March 25, 2022
CFPB Factsheet on Prepaid Interest Under General QM Rule, Rise in Prime Rate or other Variable Rate Indexes – TRID Impact, and more!
Read more below!
CFPB Factsheet on Prepaid Interest Under General QM Rule
On February 23, 2022, the CFPB released a factsheet on the interest rate that is used for calculating prepaid interest under the pricebased General Qualified Mortgage (QM) annual percentage rate (APR) calculation rule for certain adjustablerate mortgages and steprate loans.
Creditors that wish to make QMs under the pricebased General QM definition must calculate the APR for loans to determine whether they satisfy the pricebased General QM definition. The pricedbased General QM definition contains a special rule for calculating the APR for 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. These loans are sometimes referred to as “shortreset” ARMs and steprate loans. The CFPB’s factsheet describes the interest rate that is used for calculating prepaid interest for purposes of this special APR calculation rule.
Rise in Prime Rate or other Variable Rate Indexes – TRID Impact
With the fluctuations in the current interest rate environment, the Federal Reserve raising target interest rates at the March Federal Open Market Committee meeting, and the Fed signaling there will likely be more increases in the very near future, lenders and borrowers alike have asked questions about the potential impact these events may have on variable rate transactions subject to TRID disclosures.
The following represents a brief recap of potential implications:

How does it impact a Loan Estimate?
A change in the underlying variable rate index during the LE disclosure phase of the loan does not trigger a revised LE. There is no APR tolerance test required between multiple LEs that are issued prior to issuing the initial CD. If issuance of a subsequent changed circumstance or informational LE is required:
 If the initial interest rate is not locked, the payment information and loan calculations should be updated at that time to reflect the current underlying index and margin, applicable interest rate and APR at the time of issuance, or
 If the initial interest rate is locked, refer to “How does it impact a Closing Disclosure if the rate is locked” which is discussed below to determine whether a change in the variable rate index will impact subsequent LE disclosures.

How does it impact a Closing Disclosure if the rate is not locked?
If there was not a lock agreement when the LE was originally issued or any lock agreement has since expired, then the interest rate on the loan will float until the loan closes unless the applicants execute a new or renewed lock agreement. As such, any change in the variable rate index resulting in a change to the applicable interest rate since the point at which the last LE was issued would be reflected in the initial Closing Disclosure. There is no requirement to compare APRs for tolerance consideration between the last LE issued and the initial CD.
However, if the rate remains unlocked and the variable rate index changes and impacts the interest rate between the time at which the initial CD is issued and the loan closes, and if that change in the interest rate causes a change in the APR that is more than the allowable APR tolerance (1/8 percent for a regular transaction and 1/4 percent for an irregular transaction), it would trigger the delivery of a revised CD and a new three business day wait period. Refer to 1026.17(c) – Comment 8 and 1026.19(f)(2) below.
Official Interpretation
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
8. Basis of disclosures in variablerate transactions. Except as otherwise provided in §§ 1026.18(s), 1026.37 and 1026.38, as applicable, the disclosures for a variablerate transaction must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation.
1026.19(f)(2)
(ii) Changes before consummation requiring a new waiting period. If one of the following disclosures provided under paragraph (f)(1)(i) of this section becomes inaccurate in the following manner before consummation, the creditor shall ensure that the consumer receives corrected disclosures containing all changed terms in accordance with the requirements of paragraph (f)(1)(ii)(A) of this section: (A) The annual percentage rate disclosed under § 1026.38(o)(4) becomes inaccurate, as defined in § 1026.22.

