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Truth in Lending: 5.13.3.3.1 Overview

The Dodd-Frank Act requires additional detail in the change notices for hybrid adjustable rate mortgages (defined as mortgages that have both a fixed rate and variable rate period) secured by a principal residence. The Dodd-Frank Act requires the notice to be provided six months before the reset, whether or not there is a payment change, along with information about housing counseling, among other matters.1300

Truth in Lending: 5.13.3.3.3 Notice of initial rate change

Notices of the initial rate change must be provided whether or not the payment changes. The notice of the initial rate change in the case where a mortgage is converted from a fixed-rate mortgage to an adjustable rate mortgage is due when the interest rate adjusts for the first time.1321 It is possible that a homeowner could receive two notices of an initial rate change: once early on in the loan, and once after a loan has been modified and there is a subsequent rate adjustment.1322

Truth in Lending: 5.13.3.4.2 Timing rules effective January 10, 2014

The notice of the first rate change post-consummation is to be provided between seven and eight months in advance of the first payment due after the rate reset (at least 210 and no more than 240 days), unless the first rate reset occurs within seven months of consummation, in which case the initial rate reset notice must be provided at consummation.1336

Truth in Lending: 5.13.3.5 Remedies

Creditors sometimes make errors in calculating the actual payment adjustments. The errors can occur in a number of ways: using the wrong index entirely; using an incorrect value for the index; using an incorrect date in referring to the index value.1339 Any of these errors could result in either an undercharge or overcharge, so the consumer is not always harmed by these errors.

Truth in Lending: 5.13.4.1 General

In addition to the more broadly applicable interest-cap disclosure requirement, Regulation Z requires more information to consumers about the variable rate features of certain kinds of ARMs. These disclosures apply to all closed-end ARMs secured by the borrower’s principal dwelling with a term of more than one year.1354 Both purchase money mortgages and non-purchase-money mortgages are covered. This section is limited to a discussion of the disclosure rules in effect until October 3, 2015.

Truth in Lending: 5.13.4.2 ARM Brochure

One of the required early disclosures is an ARM brochure.1371 Creditors must give each consumer the brochure when an application form is given to a consumer or before a consumer pays a nonrefundable fee, whichever is earlier.1372 The Consumer Handbook on Adjustable Rate Mortgages (hereinafter the CHARM booklet), developed by the FRB, may be used by creditors to fulfill this requirement if they choose.1373 Regulation Z also permits cr

Truth in Lending: 5.13.4.3 The Interest Rate Calculation: The Index, Margin, and Resulting Payment

Regulation Z requires an explanation of how the interest rate and payment will be determined, for example, by a statement that the interest rate will be based on a specified index plus a margin and that the payment will be based on the interest rate, the loan balance, and the remaining loan term.1378 If the interest rate changes are purely discretionary or are made by an internally defined index, the creditor still must describe the method of rate changes or state that they are discretionary.1379

Truth in Lending: 5.13.4.4.2 For loans made on or after February 1, 2011

For loans made since February 1, 2011, creditors must warn all homeowners, whether their loan is a variable rate or fixed rate loan, when there is a possibility of negative amortization under the terms of their loan.1399 However, the Federal Reserve Board defined negative amortization narrowly: only loans whose required minimum payments result in negative amortization are deemed to raise the possibility of negative amortization.1400 Loans that are known to have periods of negative amortizati

Truth in Lending: 5.13.4.5.2 Historical loan payments example

If the creditor chooses to provide a historical example, it must be based upon a $10,000 loan amount, which illustrates how payments and the loan balance would have been affected by changes in the index being used by the creditor.1416 Because the example is not based on the actual amount to be borrowed, creditors can use preprinted disclosures for each loan program and give them to consumers with the ARM Handbook.

Truth in Lending: 5.13.4.5.3 Maximum payment example

The maximum payment example required under Regulation Z § 1026.19(b) is not the maximum payment possible on the consumer’s loan or even on any actual loan.1425 Instead, it is a hypothetical maximum payment, based on a hypothetical $10,000 loan, using a “recent” index, but not necessarily the actual index value or interest rate applicable to that loan. There is indeed no requirement in section 1026.19(b) that the actual maximum payment be disclosed.1426

Truth in Lending: 5.13.4.6.1 General availability

The consequences of failure to make the required TILA early variable rate disclosures are not entirely clear. The variable rate disclosures are not among the specific violations listed in 15 U.S.C.

Truth in Lending: 5.13.4.6.2 Specific ARM disclosure violations

In reviewing ARM disclosures, practitioners should compare the early ARM information to that contained in the adjustable-rate note provided at closing. If the information differs, the consumer may have a claim for damages,1443 based on the failure to make the disclosures clearly and conspicuously or to conform the disclosures to the legal obligation.1444

Truth in Lending: 5.13.6 Escrow Account Disclosures for Variable Rate Loans

The Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter the Dodd-Frank Act)1464 added a host of new disclosure requirements for closed-end residential mortgage loans.1465 Among those are new disclosure requirements for variable rate residential mortgage loans for which an escrow or impound account will be established for the payment of all applicable taxes, insurance, and assessments.1466 For such loans, the TILA disclosure

Truth in Lending: 5.14.1 Introduction

Lenders making private student loans are required to provide special disclosures.1469 As of the effective date of additions to Regulation Z that implement the Higher Education Opportunity Act of 2008 (HEOA), there are three sets of required disclosures: (1) application and solicitation; (2) loan approval; and (3) final disclosures.

Truth in Lending: 5.14.3.1 Coverage

This set of rules applies to “private education loans,” that is, loans extended to consumers by the educational institution or by other creditors that are expressly, in whole or in part, for postsecondary educational expenses and are not made, insured, or guaranteed by the federal government under the Higher Education Act.1488 Open-end credit or any loan secured by real property or a dwelling is not covered.

Truth in Lending: 5.14.3.4 Final Disclosures

The creditor is required to provide the consumer with final disclosures after the consumer has accepted the loan.1517 The content of the final disclosures is similar to the approval disclosures, with the addition of information about the cancellation right.1518 The sample form has a box at the top titled “Right to Cancel” and including this statement: “You have a right to cancel this transaction, without penalty, by midnight on DATE.

Truth in Lending: 5.14.3.5 Self-Certification

The creditor must obtain a self-certification form from the consumer or the school with information about cost of attendance, the expected family contribution, and estimated financial assistance.1519 The creditor may receive the form directly from the consumer or from the consumer through the school.