New loan disclosure rules announced today

The Fed announced some changes to the ever catchy “Regulation Z” (it makes me think of the B-52′s song, Channel Z). What this means is that effective January 31, 2011 (but no penalty for implementing it sooner) the Truth-in-Lending (TIL) disclosure has to be updated to provide loan applicants with better information about how their loan payments could change if they are getting an adjustable rate mortgage.

The Federal Reserve Board on Monday issued an interim rule that revises the disclosure requirements for closed-end mortgage loans under Regulation Z (Truth in Lending). The interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) that require lenders to disclose how borrowers’ regular mortgage payments can change over time.

The MDIA, which amended the Truth in Lending Act, seeks to ensure that mortgage borrowers are alerted to the risks of payment increases before they take out mortgage loans with variable rates or payments. Accordingly, under the interim rule, lenders’ cost disclosures must include a payment summary in the form of a table, stating the following:

• The initial interest rate together with the corresponding monthly payment;
• For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a “worst case” example showing the maximum rate and payment possible over the life of the loan; and
• The fact that consumers might not be able to avoid increased payments by refinancing their loans.

Read the entire release