The Federal Reserve has issued an interim rule containing modifications to the September 2010 interim rule which implemented changes in the Truth in Lending Act (TILA) and Regulation Z. 

This interim rule revises the Board’s interim rule published on September 24, 2010, which implemented certain requirements of the Mortgage Disclosure Improvement Act of 2008. The September 2010 interim rule requires
creditors who extend consumer credit secured by real property or a dwelling to disclose summary information about interest rates and payment changes in a tabular format. The Board is issuing this interim rule to clarify certain provisions of the September 2010 interim rule.

The September Interim Rules require lenders to provide disclosures in tabular form of the contract interest rate and corresponding monthly payment including an estimated amount of any escrows.  There are special disclosure requirements  for adjustable or step-rate loans to show the initial rate and payment, the maximum rate and payment at any time during the first five years after consummation of the loan, and the maximum rate and payment possible over the life of the loan.  Special disclosures are also required for negatively amortizing option payments, introductory interest rates, interest only payments, and balloon payments. Lenders are also required to include a statement that there is no guarantee the consumer will be able to refinance the transaction in the future.  

The changes to the September Interim Rule as made by the Federal Reserve this week are summarized below.

• Because the first change to a 5/1 hybrid loan would typically come five years plus one month after consummation of said loan, the tabular example will instead reflect changes up to and including the fifth anniversary of the initial loan payment.

• The September rule requires that, for an interest only loan, the lender must disclose both the earliest date each rate can apply and the earliest date the resulting payment will apply. In order to eliminate confusion, the new rule will require creditors to disclose only the earliest date that the rate becomes effective.

• The definition of "negative amortization" is being revised so clarify that such disclosures apply only to loans where consumers are allowed to make minimum payments that result in negative amortization but do not apply to loans that are designed to allow borrowers to skip or reduce payments during certain periods - for example to accommodate seasonal employment - even if those payments do result in negative amortization.

• When a construction loan secured by real property or a dwelling that may be permanently financed by the same creditor is disclosed as more than one transaction, the construction portion of the financing must be disclosed under the new rules for interest rate and payment summary tables. If it is disclosed as a single transaction, the summary table need reflect only the permanent financing; the construction financing should be disclosed only with a statement outside the table that interest payments must be made and the timing of such payments.

These interim changes become effective in concert with the September Interim Rule on January 30, 2011, however, they remain optional for all loans for which application is made prior to October 1, 2011.