When an ARM adjustment error involves an interest rate change error only and the error results in the use of a lower interest rate than was required:
• the mortgage loan amortizes at a faster pace, and
• the UPB is lower than it would have been from the amortization of the borrower's actual payment at the correct, higher interest rate.
Since Fannie Mae has decided that the borrower will not be required to make up undercharges, the servicer must not change the mortgage loan balance in Fannie Mae's investor reporting system records even though too little of the borrower's payment would have been applied to interest and too much to principal. The following table provides additional information depending on mortgage loan type.
When an ARM adjustment error involves an interest rate error only and the error results in the use of a higher interest rate than was required by the mortgage note:
• the borrower has not actually paid too much, but
• his or her actual payment has been misallocated between principal and interest.
The servicer must report a curtailment to Fannie Mae to reduce the UPB of the mortgage loan by the amount of the interest overcharge, rather than refunding the overcharge to the borrower. The following table provides additional information depending on mortgage loan type.
Fannie Mae is not obligated to pay the servicer any interest on the amount of its over-remittance for either a portfolio mortgage loan or an MBS mortgage loan because the servicer is responsible for the accuracy of its ARM adjustments.
For more information see Fannie Mae Investor Reporting Manual Chapter 4, Special Loan Handling