The CFPB recently released a fact sheet discussing prepaid interest and QM’s general special rule for calculating APR for ARM loans when the interest rate can or will change within the first five years of the date on which the first regular periodic payment will be due.
As a backdrop, for a loan to meet the general price-based definition of QM, the loan’s APR cannot exceed the average prime bid rate for a comparable transaction of the amounts specified in the Rule on the date at which the interest rate is fixed. Additionally, the general price-based QM definition contains a special rule for calculating the APR for ARMs when the interest rate can or will change during the first five years from the date the first regular periodic payment will be due. The Fact Sheet provides that for loans with such characteristics, creditors should 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 the determination of the APR for the purposes of the definition of the price-based QM. , even if the creditor will use a different rate to calculate the prepaid interest due to consumption. This particular rule also applies for the purposes of determining whether the loan benefits from a conclusive or rebuttable presumption of compliance with the ATR requirement.
As an example, the CFPB explains that if a creditor “originates an ARM that has an interest rate of 2.5% in years 1-3 and 4.5% for the rest the term of the loan, the [creditor] must use 4.5% as the interest rate to determine if the loan meets the general price-based definition of QM, including to calculate any prepaid interest or negative prepaid interest as part of the APR calculation. The CFPB notes that the maximum interest rate for the first five years of the loan should be used for the calculation of the APR for the purposes of the special rule, although a different rate will be used for the calculation of prepaid interest due to consumption.