By Fredric J. Gooch – General Counsel, DocuTech Corporation
As part of the Housing and Economic Recovery Act of July 2008 the Mortgage Disclosure Improvement Act (“MDIA”) was enacted making several changes to the Truth-in-Lending Act (“TILA”) disclosure process for mortgage lenders. Waiting periods were enacted that required lenders to wait seven days to close a loan after the TILA disclosure was first provided to the borrower. Tolerances were implemented that required re-disclosure of the TILA disclosure if the APR increased by more than 1/8 of 1% from the most recent disclosure. In the event of a re-disclosed TILA disclosure the lender would need to wait three days from the re-disclosure to close the loan. In May of 2009 the Federal Reserve promulgated rules to implement MDIA, these rules became effective in July 2009. During this rule making process the federal reserve did not implement rules pertaining to disclosure requirements for mortgage loans with adjustable rates, the MDIA specified that disclosure requirements for these rules would be effective on January 30, 2011 or an earlier date set forth by the Federal Reserve.
The Federal Reserve intended to consider the disclosure requirements for adjustable rate loans in broader rulemaking for all closed end mortgage loans. They have now decided to go a different direction and supplement this rulemaking with new rules addressing the right to rescind, loan modifications, reverse mortgages and other considerations. Since the deadline of January 30, 2011 was quickly approaching the Feds decided to adopt an interim rule to implement the adjustable rate disclosures and request comments.
The MDIA set several requirements for adjustable rate loans secured by the borrower’s principal dwelling. It required special labeling for the payment schedule that stated “Payment Schedule: Payments Will Vary Based on Interest Rate Changes.” It also required examples of the adjustments to the regularly scheduled payments based on the terms of the credit agreement. The examples were required to state the maximum payment amount required based on the maximum interest rate. MDIA required the Federal Reserve to conduct consumer testing to ensure that the disclosure modifications could be easily understood by borrowers. The interim rules make some more dramatic changes than those specified by MDIA. The interim rules revise disclosure requirements for all closed end mortgage loans requiring a new interest rate and payment summary schedule.
The interim rules revise paragraph (g) of 12 CFR 226.18 and add two new paragraphs (s) and (t). It requires a payment schedule that shows the number, amounts, and timing of payments scheduled to repay the obligation. The information disclosing the interest rates and payments must be disclosed in the form of a table with, no more than 5 columns and with headings and format substantially similar to the new model clauses H-4(E through H). The tables may only contain the information specified in the regulation and they must be placed in a prominent location and must be in a minimum of 10-point font. The model clauses contain shaded areas but the rule explains that the shading is not required. This is presumably to address concerns that the shading may make it difficult to read copies of the disclosure.
The new 12 CFR 226.18(g) states that all transactions subject to paragraph (s) (i.e. closed end transactions secured by real property or a dwelling, excluding timeshare plans) must disclose the number, amounts, and timing of payments scheduled to repay the obligation. Paragraph (s) gives more details on how the interest rate and payments should be disclosed. It also sets forth the rules for formatting the disclosure including the font size and tabular rules along with the references to the appendixes noted above.
The new requirements become mandatory on January 30, 2011 and in future newsletter articles we will examine in more detail the payment schedule requirements. 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.