Sec. 226.32 Requirements for certain closed-end
home mortgages.
(a) Coverage. (1) (a) Coverage. (1) Except as provided in paragraph (a)(2) of this
section, the requirements of this section apply to a consumer credit transaction that is secured by the consumer's principal dwelling, and in which either:
(i) The annual percentage rate at consummation will exceed by more than 8 percentage points for first-lien loans, or by more than 10 percentage points for subordinate-lien loans, the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in
which the application for the extension of credit is received by the creditor; or
(ii) The total points and fees payable by the consumer at or before loan closing will exceed the greater of 8 percent of the total loan amount, or $400; the $400 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1.
[Editor's Note: Consult Supplement I - Official Staff Interpretations, Comment on § 226.32(a)(1)(ii) for the most current year's adjusted figure.]
(2) This section does not apply to the following:
nbsp; (i) A residential mortgage transaction.
(ii) A reverse mortgage transaction subject
to Sec. 226.33.
(iii) An open-end credit plan subject to subpart
B of this part.
(b) Definitions. For purposes of this subpart, the following definitions apply:
(1) For purposes of paragraph (a)(1)(ii) of this section, points and fees means:
(i) All items required to be disclosed under Sec. 226.4(a) and 226.4(b), except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers;
(iii) All items listed in Sec. 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and
(iv) Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.
(2) Affiliate means any company that controls,
is controlled by, or is under common control with another company, as set
forth in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
(c) Disclosures. In addition to other disclosures required by this part, in a mortgage subject to this section, the creditor shall disclose the following in conspicuous type size:
(1) Notices. The following statement: ``You
are not required to complete this agreement merely because you have received
these disclosures or have signed a loan application. If you obtain this
loan, the lender will have a mortgage on your home. You could lose your
home, and any money you have put into it, if you do not meet your obligations
under the loan.''
(2) Annual percentage rate. The annual percentage
rate.
(3) Regular payment; balloon payment.
1. General. The regular payment is the amount due from the borrower at regular intervals, such as monthly, bimonthly,
quarterly, or annually. There must be at least two payments, and the payments must be in an amount and at such intervals that they
fully amortize the amount owed. In disclosing the regular payment, creditors may rely on the rules set forth in § 226.18(g);
however, the amounts for voluntary items, such as credit life insurance, may be included in the regular payment disclosure
only if the consumer has previously agreed to the amounts.
i. If the loan has more than one payment level, the regular payment for each level must be disclosed. For example:
A. In a 30-year graduated payment mortgage where there will be payments of $300 for the first 120 months, $400 for the
next 120 months, and $500 for the last 120 months, each payment amount must be disclosed, along with the length of time that
the payment will be in effect.
B. If interest and principal are paid at different times, the regular amount for each
must be disclosed.
C. In discounted or premium variable-rate transactions where the creditor sets the initial interest rate and later rate adjustments
are determined by an index or formula, the creditor must disclose both the initial payment based on the discount or premium
and the payment that will be in effect thereafter. Additional explanatory material which does not detract from the required
disclosures may accompany the disclosed amounts. For example, if a monthly payment is $250 for the first six months and then
increases based on an index and margin, the creditor could use language such as the following: ‘‘Your regular monthly payment
will be $250 for six months. After six months your regular monthly payment will be based on an index and margin, which currently
would make your payment $350. Your actual payment at that time may be higher or lower.’’
(4) Variable-rate. For variable-rate transactions,
a statement that the interest rate and monthly payment may increase, and
the amount of the single maximum monthly payment, based on the maximum
interest rate required to be disclosed under § 226.19(b)(2)(viii)(B)’’.
(5) Amount borrowed. For a mortgage refinancing, the total amount the consumer will borrow, as reflected by the face amount of the note; and where the amount borrowed includes premiums or other charges for
optional credit insurance or debt-cancellation coverage, that fact shall be stated, grouped together with the disclosure of the amount borrowed. The disclosure of the amount borrowed shall be treated as accurate if it is not more than $100 above or below the amount required to be disclosed.
(d) Limitations. A mortgage transaction subject to this section shall not include the following terms:
(1)(i) Balloon payment. For a loan with a
term of less than five years, a payment schedule with regular periodic
payments that when aggregated do not fully amortize the outstanding principal
balance.
(ii) Exception. The limitations in paragraph
(d)(1)(i) of this section do not apply to loans with maturities of less
than one year, if the purpose of the loan is a ``bridge'' loan connected
with the acquisition or construction of a dwelling intended to become the
consumer's principal dwelling.
(2) Negative amortization. A payment schedule
with regular periodic payments that cause the principal balance to increase.
(3) Advance payments. A payment schedule that
consolidates more than two periodic payments and pays them in advance from
the proceeds.
(4) Increased interest rate. An increase in
the interest rate after default.
(5) Rebates. A refund calculated by a method
less favorable than the actuarial method (as defined by section 933(d)
of the Housing and Community Development Act of 1992, 15 U.S.C. 1615(d)),
for rebates of interest arising from a loan acceleration due to default.
(6) Prepayment penalties. Except as allowed
under paragraph (d)(7) of this section, a penalty for paying all or part
of the principal before the date on which the principal is due. A prepayment
penalty includes computing a refund of unearned interest by a method that
is less favorable to the consumer than the actuarial method, as defined
by section 933(d) of the Housing and Community Development Act of 1992.
(7) Prepayment penalty exception. A mortgage
transaction subject to this section may provide for a prepayment penalty
otherwise permitted by law (including a refund calculated according to
the rule of 78s) if:
(i) The penalty can be exercised only for
the first five years following consummation;
(ii) The source of the prepayment funds is
not a refinancing by the creditor or an affiliate of the creditor; and
(iii) At consummation, the consumer's total
monthly debts (including amounts owed under the mortgage) do not exceed
50 percent of the consumer's monthly gross income, as verified by the consumer's
signed financial statement, a credit report, and payment records for employment
income.
(8) Due-on-demand clause. A demand feature that permits the creditor to terminate the loan in advance of the original maturity date and to demand repayment of the entire outstanding balance, except in the following circumstances:
(i) There is fraud or material misrepresentation by the consumer in connection with the loan;
(ii) The consumer fails to meet the repayment terms of the agreement for any outstanding balance; or
(iii) There is any action or inaction by the consumer that adversely affects the creditor's security for the loan, or any right of the creditor in such security.
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