3 FACTSHEET: PREPAID INTEREST AND GENERAL QM APR SPECIAL RULE FOR ARMS VERSION 1.0 (02/2022)
General QM definition includes 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. 12 CFR 1026.43(e)(2)(vi). For loans with this characteristic, the creditor
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. 12 CFR 1026.43(e)(2)(iv). 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. 12 CFR 1026.43(b)(4) and 12 CFR 1026.43(e)(1).
Interest rate used to calculate prepaid interest under the
General QM ARMs special rule
Under Regulation Z, the APR includes any prepaid interest, sometimes referred to as “odd-days”
or “per diem” interest. Typically, mortgage interest is paid one month in arrears, meaning that, for
example, if the first scheduled periodic payment due is on November 1st, it will cover interest
accrued in the preceding month of October. In that example, if the consumer consummates the
mortgage loan on September 20th, interest starts to accrue on September 20th and at
consummation the consumer will typically prepay interest for the 11-day period through the end of
September. That amount is prepaid interest. In some cases, a creditor may provide the consumer
a prepaid interest credit, sometimes referred to as “negative prepaid interest.” Negative prepaid
interest can result if consummation occurs after interest begins accruing for periodic payments. In
the example above, if the consumer instead consummates the mortgage loan on October 4
th
, but
the first scheduled periodic payment is due on November 1st and will cover interest accrued in the
preceding month of October, then at consummation the creditor will typically credit the consumer
for the preceding three days in October to offset some of that first scheduled periodic
payment. That prepaid interest credit is also a component of the APR.
For purposes of calculating the APR for the General QM ARMs special rule, the maximum interest
rate that may apply during the five-year period after the date on which the first regular periodic
payment will be due is used to calculate prepaid interest and negative prepaid interest. For
example, if Ficus Bank 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, Ficus Bank 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. A creditor must