CUNA Regulatory Comment Call
September 3, 2010
Interim Final Rule on Disclosures Required under the Mortgage Disclosure Improvement Act
- The Federal Reserve Board (Fed) has issued an interim final rule that will revise certain Regulation Z disclosure requirements for mortgage loans. These are specific changes to implement provisions of the Mortgage Disclosure Improvement Act (MDIA), which was enacted in 2008. These changes will require lenders to disclose how borrowers mortgage payments will change over time so that they may be alerted to the risks of payment increases before they consummate the loan. The Fed has also issued several other, separate proposals and rules that will change other Regulation Z requirements with regard to mortgage loans.
- Specifically, the interim rule will require lenders to provide a payment summary, in the form of a table,
that provides the following:
- The initial interest rate, along with the monthly payment.
- For adjustable rate loans, the maximum interest rate and payment that can occur during the first five years and the maximum rate and payment that is possible over the life of the loan.
- The fact that consumers may not be able to avoid increased payments by refinancing their loans.
- The above-described payment rate and summary table will replace the payment schedule that was previously required, although non-mortgage, closed-end loans will continue to require this schedule.
- The interim rule also requires lenders to disclose certain features, such as balloon payments or options to make only minimum payments that cause the loan balance to increase.
- The rule requires lenders to disclose a statement that there is no guarantee that the consumer will be able to refinance the loan to obtain a lower rate and payment.
- Lenders must comply with this rule for applications received on or after January 30, 2011, as required under the MDIA, although lenders may comply before this date.
- Comments are due within 60 days after the proposal is published in the Federal Register, which should be within the next several days. Please submit your comments to CUNA November 1, 2010. If commenting directly to the Fed, you must refer to Docket No. R-1366. Comments should be received by November 23, 2010.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Senior Assistant General Counsel Jeff Bloch at email@example.com; or mail them to Mary and Jeff c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the interim final rule. You may also access it here.
The Truth in Lending Act (TILA) is intended to promote the informed use of consumer credit by providing for disclosures about its terms and cost. TILA requires lenders to disclose the cost of credit as a dollar amount and as an APR in a uniform manner. This uniformity is intended to assist consumers in comparison-shopping for credit. Regulation Z implements TILA, which contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions.
The MDIA requires certain mortgage loan disclosures to be provided within three business days after an application is received and before the consumer has paid a fee, other than a fee for the credit report. The MDIA also requires lenders to mail or deliver disclosures at least seven business days before loan consummation and to provide corrected disclosures if the annual percentage rate (APR) is in excess of certain tolerances, which must be provided at least three business days before consummation.
In addition, the MDIA requires that these disclosures include payment examples, based on the loans interest rate, as well as a statement that there is no guarantee the consumer will be able to refinance the transaction in the future. This interim rule implements these specific provisions. The Fed had issued a proposal last year to implement these provisions as part of the comprehensive proposal to amend the Regulation Z mortgage loan disclosures. The Fed has now reissued these in this interim final rule in order to finalize them before the required January 30, 2011 statutory effective date, as outlined in the MDIA. This interim final rule is very similar to the provisions in the proposal last year, and are described in detail below.
DESCRIPTION OF THE INTERIM FINAL RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY
The interim final rule will require the disclosure of a new interest rate and payment summary for mortgage loan transactions, other than a timeshare plan. This includes property without a dwelling, and these disclosures will replace the current requirements for providing payment schedules. They must be in the form of a table, in at least 10-point type and must be substantially similar to the model forms and clauses that are provided with the rule. The number of columns and rows may vary, depending on whether the loans is amortizing or has an adjustable rate, although the table may not have more than five columns. Also, the shading shown on these model forms does not have to be included.
As noted above, the rule includes a variety of model forms and clauses that apply to specific loans, such as fixed-rate, adjustable rate, negative amortization, interest-only loans, loans with balloon payments, and loans with introductory rates. These disclosures were also proposed last year as part of the comprehensive proposal to change the Regulation Z mortgage loan disclosures, along with other proposed disclosures that will be finalized at a later date. Click here for a compilation of the forms and samples included in this rule.
The summary table requires disclosure of the interest rate, regular periodic payment, and balloon payment, if applicable. For adjustable rate loans, up to three interest rates and corresponding payments are required, including the maximum possible rate and payment and the earliest date in which that could occur.
