By Fredric J. Gooch – General Counsel, DocuTech Corporation
In September, in Part 1 of this MDIA article, we discussed general information relating to the Mortgage Disclosure Improvement Act. This month we examine in more detail the payment schedule requirements for various amortization types and payment options.
Fixed Rate Mortgages
For fixed rate amortizing mortgages the interest rate at consummation must be disclosed. If all the period payments will be applied to accrued interest and principal, the principal and interest, the estimated taxes and insurance and the total estimated monthly payment must be disclosed. If the periodic payment may increase without regard to an interest rate adjustment the payment that corresponds to the first such increase and the earliest date on which the increase could occur should be disclosed. Below is the model table for fixed rate mortgages:
As you can see there is also a section on the payment table that references the estimated charges for taxes and insurance. This amount must be added to the principal and interest payment to give the borrower a disclosure of the estimated monthly payment for the loan.
Adjustable Rate or Fixed Rate Mortgages
If an amortizing loan has an adjustable or a step-rate feature the rate at consummation until the first rate adjustment must be disclosed and labeled as the “introductory rate and monthly payment.” The maximum interest rate that may apply during the first five years of the transaction and the earliest date on which this rate may apply should be disclosed and labeled as “maximum during the first five years.” The maximum interest rate that may apply during the life of the loan and the earliest date on which it may apply must be disclosed and labeled as “maximum ever.” Below is the model form provided in the rule for an ARM loan or a step rate mortgage:
Negatively Amortizing Loans
For a negative amortization loan the table must disclose the interest rate at consummation and if it will adjust after consummation, the length of time until it will adjust must be labeled as “introductory or intro.” The maximum interest rate that could apply when the consumer must begin making fully amortizing payments must also be disclosed. If the minimum required payment will increase before the customer must being making fully amortizing payments, the maximum interest rate that could apply at the time of the first payment increase and the date the increase is scheduled to occur. If there is a second increase in the minimum required payment that may occur before the consumer must start making fully amortizing payments, the table must disclose the maximum interest rate that could apply at the time of the second payment increase and the date the increase is scheduled to occur.
The payments on negative amortization loans must be disclosed in the following manner. The minimum period payment required until the first payment increase or interest rate increase must be disclosed and correspond with the applicable interest rate. The minimum payment due at the first payment increase, and second increase if applicable, must be disclosed with the corresponding interest rate. A statement must be included that informs the consumer that the minimum payment pays only some interest, does not repay any principal, and will cause the loan amount to increase. The fully amortizing periodic payment amount must be disclosed along with the earliest time when the payment must be made corresponding to the applicable interest rate. The full payment option must also be disclosed for each interest rate disclosed in the table. This is the model clause for a loan with negative amortization found in the rule:
For amortizing adjustable rate mortgages with an introductory rate or where the interest rate at consummation is less than the fully indexed rate, the table must include a box that is directly below the table which informs the consumer of the interest rate that applies at consummation and the period of time for which it applies and a statement that even if market rates do not change, the interest rate will increase at the first adjustment and a designation of the place in sequence of the month or year of each rate adjustment and the fully indexed rate.
Interest Only Payments
If the loan is an interest only loan a payment must be disclosed for each applicable interest rate. If the payment will be only applied to accrued interest it must be labeled as an “interest payment” and there must be a disclosure statement that none of the payment is being applied to principal. If the payment will be applied to accrued interest and principal, then there must be an itemization of the amounts being applied to principal and to interest labeled “Principal Payment” and “Interest Payment.” The escrow amounts and the totals must also be disclosed as illustrated in Model Form H-4(H) below:
If the loan has a balloon payment, which is defined in the rule as payment that is more than two times a regular period payment, the balloon payment must be disclosed separately from the other period payments disclosed in the table. It should state: [Final Balloon Payment due (date): $_________]. However, if the balloon payment is scheduled to occur at the same time as another payment required to be disclosed on the table, then the balloon payment must be disclosed in the table.
More Rules for Negative Amortization
There are further additional rules for loans negative amortization feature. The lender must disclose the maximum interest rate, the shortest period of time in which such interest rate could be reached, the amount of estimated taxes and insurance included in each payment disclosed and a statement that the loan offers payment options two of which are shown. Disclosure must also be made of the dollar amount of the increase in the loan”™s principal balance if the consumer makes only the minimum required payments for the maximum possible time and the earliest date on which the consumer must begin making fully amortizing payments, assuming that the maximum interest rate is reached at the earliest possible time.
Compliance with the interim rule becomes mandatory on January 30, 2010. However, it is not too late to have your say on how you feel the new rules should be amended or changed. Comments on the interim rule may be submitted during the sixty day period following the publication of the interim rule. More information can be found at http://www.federalreserve.gov/newsevents/press/bcreg/20100816b.htm. DocuTech has scheduled to make changes to ConformX to comply with this rule in our January release.