How does it impact a Closing Disclosure if the rate is locked?
If the initial interest rate on a variable rate transaction is locked per an executed rate lock agreement, the implications get a little more complex.
There are two possible scenarios.
 If initial interest rate is locked and the locked interest rate was equal to the then current index plus margin at the time of the rate lock, then the loan is not considered to involve either a discounted or premium variable rate transaction. Then the CD should be disclosed using the locked rate without regard to any changes in the index between the time of the rate lock and consummation. Refer to the Official Commentary .17(c) – Comment 10(vi) below.
 If initial interest rate is locked and the locked initial interest rate is NOT equal to the then current index plus margin at the time of the rate lock, then this creates a premium or discounted variable rate transaction. Refer to .17(c) – Comment 10 below.
Determining whether the change in the index rate will impact the CD disclosures will be based on timing.
The disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. Refer to .17(c) – Comment 10(i) below.
There is one caveat to this requirement and that is the creditor can use any index that was in effect prior to consummation if the loan contract provides for a delay in the implementation of changes in an index value, such as 45 days. So, if the loan contract provides for a 45day delay in the implementation of future rate changes, then the creditor’s CD will be deemed accurate if it used the any index rate as the basis for their disclosures that was in effect for the last 45 days.
As an example, the initial CD is issued on 03/06 and the creditor uses the index from 03/06 to calculate the interest rate at consummation and the note allows for the 45day delay in future rate changes. If the index changes on 03/07 and the loan closes on 03/09, the credit may still use the index based on the index as of 03/06, as that time period remains within the 45day lookback period without regard to the change in the index that occurred on 03/07.
Official Interpretation
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
10. Discounted and premium variablerate transactions. In some variablerate transactions, creditors may set an initial interest rate that is not determined by the index or formula used to make later interest rate adjustments. Typically, this initial rate charged to consumers is lower than the rate would be if it were calculated using the index or formula. However, in some cases the initial rate may be higher. In a discounted transaction, for example, a creditor may calculate interest rates according to a formula using the sixmonth Treasury bill rate plus a 2 percent margin. If the Treasury bill rate at consummation is 10 percent, the creditor may forgo the 2 percent spread and charge only 10 percent for a limited time, instead of setting an initial rate of 12 percent.
i. When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use any index value in effect during the 45 day period before consummation in calculating a composite annual percentage rate.
ii. The effect of the multiple rates must also be reflected in the calculation and disclosure of the finance charge, total of payments, and the disclosures required under §§ 1026.18(g) and (s), 1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5), as applicable.
iii. If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the first adjustment, from changing to the rate determined by the index or formula at consummation, the effect of that rate or payment cap should be reflected in the disclosures.
iv. Because these transactions involve irregular payment amounts, an annual percentage rate tolerance of ¼ of 1 percent applies, in accordance with §1026.22(a)(3).
v. Examples of discounted variablerate transactions include:
A. A 30year loan for $100,000 with no prepaid finance charges and rates determined by the Treasury bill rate plus two percent. Rate and payment adjustments are made annually. Although the Treasury bill rate at the time of consummation is 10 percent, the creditor sets the interest rate for one year at 9 percent, instead of 12 percent according to the formula. The disclosures should reflect a composite annual percentage rate of 11.63 percent based on 9 percent for one year and 12 percent for 29 years. Reflecting those two rate levels, the payment schedule disclosed pursuant to § 1026.18(g) should show 12 payments of $804.62 and 348 payments of $1,025.31. Similarly, the disclosures required by §§ 1026.18(s), 1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5) should reflect the effect of this calculation. The finance charge should be $266,463.32 and, for transactions subject to § 1026.18, the total of payments should be $366,463.32.
B. Same loan as above, except with a twopercent rate cap on periodic adjustments. The disclosures should reflect a composite annual percentage rate of 11.53 percent based on 9 percent for the first year, 11 percent for the second year, and 12 percent for the remaining 28 years. Reflecting those three rate levels, the payment schedule disclosed pursuant to § 1026.18(g) should show 12 payments of $804.62, 12 payments of $950.09, and 336 payments of $1,024.34. Similarly, the disclosures required by §§ 1026.18(s), 1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5) should reflect the effect of this calculation. The finance charge should be $265,234.76 and, for transactions subject to § 1026.18, the total of payments should be $365,234.76.
C. Same loan as above, except with a 7½ percent cap on payment adjustments. The disclosures should reflect a composite annual percentage rate of 11.64 percent, based on 9 percent for one year and 12 percent for 29 years. Because of the payment cap, five levels of payments should be reflected. The payment schedule disclosed pursuant to § 1026.18(g) should show 12 payments of $804.62, 12 payments of $864.97, 12 payments of $929.84, 12 payments of $999.58, and 312 payments of $1,070.04. Similarly, the disclosures required by §§ 1026.18(s), 1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5) should reflect the effect of this calculation. The finance charge should be $277,040.60, and, for transactions subject to § 1026.18, the total of payments should be $377,040.60.
vi. A loan in which the initial interest rate is set according to the index or formula used for later adjustments but is not set at the value of the index or formula at consummation is not a discounted variablerate loan. For example, if a creditor commits to an initial rate based on the formula on a date prior to consummation, but the index has moved during the period between that time and consummation, a creditor should base its disclosures on the initial rate.
Frequently Asked Question
Question: We have two questions. 1) When issuing the initial loan estimate, is it accurate to say that the aggregate adjustment for escrow is not credited on the LE? 2) When a borrower has an active escrow account and we refinance the property and move the current escrow account to the new rate term refinance, would we disclose the escrow credit on the initial LE – so that a more accurate number for the cash to close is disclosed?
Answer: 1) That is correct. The aggregate escrow adjustment is not included on the LE. See 1026.37(g)(3).
37(g)(3) Initial escrow payment at closing. 2. Aggregate escrow account calculation. The aggregate escrow account adjustment required under § 1026.38(g)(3) and 12 CFR 1024.17(d)(2) is not included on the Loan Estimate under § 1026.37(g)(3).
2) If you expect to transfer the existing escrow balance to the new loan, then, yes, an estimate of the amount being transferred can be included on the Loan Estimate. Because this involves a refinance, you are likely using the alternative version of the LE/CD. If that is the case, you would reflect the amount of the escrow funds being transferred as a negative amount within the Payoffs and Payments line in the Cash to Close Table on the alternative version of the LE. On the CD, it would appear in the Payoffs and Payments Table as a negative amount with a label such as “Escrow balance transfer from Loan # XXXXXXX.”