Summary ABA Staff Analysis: Interim Rule Amending Regulatin Z: Summary Infrmatin Regarding Interest Rates and Payment Changes September 2010 The Bard published interim rule (75 FR 58469-58489) changes and sliciting cmments fr amendments t Regulatin Z, which implements the Truth in Lending Act (TILA). The new interim rule implements Cngressinal directives cntained in the Mrtgage Disclsure Imprvement Act f 2008 (MDIA), which amended TILA t add new timing requirements and cnsumer prtectins in hmesecured transactins. 1 Under this interim rule, creditrs that extend credit secured by real prperty r a dwelling must disclse summarized infrmatin abut interest rates and payment changes. The interest rate and payment summary tables replace the payment schedule previusly required as part f the TILA disclsure fr mrtgage transactins. The interim rule mandates that such summaries be presented in tabular frmat. The rule adds a statement infrming cnsumers that they are nt guaranteed t be able t refinance their lans in the future. Effective Dates This interim rule is effective Octber 25, 2010. Bard clarifies that cmpliance with its requirements is ptinal until January 30, 2011. In rder t cmply with the time deadlines impsed by MDIA, the new rule requirements are mandatry fr transactins fr which an applicatin fr credit is received by the creditr n r after January 30, 2011. The Bard is als sliciting cmments n this interim rule, which must be received n r befre Nvember 23, 2010. The Bard states that it is issuing an interim rule, rather than a final rule, because it intends t cnduct additinal testing f this and ther disclsure requirements, and may revise these interim prvisins further in light f further testing results. Scpe The Bard s interim rule applies t clsed-end credit transactins secured by real prperty r a dwelling, and excludes lans secured by interests in timeshare plans. The rule therefre requires interest rate and payment summary tables fr all transactins secured by real prperty r a dwelling, including fixed-rate, fixed-payment mrtgages. Reverse Mrtgages: Under the interim rules, reverse mrtgages are subject t Sectin 226.18(s) and (t), but they will be excluded frm the definitin f a negative amrtizatin mrtgage. Timeshares: Lans secured by interests in timeshare plans are nt subject t new Sectin 226.18(s) and (t), but wuld be subject t Sectin 226.18(g) requiring an exact payment schedule t be disclsed in accrdance with the prvisins f that sectin. Rule Cntent Fr full understanding f the new disclsures mandated under the interim rule, readers must examine the mdel frms set frth by the Bard under Appendix H t the regulatins. These mdel frms are reprduced belw, as an attachment t this summary. 1 The MDIA is cntained in Sectins 2501 thrugh 2503 f the Husing and Ecnmic Recvery Act f 2008, Pub.L. 110 289, enacted n July 30, 2008. The Bard implemented an initial prtin these MDIA requirements in final rules published n May 19, 2009, and effective July 30, 2009. See 74 FR 23289 (May 19, 2009). The current rules were published n September 24, 2010. See 75 FR 58469-58489. 1
Interest Rate and Payment Summary The Bard is adpting a new Sectin 226.18(s) that will replace the current payment schedule disclsure fr clsed-end cnsumer credits (fund in Sectin 226.18(g)) with a new interest rate and payment summary table fr a transactin secured by real prperty r a dwelling. Sectin 226.18(g) will remain in place, but will apply nly t lans that are nt secured by real prperty r a dwelling; that sectin is therefre amended t exclude prperty r dwelling-secured transactins frm its cverage. The Bard crafted the interim rules in a manner that permits their applicatin t all types f lan prducts. The precise detail and presentatin f the disclsure will vary upn the specific characteristics f the particular lan prduct. Since the applicatin f these new rules t actual prducts can vary accrding t the details f the individual prducts, the interim rule and accmpanying cmmentaries prvide varius sets f examples t prperly illustrate the crrect applicatin f the new prvisins. The new Sectin 226.18(s) requires creditrs t disclse the cntract interest rate, regular peridic payment, and balln payment if applicable. Creditrs must prvide the infrmatin abut interest rates and payments in the frm f a table, and creditrs are nt permitted t include ther, unrelated infrmatin in the table. Fr all amrtizing lans, creditrs must separately itemize an estimate f the amunt fr taxes and insurance if the creditr will establish an escrw accunt. Under 226.18(s)(1), the table must be in a minimum 10-pint fnt t ensure that it is clear and cnspicuus. (TILA s current fnt and size requirements generally state that n minimum type size is mandated fr the disclsures.) The regulatry elements applicable t the varius cmbinatins f interest rate prducts are as fllw Amrtizing Lans (18(s)(2)(i)) Fr a fixed-rate mrtgage with n scheduled payment increases r balln payments, the creditr disclses nly ne interest rate. Creditrs must disclse the interest rate applicable at cnsummatin. Fixed-rate lans with payment increases require the creditr t disclse the interest rate alng with each payment increase, even if the interest rate des nt change. Sectin 226.18(s)(2)(i)(C) prvides that, where payment increases will nt cincide with an interest