The Federal Reserve Board on Wednesday approved an interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA).
The interim rule clarifies that creditors' disclosure should reflect the first rate adjustment for a "5/1 ARM" loan because the new rate typically becomes effective within five years after the first regular payment due date.
It corrects the requirements for interest-only loans to clarify that creditors' disclosures should show the earliest date the consumer's interest rate can change rather than the due date for making the first payment under the new rate.
The rule also clarifies which mortgage transactions are covered by the special disclosure requirements for loans that allow minimum payments that cause the loan balance to increase.
The Fed previously issued an interim rule on Sept. 24, 2010, ammending TILA to require mortgage lenders to disclose examples of how a loan's interest rate or monthly payments can change. Those statutory amendments will become effective on Jan. 30, 2011.
The Mortgage Disclosure Improvement Act (MDIA) seeks to alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments. Under the Fed's September interim rule, lenders' cost disclosures must include a payment summary in the form of a table stating the initial rate and corresponding periodic payment and, for adjustable rate loans, the maximum rate and payment that can occur during the first five years as well as a "worst case" example showing the maximum rate and payment possible over the life of the loan.
Creditors have the option of complying with either the Fed's September interim rule as originally published or as revised by the latest interim rule until Oct. 1, 2011, at which time compliance will become mandatory.
