A borrower asks which part of her adjustable rate the lender can change during the loan: the index at 4.1% or the margin at 2.75. Under a note specifying a fixed margin and an externally published index, may the lender unilaterally reset either component at each adjustment?
Correct Answer
D) Neither at the lender’s discretion: apply the specified index and the fixed 2.75-point margin
D. The lender applies the agreed components rather than repricing them at will. The fixed margin is a contractual addition to the index. The published index value can move. Using its applicable value is not the same as choosing a new index each adjustment. At the supplied values, index plus margin is 6.85% before caps and other terms. Scope and exceptions: This does not say the index value is frozen at 4.1%. A lawful benchmark replacement or agreed modification is a different issue; do not infer that an index can never be replaced under any circumstances. Source: Index and margin definitions — https://www.consumerfinance.gov/ask-cfpb/for-an-adjustable-rate-mortgage-arm-what-are-the-index-and-margin-and-how-do-they-work-en-1949/
Why This Is the Correct Answer
D. The lender applies the agreed components rather than repricing them at will. The fixed margin is a contractual addition to the index. The published index value can move. Using its applicable value is not the same as choosing a new index each adjustment. At the supplied values, index plus margin is 6.85% before caps and other terms. Scope and exceptions: This does not say the index value is frozen at 4.1%. A lawful benchmark replacement or agreed modification is a different issue; do not infer that an index can never be replaced under any circumstances.
Why the Other Options Are Wrong
Option A: The margin: the lender resets it from 2.75 at each adjustment
It contradicts the stipulated fixed margin.
Option B: The index, which the lender selects afresh from published sources
Routine adjustments do not authorize selecting a new benchmark at will.
Option C: Both, because the lender recalculates the rate at every adjustment
Recalculation does not create discretionary control of both components.
Exam Tip
An ARM adjusts by an agreed formula, not by unlimited lender discretion.
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