rate adjustment, the creditr must include a clumn that disclses the interest rate that wuld apply at the time the adjustment is scheduled t ccur, and the date n which the increase wuld ccur. Fr a fixed-rate mrtgage, the creditr shws the same interest rate twice. Fr adjustable-rate r step-rate amrtizing lans, the rule requires up t three interest rates and crrespnding peridic payments, including the maximum pssible interest rate and payment. Sectin 128(b)(2)(C) requires creditrs t disclse examples f payment increases, including the maximum pssible payment, fr adjustable-rate mrtgages and ther mrtgages where payments may vary. Sectin 226.18(s)(2)(i)(B)(1), requires disclsure f the interest rate at cnsummatin and the perid f time until the first adjustment, labeled as intrductry rate and mnthly payment. Sectin 226.18(s)(2)(i)(B)(2) requires disclsure f the maximum pssible rate at any time during the first five years after cnsummatin, even if that is nt the first adjustment, and the earliest date that rate may apply. Sectin 226.18(s)(2)(i)(B)(3) requires creditrs t disclse the maximum interest rate that culd apply at any time, and the earliest date n which that rate culd apply, as required by TILA Sectin 128(b)(2)(C). Sectin 226.18(s)(2)(i)(C) prvides that, where payment increases will nt cincide with an interest rate adjustment, the creditr must include a clumn that disclses the interest rate that wuld apply at the time the adjustment is scheduled t ccur, and the date n which the increase wuld ccur. In such instances, creditrs must include a clumn that 2
disclses the interest rate that will apply at the time f the increase, the date the increase is scheduled t ccur, and an apprpriate descriptin such as first increase r first adjustment, as apprpriate. Negative Amrtizing Lans (18(s)(2)(ii)) Fr negative amrtizatin lans, fr which any scheduled payment may cause the principal balance t increase, Sectin 226.18(s)(2)(ii) requires disclsure f the interest rate applicable at cnsummatin. Fr ARM lans that d nt prvide any limitatins n interest rate increases ( caps ), the creditr must disclse the rate applicable at cnsummatin and assume that the interest rate reaches the maximum at the next adjustment. Sectin 226.18(s)(6) requires a statement f the amunt f the increase in the lan s principal balance if the cnsumer makes nly minimum payments and the earliest mnth and year in which the minimum payment will recast t a fully amrtizing payment, assuming that the interest-rate reaches its maximum at the earliest pssible time. T further infrm cnsumers, this sectin requires a statement directly abve the summary table explaining that the lan ffers payment ptins. The explanatin preceding the table als must state the maximum pssible interest rate and the smallest number f mnths r years in which the interest rate culd reach its maximum. Intrductry Rate Disclsure fr Amrtizing Adjustable-Rate Mrtgages (18(s)(2)(iii)) In instances f adjustable-rate mrtgages that have an intrductry r teaser rate set belw the sum f the index and margin used fr later adjustments, Sectin 226.18(s)(2)(iii) requires An explanatin f the intrductry rate belw the table; Disclsure f the intrductry rate, hw lng it will last, and that the interest rate will increase at the first scheduled adjustment even if market rates d nt increase; The fully indexed rate that therwise wuld apply at cnsummatin. The Bard clarifies that fr early disclsures required t be delivered within three business days after receipt f an applicatin (under 226.19(a)(1)), the fully-indexed rate disclsed under Sectin 226.18(s)(2)(iii)(C) may be based n the index in effect at the time the disclsure is prvided. This is set frth in Cmment 18(s)(2)(iii)(C)-1. Principal, Interest Payments, and Escrws (18(s)(3)(i)) Sectin 226.18(s)(3)(i) requires disclsure f the principal and interest payment that crrespnds t each interest rate disclsed under Sectin 226.18(s)(2)(i). Under Sectin 226.18(s)(3)(i), if all regular peridic payments include principal and interest, each disclsed payment amunt must be listed in a single rw in the table with a descriptin such as principal and interest. Sectin 226.18(s)(3)(i)(C) prvides that, if an escrw accunt will be established, the creditr must disclse the estimated payment amunt fr taxes and insurance, including any mrtgage insurance. The rules prvide that the escrw amunt must include mrtgage insurance premiums even if they are nt escrwed. The Bard has determined that escrw payments are an imprtant piece f cnsumer infrmatin, and under these new rules, fr purpses f transactins secured by real prperty r a dwelling, creditrs may n lnger pt t exclude escrw accunts as prvided in existing Sectin 226.18(g). The Bard is further cnsidering whether taxes and insurance estimates shuld be included even when n escrw accunt is established. Cmment 18(s)(3)(i)(C)-1 clarifies the types f taxes and insurance that are required t be included in the estimate. Include amunts fr prperty taxes and mrtgage-related insurance items required by the creditr, such as insurance against lss f r damage t prperty, 3
