Yes, we recommend delaying the rate and payment adjustments until after you have provided customers with the notice required by Regulation Z.

Regulation Z requires that ARM borrowers receive advance notice of rate changes, and the notice of an initial rate adjustment must be provided to customers at least 210 days (and no more than 240 days) before the first payment at the adjusted level is due (or at the loan consummation, if the first adjustment is scheduled to occur within the first 210 days after consummation). We believe that you should delay payment increases until the affected customers have received the initial rate adjustment notice and at least 210 days have passed, even if those changes were scheduled to take place sooner under the original loan agreement.

If you increase the rate and the payment without providing the amount of notice required by Regulation Z, you could face civil liability and exam criticism under the Truth in Lending Act (TILA). There are a few defenses against civil liability for disclosure errors, such as notifying and reimbursing affected customers for any overcharges within sixty days of discovering the error or showing that the error was a “bona fide error.” However, these defenses would not preclude examination criticism. Consequently, we believe the prudent approach is to issue the disclosures as soon as you can and wait the required duration under Regulation Z before increasing the rates and payments.

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.20(d)(1) (“Initial rate adjustment. The creditor, assignee, or servicer of an adjustable-rate mortgage shall provide consumers with disclosures, as described in this paragraph (d), in connection with the initial interest rate adjustment pursuant to the loan contract. . . . The disclosures shall be provided to consumers at least 210, but no more than 240, days before the first payment at the adjusted level is due. If the first payment at the adjusted level is due within the first 210 days after consummation, the disclosures shall be provided at consummation.”)

• Truth in Lending Act,15 USC 1640(b) (“A creditor or assignee has no liability under this section or section 1607 of this title or section 1611 of this title for any failure to comply with any requirement imposed under this part or part E, if within sixty days after discovering an error, . . . and prior to the institution of an action under this section or the receipt of written notice of the error from the obligor, the creditor or assignee notifies the person concerned of the error and makes whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower.”)

• Truth in Lending Act, 15 USC 1640(c) (“A creditor or assignee may not be held liable in [an individual or class action] . . . if the creditor or assignee shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programing, and printing errors, except that an error of legal judgment with respect to a person’s obligations under this subchapter is not a bona fide error.”)