Every company that advertises adjustable rate mortgage loans is likely violating Regulation Z. Well, that sounds pretty alarming and conclusive and our intent in writing this post is not to create panic and compliance hysteria. Rather we want to point out a little known explanatory commentary that appears in the Official Staff Commentary to Regulation Z and a recent enforcement action from the CFPB that made comments on the clear and conspicuous requirements of making required disclosures.
Keep in mind that this is more of an issue if the loan product you are advertising is an ARM. If you are advertising a fixed rate loan that has a 3.75% interest rate for 30 years, there’s not much you are going to have to say other than the quoting the APR on the loan. However, if you are advertising an ARM the rules under Regulation Z require us to give the consumer information about how the payment can change over the life of the loan.
Let’s say we are advertising a 5 year LIBOR ARM loan that permits the payment to adjust each year after the five-year initial period ends.So we have to tell the consumer that the rate and payment will be fixed for the first five years and after the five years end, the payment will adjust to reflect the fully indexed rate, meaning the margin of 2.25% plus the LIBOR value on the adjustment date. Then each year after that the payment can change each year based on changes to LIBOR. But in each case the rate cannot increase more than 2% (the “change cap” described in the promissory note). And, over the lifetime of the loan, the rate cannot go up more than 6% (the “life cap”described in the promissory note).
Now keep in mind that a certain section of Regulation Z says that the disclosures about “how the payment changes” that I describe above must be made clearly and conspicuously. And if you look at the Official Commentary to Regulation Z you will see that it says that this particular disclosure must be made “with equal prominence” and “in close proximity” to the rate or payment amount being advertised. The rules state that “close proximity” means “immediately next to or directly above” the rate or payment amount (but not in a footnote). Then this same commentary says that the required disclosure will be considered provided “with equal prominence” if the disclosure is made in the same font sized as the advertised rate or payment.
The below is the Official Interpretations to Regulation Z Section 1026.24(f):
2. Equal prominence, close proximity. Information required to be disclosed under §§1026.24(f)(2)(i) and 1026.24(f)(3)(i) that is immediately next to or directly above or below the simple annual rate or payment amount (but not in a footnote) is deemed to be closely proximate to the listing. Information required to be disclosed under §§1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A) and (B) that is in the same type size as the simple annual rate or payment amount is deemed to be equally prominent.
So be careful about those footnotes, daggers and asterisks – it might be better to just disclose nearby the advertised rate and payment instead.