FRB Issues New MDIA "Payment Shock" Disclosure Interim Rule, Proposes Higher Dollar-Amount Threshold for TILA/CLA

New Interim Rule Regarding MDIA "Payment Shock" Disclosures


In response to public comments, the Federal Reserve Board recently issued a new interim rule, amending the prior interim rule issued a few months ago regarding a mortgage lender's duty to disclose examples of how a loan's interest rate or monthly payments can change.

The FRB's new interim rule is available at:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20101222a1.pdf

Under the Mortgage Disclosure Improvement Act of 2008 (MDIA), mortgage lenders must alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments. The statutory amendments will become effective on January 30, 2011.

As you may recall, in September of 2010, the FRB issued an interim rule, implementing these provisions of the MDIA. Under the FRB's September interim rule, lenders' cost disclosures must include a payment summary in the form of a table stating the initial rate and corresponding periodic payment and, for adjustable rate loans, the maximum rate and payment that can occur during the first five years as well as a "worst case" example showing the maximum rate and payment possible over the life of the loan.

This new interim rule clarifies that:

1. 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;

2. 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; and

3. Which mortgage transactions are covered by the special disclosure requirements for loans that allow minimum payments that cause the loan balance to increase.

The FRB states that creditors have the option of complying with either the FRB's September 2010 interim rule as originally published, or as revised by this interim rule, until October 1, 2011, at which time compliance with this new interim rule will become mandatory.

The Board is soliciting comment on this interim rule for 60 days after publication in the Federal Register.

Proposed Increase in Dollar-Amount Threshold for TILA and CLA

The Federal Reserve Board recently proposed two rules that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.

As you may recall, effective July 21, 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that the protections of the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA) apply to consumer credit transactions and consumer leases up to $50,000, from the current amount of $25,000. This amount will be adjusted annually to reflect any increase in the Consumer Price Index.

TILA requires creditors to disclose key terms of consumer loans and prohibits creditors from engaging in certain practices with respect to those loans. Currently, consumer loans of more than $25,000 are generally exempt from TILA. However, private education loans and loans secured by real property (such as mortgages) are subject to TILA regardless of the amount of the loan.

The CLA requires lessors to provide consumers with disclosures regarding the cost and other terms of personal property leases. An automobile lease is the most common type of consumer lease covered by the CLA. Currently, a lease is exempt from the CLA if the consumer's total obligation exceeds $25,000.

The notices published in the Federal Register are available at:

Regulation M: http://edocket.access.gpo.gov/2010/pdf/2010-31530.pdf

Regulation Z: http://edocket.access.gpo.gov/2010/pdf/2010-31529.pdf

Comments on the FRB's proposals must be submitted by February 1, 2011.