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Truth in Lending: 5.12.2.2 When Must Variable Rate Disclosures Be Made

These disclosures must be made in every transaction in which the terms of the legal obligation allow the creditor to increase the annual percentage rate originally disclosed to the consumer that are not covered by the ARM requirements.1216 It includes not only increases in the interest rate but also increases in any of the components of the annual percentage rate, such as the rate of required credit life insurance.

Truth in Lending: 5.12.2.8 Disclosure of an Example of the Payment Terms That Would Result from an Increase

The creditor must disclose in variable rate transactions a hypothetical example of the effects of an increase in the annual percentage rate. The creditor can provide either one of two types of hypothetical examples.1248 The creditor can provide a specific example that directly reflects the terms and conditions of that particular transaction; for example, “if the interest rate increases by 1% in one year, your regular payment would increase to $594.51.”1249

Truth in Lending: 5.13.1.1 Purpose

The creation of expanded disclosures for ARMs arose from two concerns. The first was that different regulatory agencies imposed different ARM disclosure requirements on lenders under their jurisdiction, which made things difficult for both consumers and lenders. The second concern was to assure that consumers had some understanding of the potential impact of the adjustable-rate mortgage that secured their homes.

Truth in Lending: 5.13.1.2 Disclosure in Note

Though not required by the Act, creditors generally include a description of the consumer’s repayment obligation in the loan note. The note ordinarily will describe the change dates, the margin, the initial interest rate and how to calculate the rate at each change, as well as information about the payment amounts, due dates, late charges, and the like. To decide whether the consumer received the loan product that matches the ARM disclosures, the loan note and any riders must be reviewed.1253

Truth in Lending: 5.13.1.4 Required Disclosures

The ARM-related disclosures given to the consumer at closing consist of two items: a statement that an adjustable-rate feature exists and a statement that the variable rate disclosures have been provided to the consumer.1259 Consumers must also be told what rate reset notices will be provided.1260 Of course, consumers must also receive all of the “regular” TILA disclosures discussed elsewhere in this chapter, as applicable.

Truth in Lending: 5.13.1.5 Illustrations

In addition to the existing TILA-mandated disclosures, the FRB and other banking agencies released two sets of illustrations creditors can use to help consumers understand ARM products, one for “nontraditional” ARMs—primarily payment option ARMs1262—and one for hybrid ARMs.1263 The nontraditional ARM illustrations explain nontraditional mortgage products, compare interest-only loans and payment option ARMs to fixed rate and traditional adjustable-rate loans, and provide information for inclu

Truth in Lending: 5.13.3.1 Introduction

For most adjustable rate mortgages, homeowners must be notified about upcoming interest rate changes that will affect their payments. Regulations related to interest rate change notice have existed for more than twenty-five years.

Truth in Lending: 5.13.3.2.1 Coverage

An adjustment to the interest rate in a variable rate transaction subject to the disclosure rules for Adjustable-Rate Mortgages (ARMs) requires new disclosures to the consumer regardless of whether there is a corresponding adjustment to the payment.1291 A disclosure concerning rate adjustments is required for all ARMs that are subject to the variable rate disclosure requirements of section 1026.19(b)—ARMs secured by a the consumer’s principal dwelling with a term of more than a year.1292 Thi

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