Compliance

CFPB’s Mortgage Servicing Requirements

Final rule covers periodic statement requirements, interest-rate adjustments, and more.

December 31, 2013
KEYWORDS adjustment , loan , payment , rate
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My compliance article in the November print edition covered certain requirements from the CFPB’s Mortgage Servicing Regulation Z final rule including periodic statement requirements, the timing of interest rate adjustment notices and the requirements for payment processing and payoff requests.

Space limitations prevented us from covering the content requirements for interest rate adjustment notices—therefore we are covering those requirements in this special online edition.

Interest Rate Adjustment Notices: Creditors, assignees, and servicers must provide a consumer whose mortgage has an adjustable rate with a notice between 210 and 240 days prior to the first payment due after the rate first adjusts. This notice may contain an estimate of the new rate and new payment. Creditors, assignees, and servicers also must provide a notice between 60 and 120 days before payment at a new level is due when a rate adjustment causes the payment to change. The current annual notice that must be provided for adjustable-rate mortgages (ARMs) for which the interest rate, but not the payment, has changed over the course of the year is no longer required. The rule contains model and sample forms that servicers may use .All servicers, including small servicers are subject to these requirements.

Rate Adjustments with a corresponding Change in Payment: Section 1026.20(c):
When an interest rate adjustment results in a payment change, 20(c) notices must be provided between 60 and 120 days before the first changed payment is due.

Content of Notices: The disclosures required by paragraph (c) must include a statement providing:
• An explanation that under the terms of the consumer’s ARM, the time period in which the current interest rate has been in effect is ending and the interest rate and mortgage payment will change;
• (B) The date of the interest rate adjustment and when additional future interest rate adjustments are scheduled to occur; and
• (C) Any other changes to loan terms, features, or options taking effect on the same date as the interest rate adjustment, such as the expiration of interest-only or payment-option features.

A table containing the following information:
• (A)The current and new interest rates;
• (B) The current and new payments and the date the first new payment is due; and
• (C) For interest-only or negatively-amortizing payments, the amount of the current and new payment allocated to principal, interest, and taxes and insurance in escrow, as applicable. The current payment allocation disclosed shall be the payment allocation for the last payment prior to the disclosure date.

An explanation of how the interest rate is determined, including:
• The specific index or formula used in making interest rate adjustments and a source of information about the index or formula; and
• (B) The amount of any adjustment to the index, including any margin and an explanation that the margin is the addition of a certain number of percentage points to the index, and any application of previously foregone interest rate increases from past interest rate adjustments.

Limits on the interest rate or payment increases at each interest rate adjustment and over the life of the loan, including the extent to which the limits result in the creditor, assignee, or servicer foregoing any increase in the interest rate and the earliest date that such foregone interest rate increases may apply to future interest rate adjustments, subject to those limits.

An explanation of how the new payment is determined, including:
• The index or formula used;
• Any adjustment to the index or formula, such as the addition of a margin or the application of any previously foregone interest rate increases from past interest rate adjustments;
• The loan balance expected on the date of the interest rate adjustment; and
• The remaining loan term expected on the date of the interest rate adjustment and any change in the term of the loan caused by the adjustment.

A statement that the new payment will not be allocated to pay loan principal and will not reduce the loan balance. If the new payment will result in negative amortization, a statement that the new payment will not be allocated to pay loan principal and will pay only part of the loan interest, thereby adding to the balance of the loan. If the new payment will result in negative amortization as a result of the interest rate adjustment, the statement shall set forth the payment required to amortize fully the remaining balance at the new interest rate over the remainder of the loan term.

The circumstances under which any prepayment penalty may be imposed.

Initial Rate Adjustments: Section 1026.20(d):
Creditors, assignees, or servicers of an ARM must provide consumers with disclosures, in connection with the initial interest rate adjustment. The disclosures required by paragraph (d) shall be provided as a separate document from other documents provided by the creditor, assignee, or servicer. 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

Coverage. For purposes of paragraph (d), an ARM is a closed-end consumer credit transaction secured by the consumer’s principal dwelling in which the annual percentage rate may increase after consummation.

Content. If the new interest rate (or the new payment calculated from the new interest rate) is not known as of the date of the disclosure, an estimate shall be disclosed and labeled as an estimate. This estimate must be based on the calculation of the index reported in the source of information within fifteen business days prior to the date of the disclosure. The disclosures required by this paragraph (d) shall include:

The date of the disclosure.

A statement providing:
• An explanation that under the terms of the consumer’s ARM, the time period in which the current interest rate has been in effect is ending and that any change in the interest rate may result in a change in the mortgage payment;
• The effective date of the interest rate adjustment and when additional future interest rate adjustments are scheduled to occur; and
• Any other changes to loan terms, features, or options taking effect on the same date as the interest rate adjustment, such as the expiration of interest-only or payment-option features.

A table containing the following information:
• The current and new interest rates;
• The current and new payments and the date the first new payment is due; and
• For interest-only or negatively-amortizing payments, the amount of the current and new payment allocated to principal, interest, and taxes and insurance in escrow.

An explanation of how the interest rate is determined, including:
• The specific index or formula used in making interest rate adjustments and a source of information about the index or formula; and
• The type and amount of any adjustment to the index, including any margin and an explanation that the margin is the addition of a certain number of percentage points to the index.

Limits on the interest rate or payment increases at each interest rate adjustment and over the life of the loan, including the extent to which any limits result in the creditor, assignee, or servicer foregoing any increase in the interest rate and the earliest date that such foregone interest rate increases may apply to future interest rate adjustments that are subject to those limits.

An explanation of how the new payment is determined, including:
• The index or formula used;
• Any adjustment to the index or formula, such as the addition of a margin;
• The loan balance expected on the date of the interest rate adjustment;
• The length of the remaining loan term expected on the date of the interest rate adjustment and any change in the term of the loan caused by the adjustment, and
• If the new interest rate or new payment provided is an estimate, a statement that another disclosure containing the actual new interest rate and new payment will be provided to the consumer between two and four months before the first payment at the adjusted level is due for interest rate adjustments that result in a corresponding payment change.

If applicable, a statement that the new payment will not be allocated to pay loan principal and will not reduce the loan balance. If the new payment will result in negative amortization, a statement that the new payment will not be allocated to pay loan principal and will pay only part of the loan interest, thereby adding to the balance of the loan. If the new payment will result in negative amortization as a result of the interest rate adjustment, the statement shall set forth the payment required to amortize fully the remaining balance at the new interest rate over the remainder of the loan term.

The circumstances under which any prepayment penalty may be imposed.

The telephone number of the creditor, assignee, or servicer for consumers to call if they anticipate not being able to make their new payments.

The following alternatives to paying at the new rate that consumers may be able to pursue and a brief explanation of each alternative:
• Refinancing the loan with the current or another creditor or assignee;
• Selling the property and using the proceeds to pay the loan in full;
• Modifying the terms of the loan with the creditor, assignee, or servicer; and
• Arranging payment forbearance with the creditor, assignee, or servicer.

The website to access either the Bureau list or the HUD list of homeownership counselors and counseling organizations, the HUD toll-free telephone number to access the HUD list of homeownership counselors and counseling organizations, and the Bureau website to access contact information for State housing finance authorities.

MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel.

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