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FEDERAL RESERVE BANK OF NEW YORK M'ibl IDS7S-ft A ugust 24, 1990 ADJUSTABLE RATE MORTGAGE LOANS Accuracy o f Interest Rate Adjustm ents To the Chief Executive Officers of All State Member Banks in the Second Federal Reserve District: T here have been re cen t allegations in th e p ress concerning th e accuracy of in te re st ra te adju stm en ts being m ade to adjustable ra te m ortgage (ARM) loans by lenders th a t m ay re su lt in th e len d ers’ collecting ra te s of in te re st th a t are not consistent w ith th e underlying contracts. A t this tim e, it is not possible to draw firm conclusions as to th e ex ten t or m agnitude of this alleged problem ; how ever, we wish to bring this issue to your attention. All ARM loans are subject to R egulation Z. Section 226.20(c) of th a t R egulation req u ires th a t a b o r ro w er receive tim ely adjustm ent notices th a t contain inform ation about in te re st ra te s, index values, the contractual effects of the adjustm ent, and the new paym ent due a fte r an adjustm ent. A d justm ent e rro rs m ay be caused by a num ber of factors, such as use of an index different from th a t described in the contract or of an index from th e w rong date or tim e period, an inappropriate rounding m ethod, or an incorrect application of adjustm ent caps. E rro rs m ay also re su lt from en terin g loan data incorrectly into a com puter a t th e tim e th e loan is originated or w hen th e in te re st ra te is adjusted, or by selecting an incorrect in te re st ra te or changing data incorrectly w hen th e in te re st ra te is adjusted. These erro rs m ay be considered breaches of contract, and m ay expose th e bank to legal action if th e bank has overcharged custom ers. W e recom m end th a t your bank review its ARM system to ensure th a t in te re st ra te inform ation is correctly determ ined and adm inistered, and th a t ra te s are adjusted properly. E ffective internal controls and procedures should be in place to ensure th a t all ad justm ents are m ade in accordance w ith th e term s of th e underlying contracts and th a t com plete, tim ely, and accurate ad ju stm en t notices are being provided to borrow ers. In addition, we urge you to m aintain docum entation indicating th e basis for in te re st ra te adju stm ents m ade to your ARM loans in th e event questions are raised about w h e th e r th ese changes have been consistent w ith th e underlying contracts. Questions on this m a tte r m ay be directed to our Compliance E xam inations D epartm ent (Tel. No. 212-720-5914). Ja m es K. H o d g etts, Chief Compliance Examiner.
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