Section 20 of Regulation Z (12 CFR § 1026.20) has, for many years, required a post-closing servicing notice to be provided to consumers, in connection with loans in which the interest rate changes. This notice reminded the consumer of the upcoming change and how it will affect their payments.
As set forth in the new Regulation Z servicing rules (see 78 FR 10902), Section 20 has been revised to now require two post-closing servicing notices. One of them, under Subsection 20(c), is generally required to be given between 60 and 120 days before a rate adjustment which has a corresponding payment change. The other, required under new Subsection 20(d), is to be provided between 210 and 240 days before the first payment under the first initial rate adjustment is due.
The one required under Subsection 20(d) must also be provided at the closing of the loan if the first adjustment occurs within 210 after closing. For this reason, we will be providing a notice for this requirement, under the appropriate circumstances, in closing packages. The notice will be a duplicate of the model form published for this requirement (12 CFR Pt. 1026, App. H, Form H-4[D][3]).
The form is required in connection with an adjustable-rate mortgage which is closed-end and is secured by the consumer’s principal dwelling. To follow industry practice, however, we are triggering this new disclosure to print regardless of occupancy type. A special exemption is carved out for such ARMs which have a term of one year or less (see 12 CFR § 1026.20[d][1][ii]).
The form Cx17906 prints in Closings for non-HELOC loans with terms over 12 months when:
1. “Closing On or After 01/10/2014” is “Yes”; and
2. “First Payment Date After First Rate Adjustment Is Within 210 Days Of Closing Date Indicator” is “Yes.”
Both of the fields above are set by ConformX.
The form generally has six sections and a payment schedule, with two additional sections which will print dynamically based on whether there are any interest-only payments or negative amortization features.
Introductory Section
The first section gives a general overview to the consumer of what their loan is, when the interest rate will change after the fixed-rate period, how often the interest rate will change in the future, and that such changes will result in changes to the mortgage payment. We have added the following additional text which will print for interest only loans when the ARM fixed period is the same as the interest only period:
“Also, as of [FIRST PAYMENT OF PRINCIPAL AND INTEREST DATE], your mortgage payment will include principal as
well as interest.”
It will also print the following text for Construction and Construction-to-Permanent loans:
“Your payment will, for the remainder of the construction phase of your loan, vary each month based on changes in your interest rate (which are described below) which are applied to the amounts of money drawn from your loan.”
Payment Table
Following the introductory paragraph is the payment table, which discloses to the consumer the interest rate and principal, interest, escrow, and total amount of payments under the current interest rate and the new rate, as well as how frequent the payments are. It will also disclose the due date of the total payment under the new rate. Due to various limitations, the amounts disclosed in the new rate column of the form will be estimates only.
Interest Rate
The section following the payment table explains to the consumer how the interest rate is calculated, as well as disclosing which index is used in the calculation (and how frequently it is published) as well as the margin percentage. Additional text may be added if any clients use any other adjustments to the index.
Rate Limits
The next section discloses to the consumer the caps applicable to the interest rate changes, such as the maximum amount it can ever be over the life of the loan and the maximum amount by which it can increase within a year.
There is one clause dealing with increases from the interest rate which results from a loan with a feature which allows the rate to carry over from a previous term. ConformX does not support such features, so we will not be including this text from the model form.
New Interest Rate and Monthly Payments
This section explains some of the features of the payment table. The first sentence will disclose that the amounts in the table are estimates (since we are only able to estimate the payments in our software). The following sentences disclose which index and margin the estimated payments are currently based on, plus the current loan balance and remaining loan terms.
The last sentence of this section informs the consumer that if the index changes when the exact amount of the new interest rate and payment is calculated, the rate and payments will be different than the estimates in the payment table and the consumer will receive another notice (the Subsection 20[c] notice) which will contain the exact payment.
Dynamic Sections
The two dynamic sections will print after the “New Interest Rate and Monthly Payments” section, when applicable.
The first one (“Interest-Only Payments”) will inform the consumer that their payments will not cover principal and, as a result, the loan balance will not decrease. This section will print for interest only loans when the interest only term is longer than the fixed rate term.
The second section (“Warning about Increase in Your Loan Balance”) informs the consumer that their payment will only partially cover interest payments and will not apply to the principal amount of the loan, resulting in an increase of the unpaid balance of the loan. It further discloses the amount of payment the consumer would need to make, under the new interest rate, to fully pay off the loan. This section will print loans with a Neg-Am ARM amortization type (loans with negative amortization).
Prepayment Penalty
This section either informs the consumer that they could be charged a penalty for paying off their loan before a certain date and that they should contact the lender for more information, or that no prepayment penalty exists. Which text will print if there is a prepayment penalty on the loan.
Final Section
The last section provides the contact information of the lender to the consumer, as well as informing them of potential alternative options for avoiding the changes to the interest rate (e.g. refinancing or modifying the loan) and providing them with general information on how to find and contact housing counselors in their area.
This new disclosure is now available in the ConformX Production environment. If you have any questions or concerns about this change, please contact Client Support at 1.800.497.3584.
January 9, 2014
DR 140163