More Mortgage Changes Are on the Way

A second interim rule amends the Mortgage Disclosure Improvement Act.

March 25, 2011

September 2010, Federal Reserve Board issued an interim rule that revised disclosure requirements for closed-end mortgages under Regulation Z.

The rule implemented provisions of the Mortgage Disclosure Improvement Act that require lenders to disclose how borrowers’ regular mortgage payments can change over time.

It requires credit unions’ initial disclosures to include a payment summary in the form of a table in at least 10-point type. It also requires the disclosure of a statement that consumers shouldn’t assume they can refinance their loans (CU Mag 11/10, p. 56).

In December, the Fed released a second interim rule that revised the Reg Z interim rule it published in September.

The interim rules apply to all transactions secured by a dwelling (principle residence or second home) and transactions secured by real property that don’t include a dwelling or other structures. The rules don’t apply to timeshare plans.

Credit unions must comply with the September interim rule’s requirements for mortgage applications received on or after January 30, 2011. Clarifications in the December interim rule also are effective January 30, 2011. However, compliance with the clarifications is optional until October 1, 2011.

The second interim rule makes these changes and clarifications:

• Adjustable- and step-rate loans. For adjustable- and step-rate loans, the September interim rule requires creditors to disclose the maximum interest rate and payment during the first five years.

The December interim rule modifies the September rule to require creditors to base their disclosures on the first five years after the first regular payment due date rather than the first five years after consummation. This change ensures the disclosures are consistent with the manner in which payments are typically structured for adjustable-rate transactions that are “5/1 ARM” loans.

• Interest-only loans. Under the September interim rule, for each interest rate disclosed, creditors must disclose the earliest date the particular rate may apply and the corresponding payment amount.

For an interest-only loan, if the corresponding payment amount will be applied to both principal and accrued interest, the rule also requires the creditor to disclose the earliest date that such payments will be required.

The December rule eliminates the potential conflict from disclosing two different dates in the same column by clarifying that creditors should disclose the earliest date that the interest rate becomes effective rather than the date the first payment is due under the new rate.

• Negative amortization loans. The December interim rule revises the definition of “negative amortization loan” to clarify which loans are covered by the special disclosure requirements for such loans. The clarifications were designed to enable consumers to compare the effects of making “minimum” vs. “full” payments.

The revision clarifies that these disclosures apply only to loans where consumers may make minimum payments that result in negative amortization. The revised definition excludes loans that don’t have a minimum required payment that results in negative amortization.

• Home construction loans. The December interim rule adds a new comment in Appendix D. It clarifies that when a construction loan secured by real property or a dwelling that may be permanently financed by the same creditor is disclosed as more than one transaction, the creditor must provide the payment summary tables (required by the September interim rule) for the construction loan.

Otherwise, if the creditor discloses the construction loan and permanent financing as a single transaction, the payment summary table should reflect only the permanent financing, and the construction loan should be disclosed only with a statement outside the table that interest payments must be made (including the timing of the payments).

Credit unions should become familiar with these changes, as well as the changes required by the September interim rule, and adopt procedures to ensure compliance with the requirements of the complex payment summary tables.

MICHAEL MCLAIN is assistant general counsel and senior compliance counsel for the Credit Union National Association. Contact him at 608-231-4185.