New Rules for Adjustable Rate Mortgages Coming

December 23, 2010 (Shirley Allen)
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Beginning October 1st, 2011, mortgage banks and lenders must notify mortgage applicants of the risk of possible payment increases on any adjustable rate mortgage loan before they agree to the terms of the loan.

In a press release Wednesday, the Federal Reserve Board approved an interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA). The Board is issuing this interim rule to clarify certain aspects of a September 24, 2010 interim rule, in response to public comments. The September interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) which amended TILA to require mortgage lenders to disclose examples of how a loan’s interest rate or monthly payments can change.

Lenders will be required to include a payment summary in the form of a table, including the initial rate, maximum rate that can occur in the first five years, and the “worst case” rate possible over the life of the loan, along with corresponding monthly mortgage payments.

Additionally, it clarifies which mortgage types are covered by the special disclosure requirements, including loans with minimum payment options that can cause the loan balance to increase and interest-only loans, which when in effect will then disclose 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 MDIA seeks to alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments,” the Fed said in its release.

Tags: federal reserve, adjustable rate mortgage, mortgage loan, truth in lending act, mortgage disclosure improvement act, mortgage lenders, minimum payment options, variable rates, negative amortization, interest-only loan