ARM Adjustment Disclosures: The Basics
Written By David Park, Regulatory Compliance Counsel, NAFCU
We have been gearing up for the spring Regulatory Compliance School that runs from March 18, 2019 through March 22, 2019 here in Arlington, Virginia. In preparing for the mortgage servicing presentation, I did a deep dive on the disclosure requirements in Regulation Z for adjustable rate mortgage (ARM) rate adjustments that occur post-consummation. We have received a few questions about ARM disclosures over the past couple of weeks, so I thought it might be useful to briefly cover them here.
Section 1026.20
Under section 1026.20 of Regulation Z, disclosures are required when the annual percentage rate on an ARM adjusts. Section 1026.20(d) provides the requirements for the initial rate adjustment disclosure, and section 1026.20(c) sets forth the disclosure rules that apply for ongoing rate adjustments that are required any time an ARM rate changes.
Initial Interest Rate Adjustment Disclosure
Regulation Z generally requires that the initial interest rate adjustment disclosure for an ARM be sent to a consumer at least 210 but no more than 240 days before the first adjusted payment is due. If the initial rate adjustment will occur within 210 days of consummation of the ARM, then the initial interest rate adjustment disclosure must be provided at consummation.
The First Interest Rate Adjustment
It is important to remember that the initial interest rate adjustment on an ARM will usually require the initial interest rate adjustment disclosure discussed above and the ongoing interest rate adjustment disclosure discussed next. For an ARM that is subject to the general rules, the section 1026.20(d) disclosure must be sent at least 210 but no more than 240 days before the first adjusted payment is due. And the section 1026.20(c) disclosure must be sent at least 60 but no more than 120 days before that first adjusted payment is due.
Ongoing Interest Rate Adjustment Disclosures
With respect to the ongoing disclosures required by section 1026.20(c), Regulation Z generally requires that those disclosures be sent to a consumer at least 60 but no more than 120 days before the adjusted payment is due. There are special rules that apply to three types of ARMs. The ongoing disclosures are due at least 25 but no more than 120 days before the adjusted payment is due if (1) the ARM has scheduled rate adjustments occurring every 60 days; or (2) the ARM was originated before January 10, 2015, and the look-back period (the gap between effective date of the adjustment and how far in advance the index that provides the basis for the adjustment is calculated) is less than 45 days. And in the case of an initial adjustment that occurs within 60 days of consummation of the ARM and the initial interest rate adjustment disclosure provided at consummation only contained an estimate of the adjusted rate, the ongoing disclosure must be provided as soon as practicable but no less than 25 days before the first adjusted payment is due.
Exemptions
ARMs with terms of one year or less are exempt from the requirements described in sections 1026.20(c) and (d). And there are two other categories of exemptions that might apply to the ongoing notice requirements in section 1026.20(c). If the first interest rate adjustment on an ARM occurs within 210 days of consummation and the new interest rate disclosed in the initial interest rate adjustment disclosure at consummation was not an estimate, then the ongoing interest rate adjustment disclosure requirements do not apply to that specific rate adjustment. There is also an exemption from the ongoing disclosure requirement when the servicer is subject to the Fair Debt Collection Practices Act (FDCPA) and the consumer has sent an FDCPA cease communication notice.
Other Resources
Credit unions can review sample forms H-4(D)(1) through (4) to see how to comply with the section 1026.20 ARM disclosure requirements. The CFPB's Mortgage Servicing Small Entity Compliance Guide and Truth In Lending Act examination procedures may also provide some useful information.
We look forward to seeing all of the Regulatory Compliance School attendees in a few weeks.