Federal Reserve Tweaks ARM & Construction Loan Disclosure Regs

The Federal Reservernhas issued an interim rule containing modifications to the September 2010rninterim rule which implemented changes in the Truth in Lending Act (TILA) and RegulationrnZ. </p

This interim rule revises the Board’s interim rule published on September 24, 2010, which implemented certain requirements of the Mortgage Disclosure Improvement Act of 2008. The September 2010 interim rule requires
creditors who extend consumer credit secured by real property or a dwelling to disclose summary information about interest rates and payment changes in a tabular format. The Board is issuing this interim rule to clarify certain provisions of the September 2010 interim rule.</p

The September InterimrnRules require lenders to provide disclosures in tabular form of the contractrninterest rate and corresponding monthly payment including an estimated amountrnof any escrows.  There are specialrndisclosure requirements  for adjustablernor step-rate loans to show the initial rate and payment, the maximum rate andrnpayment at any time during the first five years after consummation of the loan,rnand the maximum rate and payment possible over the life of the loan.  Special disclosures are also required forrnnegatively amortizing option payments, introductory interest rates, interestrnonly payments, and balloon payments. Lenders are also required to include arnstatement that there is no guarantee the consumer will be able to refinance therntransaction in the future.  </p

The changes to the SeptemberrnInterim Rule as made by the Federal Reserve this week are summarized below.</p<ul class="unIndentedList"<liBecause the first change to a 5/1 hybrid loanrnwould typically come five years plus one month after consummation of said loan,rnthe tabular example will instead reflect changes up to and including the fifthrnanniversary of the initial loan payment.</li</ul<ul class="unIndentedList"<liThe September rule requires that, for anrninterest only loan, the lender must disclose both the earliest date each raterncan apply and the earliest date the resulting payment will apply. In order to eliminate confusion, the new rulernwill require creditors to disclose only the earliest date that the rate becomesrneffective.</li</ul<ul class="unIndentedList"<liThe definition of "negative amortization"rnis being revised so clarify that such disclosures apply only to loans wherernconsumers are allowed to make minimum payments that result in negativernamortization but do not apply to loans that are designed to allow borrowers tornskip or reduce payments during certain periods – for example to accommodate seasonalrnemployment – even if those payments do result in negative amortization.</li</ul<ul class="unIndentedList"<liWhen a construction loan secured by realrnproperty or a dwelling that may be permanently financed by the same creditor isrndisclosed as more than one transaction, the construction portion of thernfinancing must be disclosed under the new rules for interest rate and paymentrnsummary tables. If it is disclosed as arnsingle transaction, the summary table need reflect only the permanentrnfinancing; the construction financing should be disclosed only with a statementrnoutside the table that interest payments must be made and the timing of such payments.rn</li</ul

These interimrnchanges become effective in concert with the September Interim Rule on Januaryrn30, 2011, however, they remain optional for all loans for which application isrnmade prior to October 1, 2011.

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