On August 26, 2014, the U.S. Department of Housing and Urban Development (HUD) issued a final rule to align HUD rules governing FHA-insured adjustable mortgage rates (ARMs) with the recent CFPB rules regarding ARM interest rate adjustment and disclosures under Regulation Z. As we previously reported, on May 8, 2014, HUD published a proposed rule in response to the CFPB's new Truth in Lending Act (TILA) mortgage servicing rules. The final rule adopts the proposed rule without change and is effective January 10, 2015.
Under the Regulation Z ARM Rules, when the interest rate on a covered mortgage loan adjusts based on index movement, servicers are required to notify borrowers of an impending payment change between 60 and 120 days before the new payment amount is first due. However, for loans that have rate adjustment every 60 days or more frequently, or are originated before January 10, 2015, and have look-back periods for the index value of less than 45 days, the notice may be provided between 25 and 120 days before the adjusted payment amount is first due. HUD interprets the ARM Rules as actually setting the look-back period for the index value as 45 days, which is not the case.
The final rule amends 24 C.F.R. § 203.49(d)(2) to require FHA-insured mortgages to use the most recent index figure available 45 days before an interest rate change becomes effective.
The final rule also amends 24 C.F.R § 203.49(h) to align directly with the ARM Rules under Regulation Z. HUD accomplishes this by cross-referencing 12 C.F.R. § 1026.20 to “not only avoid repetition of regulatory text, but help ensure that HUD’s codified regulations remain current” in the event that the CFPB amends Regulation Z.
Under the final rule, lenders and servicers of FHA-insured ARM loans will be required to make the initial adjustment disclosures and subsequent adjustment disclosures as required under the ARM Rules. HUD states that it does not insure ARMs with rate adjustment terms of less than 12 months; consequently, the shorter-term exemption found in the ARM Rules is not applicable to FHA-insured ARMs.