New Disclosure Rules for Adjustable Rate Mortgages

December 22, 2010 No Comments »

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The Federal Reserve today approved an interim rule that will require mortgage lenders to disclose examples of how a mortgage loan’s interest rate and monthly payment may change.

Beginning on October 1, 2011, banks and lenders must alert borrowers to the risk of payment increases before they agree to take out mortgage loans with variable rates or terms, otherwise known as adjustable-rate mortgages.

They 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.

“This interim rule clarifies that creditors’ disclosure should reflect the first rate adjustment for a “5/1 ARM” loan because the new rate typically becomes effective within 5 years after the first regular payment due date,” the Fed said in a release.

“Today’s interim rule also corrects the requirements for interest-only loans to clarify that creditors’ disclosures should show the earliest date the consumer’s interest rate can change rather than the due date for making the first payment under the new rate.”

Additionally, it clarifies which mortgage types are covered by the special disclosure requirements, including loans with minimum payment options that cause the loan balance to increase, such as teaser rates and negative amortization loans.

Of course, the impact of this rule will probably be minimal, given the fact that it’ll end up somewhere in a pile of paperwork given to borrowers at loan origination.

That, along with the fact adjustable-rate mortgages only account for about five percent of market share these days now that fixed mortgages have taken center stage.

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