If payments are scheduled to increase independently of the interest rate adjustment, the increased payments in these situations must also be disclosed, which would require a separate column in the table that discloses the rate at the time of the adjustment and the date that this will occur. If the borrower may make one or more interest-only payments, then these payments must be itemized to show the amount that will apply to interest and the amount that will apply to the principal. There are additional rate and payment disclosures for negative amortization loans. Other information not required under these rules is not permitted in the table.
For now, the fixed-rate summary will be used for reverse mortgages. The Fed has recently issued a proposed rule on disclosures for reverse mortgages. Once those are finalized, it is expected that those disclosures will replace the ones required under this rule.
For fixed-rate mortgages, lenders must disclose the interest rate applicable at consummation. However, some fixed-rate loans may have scheduled payment increases and the lender must show the interest rate applicable to such payments, even if the rate does not change. For adjustable rates, the lender must provide the rate at consummation and the period of time until the first adjustment, which must be labeled as the introductory rate and monthly payment.
For adjustable rates, the rule requires disclosure of the maximum possible rate at any time during the first five years of the loan, and the earliest date that it may apply. This differs from the closed-end mortgage loan proposal last year, which required the maximum rate and payment at the first adjustment. For amortizing adjustable rate mortgages with limits on interest rate increases, the table will have at least three columns. If there are no limits on rate increases, then there will only be two columns, one of which would be the rate at consummation and the other would be the maximum possible rate.
Information on any introductory rate must be provided in a box below the table. This would include the rate; how long it will last; that the rate will increase at the first scheduled adjustment, even if market rates do not increase; and the fully indexed rate that would have otherwise applied at consummation. Again, the rule provides a sample clause to use when providing this information. The rate at consummation would be the rate at the time the disclosures are provided or the rate during any prior period, as permitted in the contract. For example, if the contract specifies that rate changes are based on the index value 45 days before the change date, then the lender may use any index value in effect 45 days before consummation.
Lenders must disclose an estimate for taxes and insurance, if the lender establishes an escrow account, which must include any mortgage insurance. The mortgage insurance payments must be reflected until the date on which the lender must automatically terminate coverage under other applicable law, even if the consumer has a right to request that the insurance be canceled earlier. The periodic mortgage insurance premiums should be disclosed even if an escrow account is not established. However, payments for credit protection products should not be included in the disclosed escrow amounts.
For negative amortization loans, there will be a disclosure of the fully amortizing payments at the various possible interest rates, along with the dates that these payments are applicable. These will assume that the interest rate will reach its maximum at the earliest possible date. There will also be a disclosure of the minimum required payment for each rate, until the loan is recast into fully amortizing payments, along with the dates that these payments are applicable. These are the only payment options that would be disclosed, even if other options are permitted, such as interest-only payments.
The negative amortization loan disclosure must also include a statement that the minimum payment will only cover some of the interest, none of the principal, and that the principal balance will increase. When the loan is recast into fully amortizing payments, this payment must be disclosed at the highest possible interest rate that may apply. The disclosure must also have a statement at the bottom that indicates the amount that the principal balance will increase if only minimum payments are made, with the earliest month and year in which the loan will recast to require fully amortizing payments, assuming the rate reaches the maximum at the earliest possible time.
If a loan has a balloon payment, then the payment must be disclosed in the last row of the table. If it coincides with an interest rate adjustment or other payment increase, such as the expiration of an interest-only option, then it would instead be disclosed in the table as a payment increase. A balloon payment is defined as a payment more than twice the amount of other payments. Again, there is a sample clause that is to be used for this disclosure.
The rule requires lenders to disclose a statement that there is no guarantee that the consumer will be able to refinance the loan to obtain a lower rate and payment. This applies to fixed rate loans and to loans in which there is no dwelling, except for timeshares. The rule provides a sample clause for providing this disclosure that must be used.
QUESTIONS TO CONSIDER REGARDING THE INTERIM FINAL RULE
(The Fed has specifically requested comments on these issues)
- Do you have any comments with regard to the payment summary tables that are required under this rule?
- For adjustable rate loans, the applicable payment summary table requires disclosure of the maximum
possible rate at any time during the first five years of the loan, even if that is not the first adjustment,
and the earliest date that rate may apply. This is instead of the maximum rate at the first adjustment,
which was proposed as part of last years comprehensive mortgage loan proposal, due to concerns that this
earlier proposal posed the risk that consumers would not be aware of later, and more significant increases.
Do you agree that this concern should be addressed in this manner and is five years the appropriate time
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com