r against liability arising ut f the wnership r use f the prperty, r insurance prtecting the creditr against the cnsumer's default r ther credit lss. Exclude premiums fr credit insurance, debt suspensin and debt cancellatin agreements. Nte that payment amunts under 226.18(s)(3)(i) shuld reflect the cnsumer s mrtgage insurance payments until the date n which the creditr must autmatically terminate cverage under applicable law. Payment amunts under 226.18(s)(3)(i) shuld reflect the cnsumer s mrtgage insurance payments. This amunt is included whether r nt the lan carries an escrw accunt. The mrtgage insurance premiums must be calculated until the date n which the creditr must autmatically terminate cverage under applicable law (even thugh the cnsumer may have a right t request that the insurance be cancelled earlier). Sectin 226.18(s)(3)(i)(D) requires disclsure f the ttal estimated mnthly payment, which includes the sum f the principal and interest payments (required under Sectin 226.18(s)(3)(i)(A) r (B)), and the estimated taxes and insurance payments required t be disclsed (under Sectin 226.18(s)(3)(i)(C)). Payments fr Negative Amrtizatin Lans (18(s)(4)) Fr each interest rate disclsed under 226.18(s)(2)(ii) fr a negative amrtizatin lan, the creditr must disclse payments in tw separate rws, as fllws First rw shws the fully amrtizing payment fr each interest rate; Secnd rw shws the minimum required payment fr each rate, until the recast pint. At the recast pint, the minimum payment rw shws the fully amrtizing payment. The interest rate and payment summary wuld display nly tw payment ptins, even if the terms f the legal bligatin prvide fr thers the ptin t make minimum payments that result in negative amrtizatin, and the ptin t make fully amrtizing payments. Under Sectin 226.18(s)(4)(i)(C), creditr must prvide a statement that the minimum payment will cver nly sme f the accrued interest and nne f the principal and will cause the principal balance t increase. Sectin 226.18(s)(4)(ii) requires disclsure f the fully amrtizing payment that will be required at recasts (when minimum payments n lnger are permitted and fully amrtizing payments are required). This payment amunt must reflect the maximum pssible interest rate that will be applicable at that time, based n the cntract terms. Sectin 226.18(s)(4)(iii) requires disclsure f the fully amrtizing payment, assuming that the cnsumer makes nly fully amrtizing payments beginning at cnsummatin. The fully amrtizing payment rw must be cmpleted fr each interest rate required t be disclsed. Balln Payments (18(s)(5)) In instances f balln ntes, Sectin 226.18(s)(5)(i) prvides that the balln payment must be disclsed in the last rw f the table rather than in a clumn, unless it cincides with an interest rate adjustment r ther payment increase such as the expiratin f an interest-nly ptin. If a balln cincides with an interest rate adjustment r ther payment increase, the balln payment is disclsed in the table as that payment increase. Sectin 226.18(s)(5)(i) prvides that a payment is a balln payment if it is mre than twice the amunt f ther payments. MDIA Refinancing Warning MDIA amended TILA t require creditrs t disclse fr variable rate transactins, in cnspicuus type size and frmat, that there is n guarantee that the cnsumer will be able t refinance the transactin t 4
lwer the interest rate r mnthly payments ( MDIA refinancing warning ). 6 15 U.S.C. 1638(b)(2)(C)(ii). T implement this change, the Bard is adding new prvisins under Sectin 226.18(t). Sectin 226.18(t)(1) requires creditrs t disclse a statement that there is n guarantee that the cnsumer will be able t refinance the lan t btain a lwer interest rate and payment. The Bard is expanding the scpe f this requirement t include fixed-rate transactins secured by a dwelling, as well as transactins secured by real prperty withut a dwelling. Sectin 226.18(t)(2) prvides frmat requirements fr the MDIA refinancing warning. The statement must be made in a frm substantially similar t Mdel Clause H-4(K) in Appendix H. Mdel Frms and Clauses The interim rule sets frth mdel clauses t illustrate the new requirements under this regulatin. Mdel Clause H-4(E) illustrates the interest rate and payment summary table required under Sectin 226.18(s) fr a fixed-rate mrtgage transactin. Mdel Clause H-4(F) illustrates the table fr an adjustable-rate r a step-rate mrtgage transactin. Mdel Clause H-4(G) illustrates the table fr a mrtgage transactin with negative amrtizatin. Mdel Clause H-4(H) illustrates the table fr a fixed-rate lan with interest-nly terms. Mdel Clause H-4(I) illustrates the intrductry rate disclsure required by Sectin 226.18(s)(2)(iii) if an adjustable-rate mrtgage has an intrductry rate. Mdel Clause H-4(J) illustrates the balln payment disclsure required by Sectin 226.18(s)(5) fr a mrtgage with a balln payment term. Mdel Clause H-4(K) illustrates the n-guarantee-t-refinance statement required by Sectin 226.18(t). The mdel frms and clauses are set frth belw. * * * * * 5
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H-4(I) Intrductry Rate Mdel Clause Intrductry Rate Ntice Yu have a discunted intrductry rate f % that ends after (perid). In the (perid in sequence), even if market rates d nt change, this rate will increase t %. H-4(J) Balln Payment Mdel Clause Final Balln Payment due (date): $ H-4(K) N-Guarantee-t-Refinance Statement Mdel Clause There is n guarantee that yu will be able t refinance t lwer yur rate and payments. * * * * * Questins? Cntact Rd Alba fr mre infrmatin. 7