On December 29, 2010, the Federal Reserve Board published an interim rule clarifying an interim rule published in September that amended Regulation Z (Truth in Lending) to implement certain requirements of the Mortgage Disclosure Improvement Act of 2008. The latest rule serves to demonstrate the complexities of the new requirements and the need for careful attention by experienced counsel.
The September interim rule has a January 30, 2011, mandatory compliance date. (Click here to read our legal alert summarizing this rule.) For covered loans, it requires creditors to provide a new “interest rate and payment summary” in the form of a table, instead of the payment schedule that has historically been part of the segregated “federal box.” The new disclosure requirements apply to closed-end consumer transactions secured by a dwelling (not just a principal dwelling) or any real property other than a timeshare (not just residential real property).
Highlights of the December interim rule include the following:
- For amortizing adjustable-rate or step-rate loans, the table must show the maximum possible interest rate during the first five years after consummation and the earliest date that rate may apply. Because the first rate adjustment in “5/1 ARMs” generally occurs more than five years after consummation (usually on the due date of the 60th regular payment), there was uncertainty as to whether the September interim rule required creditors to disclose the first adjustment for such loans. The December interim rule revises Regulation Z to provide that for amortizing adjustable-rate or step-rate loans, creditors should disclose the maximum possible rate that will apply at any time during the first five years after the date on which the first regular periodic payment is due, rather than after consummation.
- For interest-only loans that do not result in negative amortization, the December interim rule clarifies that (i) if the payment can increase without a rate adjustment when the consumer begins making payments that include both principal and interest, the table must include an additional column showing the rate in effect at the time of the increase, the date on which the payment increase will occur, and the corresponding increased payment; (ii) if the payment corresponding to a rate disclosed in the table will be applied to principal and interest, the table should only include the earliest date on which such rate becomes effective and not the date the first payment is due at the new rate; and (iii) the itemized amounts shown in the table as being applied to principal and interest when a consumer begins making principal and interest payments are those amounts for the first such payment.
- The December interim rule clarifies that the requirement to disclose estimated payments for taxes and insurance applies whenever an escrow account will be established whether or not the escrow account is required. It also clarifies how creditors should estimate amounts for future taxes and insurance when such amounts must be disclosed in multiple columns of the table in connection with changes in the periodic payment.
- The September interim rule contains special disclosure requirements for “negative amortization loans.” The December interim rule revises the definition of “negative amortization loan” to limit that term to loans that have minimum required payments that result in negative amortization. Accordingly, loans such as adjustable-rate loans that provide for fixed periodic payments that do not increase when the rate increases would not be treated as “negative amortization loans” for purposes of the special disclosure rules.
- The December interim rule clarifies how the new table affects the guidance in Appendix D to Regulation Z for disclosing the “repayment schedule” for multiple-advance construction loans.
The December interim rule is effective January 30, 2011, but compliance with its provisions is optional for transactions in which a credit application is received before October 1, 2011. Comments on the December interim rule are due by February 28, 2011. After considering comments on both interim rules, the Fed intends to publish a final rule.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or email@example.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or firstname.lastname@example.org; John L. Culhane, Jr., 215.864.8535 or email@example.com; Barbara S. Mishkin, 215.864.8528 or firstname.lastname@example.org; or Mark J. Furletti, 215.864.8138 or email@example.com.
Copyright © 2011 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.