High Cost Mortgages: The Commentary

The Federal Reserve's published Commentary to the high cost mortgage rule contains clarification and no real surprises. High cost mortgage rules contain several special procedural rules and definitions. In particular, the calculation of the total points and fees a special procedure that differs from the calculation of the finance charge. Even if your bank does not offer high cost mortgages, it is important to be familiar with these rules so that you can flag issues that arise. You also should be able to flag similarities to and differences from the Regulation Z rules for standard mortgages.

Business Day
The treatment of "business day" is important for several purposes. First, disclosures must be provided at least three business days before consummation. This disclosure requirement is actually a cooling off period that enables the consumer to change their mind before becoming obligated. It is in addition to the rescission period that follows consummation. For this three day pre-consummation period, business days are counted the same way as for rescission: all days except Sundays and holidays. We call this the "Post Office rule" because it includes all days that the Post Office is open for business. ?226.31(c)(2)-2

The high cost rule contains one significant difference from rescission: closing may occur on the third day rather than waiting to complete the third day and closing on the following day. The right of rescission runs to midnight of the third day making disbursement occur on the morning of the fourth day. ?226.31(c)-2

Waivers of Waiting Period
Circumstances that justify a waver of the waiting period are severely limited. As in the rule on rescission, waivers are only permitted if the consumer has a bona fide personal financial emergency. The Commentary illustrates the seriousness of this limitation by using foreclosure as a circumstance that meets the bona fide personal financial emergency test. As with the rescission rule, simply having made plans for the immediate use of the funds is not sufficient to justify a waiver. ?226.31(c)(1)(iii)-1

Change in Terms and Estimates
Any change in terms in a high cost mortgage triggers new disclosures. Redisclosure is necessary even if the previously disclosed term was labeled as an estimate. The rule places great emphasis on complete and accurate information prior to closing.

As with the rule in other parts of Regulation Z, the use of estimates is limited to situations where the creditor does not have the information necessary to make a precise or certain disclosure. Estimates are not a technique for avoiding redisclosure nor are they a protection for any inaccuracies. ?226.31(d)-1

Payments
High cost mortgages must have at least two payments. Moreover, the payments must fully amortize the loan. There can be no negative amortization or balloon payments for these loans. The loan must be fully paid through regular periodic payments. A "regular periodic payment" can be no more than twice the amount of other payments. The payment schedule rules contain the same requirement as in ?226.18(g). If the loan has multiple payment levels, each payment level must be disclosed to the borrower. ?226.32(c)(3)-1; ?226.32(d)(1)(i)-1

APR Calculations
The Commentary imports the rules from ?226.17(c)(1) for calculating APRs for variable rate loans. This brings in the requirement that disclosures must be based on the variable rate elements in the underlying legal obligation. Calculations must take into account the information known and be based on the rates in effect at the time disclosures are made. Blended rates must be used to take into account any initial rate discounts or graduated steps in the loan. ?226.32(a)(1)(i)-3

The high cost mortgage rules contain special rules for calculating the total points and fees. These calculations are slightly different from calculations for standard closed-end loans because they include charges that are not treated as finance charges in ?226.4. In the next issue, we will analyze these high cost mortgage rule calculations.

ACTION STEPS

If your bank offers any balloon payment mortgages, review these loans to determine whether they are high cost loans.
Review your training materials on to see whether "business days" and rescission need updating.
Check the payment schedules for all graduated payment and step rate loans to be sure they comply with Regulation Z's requirements to disclose payment levels. Talk with staff preparing these disclosures to be sure they understand the requirements.
Review any waivers of the right to rescind to determine whether they meet the personal financial emergency test.