Rule Requires Mortgage Payment Summary

Rule requires disclosures on how mortgage payments change over time.

November 19, 2010

In mid-August, the Federal Reserve Board issued five rules (two proposed rules, two final rules, and one interim rule) dealing with mortgage lending. These rules totaled nearly 1,200 pages, setting a Fed record for the largest issuance in a single day.

This column covers the interim rule that revises disclosure requirements for closed-end mortgages under Regulation Z. The rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA), which require lenders to disclose how borrowers’ mortgage payments can change over time.

The rule requires credit unions’ initial disclosures to include a payment summary in the form of a table in at least 10-point type, stating:

  • The initial interest rate and the corresponding monthly payment amount including escrow amounts for taxes and property insurance, as well as private mortgage insurance;
  • For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and the maximum interest rate and payment possible over the life of the loan; and
  • The fact that consumers might not be able to avoid increased payments by refinancing their loans.

The interim rule also requires lenders to disclose certain features, such as balloon payments, or options to make only minimum payments that will cause loan amounts to increase.

Credit unions must comply with the interim rule for applications they receive on or after Jan. 30, 2011, as specified in the MDIA. Disclosures that comply with the interim rule, however, may be provided before that date.

The interim rule applies 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. Timeshare plans aren’t covered.

The rule includes a variety of model forms and clauses that apply to specific loans (i.e., fixed-rate, adjustable-rate, negative amortization, and interest-only), as well as loans with balloon payments and those with introductory rates.

The required disclosures must be in the form of a table in at least 10-point type. They 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 loan is amortizing or has an adjustable rate, although the table may not have more than five columns. The shading on the model forms doesn’t have to be duplicated.

Take fixed-rate mortgages, for example. Credit unions must disclose the interest rate and monthly payment applicable at consummation. If the loan documents don’t provide for any payment increases, only one interest rate and payment in a single column must be disclosed.

Fixed-rate mortgages with scheduled payment increases, however, must show the interest rate associated with the increased payments even though the rate will not change. In such cases, multiple columns may be required, such as in this model form:

Model form

For adjustable-rate mortgages, credit unions must disclose the interest rate and monthly payment applicable at consummation and the period of time until the first adjustment, labeled as “introductory rate and monthly payment.”

Credit unions must also disclose the maximum possible interest rate and payment at any time during the first five years after consummation and the earliest date that rate may apply.

Finally, credit unions must disclose the maximum interest rate and payment that could apply at any time during the term of the loan and the earliest date that rate could apply.

Space limitations here prevent coverage of disclosure requirements for other types of mortgage products, such as interest-only loans or loans with negative amortization.

Visit the Fed's website for more information and to view other model forms.

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