avoid Compliance Pitfalls During Servicing:
- Ensure that someone is responsible for maintaining the index in the LOS, and that there is a back-up person assigned.
- Use a dual control process for index data entry.
- Develop a QC Process to review the data from onboarded loans to make sure it is entered correctly.
- Ensure that the index referenced in the note is an index available and maintained in the core.
- Review each ARM Adjustment Notice before it is sent to the borrower. Ensure the accuracy of the rate change and verify that all data fields on the ARM change notice match the terms of the Note.
- Core system conversions can also wreak havoc on ARM data. If you have gone through a core system conversion (or are planning to), you will want to make sure that the ARM data converted properly.
TCA is “A Better Way” to help you manage ARM Loan compliance.
