CFPB Issues Factsheet on Prepaid Interest and General QM APR Calculations for ARMs
The CFPB recently published a factsheet addressing prepaid interest and the General QM special rule for calculating the APR for ARM loans where the interest rate may or will change within the first five years after the date on which the first regular periodic payment will be due.
As background, for a loan to satisfy the price-based General QM definition, the loan’s APR cannot exceed the average prime offer rate for a comparable transaction by the amounts set forth in the Rule as of the date the interest rate is set. Additionally, the price-based General QM definition contains a special rule for calculating the APR for ARMs where the interest rate may or will change within the first five years after the date on which the first regular periodic payment will be due. The fact sheet provides that for loans with such features, creditors must treat the maximum interest rate that may apply during that five year period as the interest rate for the full term of the loan when determining the APR for purposes of the price-based QM definition, even if the creditor will use a different rate for calculating prepaid interest due at consummation. This special rule also applies for the purpose of determining whether the loan receives a conclusive or a rebuttable presumption of compliance with the ATR requirement.
As an example, the CFPB explains that if a creditor “is originating an ARM that has an interest rate of 2.5% in years 1-3 and 4.5% for the remainder of the loan term, the [creditor] must use 4.5% as the interest rate when determining if the loan satisfies the price-based General QM definition, including for calculating any prepaid interest or negative prepaid interest as part of the APR calculation.” The CFPB notes that the maximum interest rate in the first five years of the loan must be used for calculating the APR for purposes of the special rule, even if a different rate will be used for calculating prepaid interest due at consummation.
