As published in Scotsman Guide's Residential Edition, January 2011.
Truth-in-lending disclosure requirements have gone through so many revisions in the past year or two that it's getting hard to keep track of them. In July 2009, the early truth-in-lending disclosure was revised. Among other things, the changes added timing requirements, a restriction on charging fees, and rules for revising the disclosure.
In addition to those tweaks and others, the Federal Reserve Board's new interest-rate and payment disclosures become mandatory Jan. 30. The newest form — which brokers and loan originators have had the option of using since this past October — brings more alterations.
The good news is that it implements the last of the truth-in-lending mandates of the Mortgage Disclosure Improvement Act. This should allow regulators and business practitioners, to turn their focus to the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The bad news is that the Fed hasn't completed consumer testing on the new disclosure form. Because of this, it issued the requirement as an interim rule so it could make revisions as testing continues. As a result, the newest disclosure requirements are tentative at best.
Nonetheless, until the Fed changes the form yet again, mortgage brokers and creditors will be required to provide truth-in-lending disclosures with new rate and payment information in a specified format. As with recent Regulation Z disclosure requirements implemented for open-end lines of credit under the Credit Card Accountability Responsibility and Disclosure Act, the requirements are specific.
They must be in a table format; have specific headers, font size and formatting; and generally can't contain anything other than the information required. Although the language of the regulation states that the disclosures must be "substantially similar" to the model language provided by the Fed, it effectively must be identical.
The new disclosure requirements apply to closed-end loans secured by real property or a dwelling. For those kinds of loans, the new rate and payment information will replace the payment schedule previously required. For other kinds of closed-end loans, however, the payment schedule still must be completed. Further, the new requirements don't impact open-end lines of credit, such as home-equity lines.
The new disclosure requirements effectively fit into four categories:
Interest-rate and payment disclosures for amortizing loans;
Interest-rate and payment disclosures for loans that may result in negative amortization;
Balloon payments; and
A no-guarantee-to-refinance disclosure.
Amortizing loans are those that don't result in negative amortization. The term doesn't require that the loan actually be fully amortized during the term. As a result, a loan with a balloon payment will still be treated as an amortizing loan if its terms do not result in negative amortization.
The first disclosure requirement for an amortizing loan is the interest rate. This requirement is the interest rate at closing for a fixed-rate loan. For variable-rate loans, however, additional disclosures are required, including:
The period of time until the first rate adjustment;
The highest interest rate that may apply in the first five years of the loan and the earliest date when that rate may be reached; and
Information about any introductory rate and period that may apply.
In addition, brokers will be required to disclose payment information, such as the amount of the principal and interest payment, information about payment increases, a statement that an escrow account is required (if applicable), an estimate of taxes and insurance, the interest rate on the date a payment increase is scheduled to occur and the date of such payment increase, and special disclosures for loans that allow interest-only payments.
Page: 1 2 Next