Both Cx13457 and 14089 provide the adjustable-rate mortgage (ARM) disclosures required under 12 CFR § 1026.19(b). One of the disclosures set forth in this Subsection is as follows:
“The maximum interest rate and payment for a $10,000 loan originated at the initial interest rate (index value plus margin, adjusted by the amount of any discount or premium) in effect as of an identified month and year for the loan program disclosure assuming the maximum periodic increases in rates and payments under the program; and the initial interest rate and payment for that loan and a statement that that the periodic payment may increase or decrease substantially depending on changes in the rate.” (12 CFR § 1026.19[b][viii][B])
This disclosure is set forth in the “Maximum Interest Rate and Payment Example” section in our documents. Since the terms of the loan set forth in these disclosures are only examples for a $10,000 loan, the payment amounts for the actual loan do not need to be calculated (see 12 CFR Pt. 1026, Supp. I, Paragraphs 19[b][viii][B] –  & 19[b][ix] – ).
However, a problem arises when an ARM loan is also a construction loan. During the Construction Period of the loan, the borrower will only make interest payments, which are based on the amounts of principal which are advanced by the creditor. It is, therefore, theoretically possible for the initial payment to be $0.00 and, while disclosure of this amount in the forms is compliant (it is only required to be an estimate), it may confuse the borrower into thinking that his initial payment on his loan is $0.00, when it could actually be higher.
Another problem arises over the issue of whether a construction loan is treated by the lender as either a single transaction (Construction Only) or two transactions (Construction-to-Permanent). If it is treated as a single transaction, then the first payment during the Construction Period should be disclosed. If it is treated as two transactions, then the first payments of both the Construction and Permanent periods should be disclosed (see Ibid. Paragraph 17[c] – ).
Calculations for the interest rate and the annual percentage rate on a construction loan must also be based on the ones set forth in 12 CFR Pt. 1026, App. D, which generally provide for the estimated rates to be based on the assumption that one-half of the loan amount “is outstanding at the contract interest rate for the entire construction period.”
To mitigate these issues, we will be creating two additional versions of Cx13457 and Cx14089 (which will print within both documents), one to print for Construction Only loans and the other for Construction-to-Permanent loans.
For the Construction Only versions, the following new second paragraph will appear:
“The mortgage you have applied for includes a Construction Period, during which you will only make Interest Payments. The dollar amount of your Interest Payments during the Construction Period will depend on the interest rate in effect during the Construction Period and the amount of principal that has been advanced to you. The dollar amount of your Interest Payments during the Construction Period will also depend on the timing of the advances of principal we make to you or on your behalf.”
An asterisk will also appear after the initial payment amounts in the “Maximum Interest Rate and Payment Example” section. The asterisks will cross-reference a note, which states the following:
“The Construction Period payment is based on interest-only and is calculated on 50% ($5,000) of the total loan amount and is an estimate only. Your actual initial payment may be lower or higher, depending on the amount of principal that is advanced.”
These two paragraphs should help clarify, for the borrower, that the dollar amounts disclosed are estimates only, due to the fact that his loan has two different payment periods.
For Construction-to-Permanent loans, the new second paragraph for Construction Only loans will also print, but will also include the following as the last sentence:
“Once the Construction Period ends, a Principal & Interest Payment Period begins and you will begin making both principal and interest payments.”
The “Maximum Interest Rate and Payment Example” section will be split into two parts. Under one of them (entitled “Maximum Interest Rate and Payment Example [Construction Period Only]”), the current text of the section will print, with the asterisks and note aforementioned for Construction Only loans.
Under the second part (entitled “Maximum Interest Rate and Payment Example [Principal and Interest Payment Period]), the current text of the section will still print, without any alterations to the text, except that the initial payment and interest rates will be based on the regular payment period amounts.
The “Loan Term” section will also be revised to state the following:
“The Construction Period will be for [Field 540] month(s) or until completion of construction (whichever is earlier). At this time, the Principal and Interest Payment Period will begin. The loan will have a total term of [Field 46266] years.”
These changes will take effect on September 12, 2013. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.
September 4, 2013