If the loan carries a variable rate, generally the loan's effective interest rate may be:

The choice should be applied consistently for all individually assessed impaired variable rate loans.

For adjustable rate mortgages with initial fixed interest rates, lenders must calculate the loan's effective interest rate using a blend of the initial fixed interest rate over the fixed period and the variable rate of the loan on the date of loan modification over the variable period. Subsequent measurement of impairment can be performed by either (a) fixing the effective interest rate at the rate used in the initial measurement or (b) calculating a new effective rate as a blend of the initial fixed interest rate over the fixed period, the actual variable rate of the loan (based on previous changes in the index), and the rate in effect as of the date of the remeasurement.

If an adjustable rate mortgage has an initial interest rate that is below the fully indexed market rate ("teaser" rate), it would not be appropriate to use the single teaser rate as the effective interest rate for calculating the present value of the expected future cash flows of a modified loan if the modification under a TDR occurs during the initial teaser period. The interest rate used under ASC 310-40 should reflect the fact that the lender has made a concession to the borrower; therefore, the teaser rate cannot be used, as it would not reflect the lost interest to the lender. 

There are alternatives available to lenders in determining the loan's effective interest rate for hybrid adjustable rate residential mortgages in their ASC 310-10 impairment calculation. Lenders have a policy choice to use the "Spot Effective Rate" or the "Forward Effective Rate" to determine the effective interest rate for measuring impairment using the present value of expected future cash flows method under ASC 310-10.

Future reset provisions of the original loan prior to modification may include rate and payment caps and/or floors. These provisions will also need to be carefully considered in the determination of the loan's effective interest rate. Additionally, the effective rate should be adjusted for any net deferred loan fees or costs, premiums or discounts. Under each of these alternatives, the loan's effective interest rate determined at the time of the loan modification should result in an effective interest rate in excess of the loan's initial rate (teaser rate).