Topic: Adjustable Rate Mortgage (ARM)
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We had a technical issue that caused a failure to send notices of the initial interest rate adjustments for some of our adjustable rate mortgage (ARM) loans. The increased interest rate will correspond with an increased payment. We are now sending the notices, but they will not be timely. What is the best way to rectify this situation? Should we delay changing the customers’ rates and payment amounts?
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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…
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We discovered an issue with some of our adjustable rate mortgages (ARMs). For some of our ARMs that closed in 2009 and earlier, we provided early disclosures that omitted a lifetime floor for the interest rate. But the promissory notes for the loans do include a floor, which we have enforced. Is this a UDAAP violation? Do we need to reimburse customers?
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We agree that having omitted the interest rate floor in your ARM disclosures creates a range of risks for your bank. Both the present version of Regulation Z and the version in effect in 2009 require lenders to disclose how the interest rate for a variable rate loan will be calculated, including “an explanation of…
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We have a small number of three-year adjustable rate mortgage (ARM) loans held in portfolio. We would like to modify them to expand the fixed rate term to five years. If borrowers sign modification agreements to make the change, would that be considered a troubled debt restructuring for GAAP purposes?
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We are unable to determine whether this modification would be considered troubled debt restructuring under generally accepted accounting principles (GAAP) based on the information provided. For a debt restructuring to qualify as a “troubled debt restructuring,” GAAP requires that the creditor grant a concession to the borrower that it would not otherwise consider, for “economic…
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We made an error in disclosing the initial interest rate for an adjustable rate mortgage (ARM) on the Closing Disclosure. This was a simple, one-time clerical error, but it does exceed tolerances (we think the error resulted in understating the finance charge by several thousand dollars). We know we owe the customer restitution and a new closing disclosure. Is it defensible to leave it at that? Also, if we provide restitution, do we have to pay it as a lump sum?
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It may be possible to argue that the disclosure issue was an isolated incident, requiring only restitution and new disclosures, but that depends on the circumstances, and we do recommend consulting with bank counsel about the error and the best response for your bank. The Truth in Lending Act (TILA) generally requires examiners to order…
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We offer higher priced mortgage loans that are balloon loans with a 61-month fixed rate term and an amortization of up to 30 years. Which Federal Financial Institutions Examination Council (FFIEC) table should we use to determine average prime offer rates (Average Prime Offer Rates – Fixed or Average Prime Offer Rates – Adjustable)?
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You should use the FFIEC’s fixed-rate table for the loans you described. The balloon payment at the end of loan term does not change the fact that the loans have a fixed rather than adjustable interest rate. A fixed-rate mortgage is defined as a transaction secured by real property or a dwelling that is not…
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We qualify as a small creditor under the Qualified Mortgage (QM) rules, but we are not located in a “rural or underserved area.” We do make portfolio balloon loans that qualify for the small creditor balloon QM exemption, but that expires on April 1st of this year. After that date, can we continue to make balloon mortgages? Do you recommend not offering balloon loans and instead offering adjustable rate mortgages?
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We believe you may continue offering balloon loans that pass an ability-to-repay (ATR) analysis. However, your balloon loans will not qualify as QMs after April 1, 2016, unless you qualify for the “rural or underserved” exception to the QM requirements (which may be subject to change, as discussed below). As you suggested, an ARM loan…
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Our mortgage software understated the APR for several adjustable rate mortgage (ARM) loans by about 20 basis points. How should we calculate the cure amount? Are we required to pay the borrowers the difference between the total amount of interest that we should have disclosed and the amount that we did disclose?
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In order to avoid civil liability (and exam criticism) for overstating the APR on these loans, the Truth in Lending Act (TILA) requires you to notify and reimburse your affected customers for the overcharges within sixty days of discovering the error. While the TILA does not specify a calculation method for the required reimbursements, clear…
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Does Illinois law require us to inform a borrower that they will receive the following materials in connection with their residential mortgage loan application: the Settlement Cost Booklet, a Good Faith Estimate of Settlement Costs, a “RESPA Servicing Disclosure,” a copy of the loan application or equivalent form, a copy of the bank’s privacy statement, a notice detailing the customer identification procedures, the Consumer Handbook on Adjustable Rate Mortgages, and a separate disclosure and description for the specific type of adjustable rate mortgage.
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No, we do not believe Illinois law requires you to inform a borrower that you will be providing those disclosures. However, we understand it may be a best practice to obtain a borrower’s signature acknowledging receipt of those disclosures, as proof of your compliance with those federal requirements.
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How should we distribute the CHARM Handbook and the HUD Settlement Cost Booklet to customers who access our loan applications online? Currently, our online system automatically prints the both documents, leading to customer complaints. We don’t accept applications online; customers can submit applications by faxing, mailing, or bringing the application to a branch.
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We do not believe that the Consumer Handbook on Adjustable Rate Mortgages (CHARM Handbook) or the Settlement Cost Booklet (referred to in the rules as the “special information booklet”) need to be automatically printed with loan applications that your customers access online. As explained below, the CHARM Handbook can be provided to an online loan…
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What are the requirements under the CFPB’s new ARM rate change notice? We have a loan with the first payment under the initial rate adjustment due on December 1. What model form should we use, and when should we mail it?
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The first adjustable rate mortgage (ARM) rate change notice must “be provided to consumers at least 210, but no more than 240, days before the first payment at the adjusted level is due.” 12 CFR 1026.20(d). The staff commentary clarifies that this rule requires a lender or servicer to “deliver the notice or place it…