What do the new-to-2014 ARM Adjustment Notices look like?
- Jul 23, 2014
- 4 min read
Here are some thoughts on the new ARM adjustment notices, in particular the initial "20(d)" Notice. Have anything to add? Send in comments!
Sometimes I worry that I need to send the newsletter out with smelling salts ... but not this time! (Okay, that's just my opinion).
There are really 3 changes this year to the adjustable rate mortgage notices.
- New 20(d) notice
- Increased timing on the 20(c) interest rate adjustment notice (now 60-120 days instead of 25-125 days prior to first payment due)
- Old 20(c) annual notice is gone
But today we'll just take a closer look at the first change- the new "20(d)" notice (named after the regulation- 12 CFR 1026.20(d), a/k/a "initial rate adjustment" notice).
What is the 20(d) notice?
It is given out only once--210-240 days before the new payment after the first rate adjustment--telling the borrower basic information about when the payment is going to change, by how much, and why. That's right, 7-8 months in advance!
Estimate required if unable to determinate rate/payment
If you're unable to determine the new rate or payment that will apply (again- 7 to 8 months in advance!), then you're required to disclose an estimate instead. Important Note: Be careful to actually label this an "estimate" and to clearly explain that it is only an estimate- you don't want to be stuck with this! When an estimate is used, you have to send a follow-up disclosure with the actual new rate and payment 2-4 months before payment adjustment.
Why do we have this?
Congress determined that (a) ARMs pose a particular risk to borrowers, (b) borrower don't currently have enough time or information to understand how an ARM works, and (c) giving borrowers 7-8 months advance notice will help avoid payment shock and give borrowers enough time to look into alternatives to being saddled with a loan they can no longer afford (refinance, deferral, modification, etc.).
Criticism
The critics argue the costs outweigh the benefits. Of course- the "costs" are reprogramming systems and compliance training/research. Here's how a critic would argue that the the "benefits" are weak: The borrower is already advised at origination of rate adjustments. And how much help is a notice going to be 8 months before adjustment? The borrower is going to ignore that, it's too far away! Estimates are going to have poor accuracy in a changing rate environment, and that will just lead to confusion and uncertainty ... scaring borrowers into unnecessary refinances and "strategic defaults" (not to mention an increased burden on people assigned to customer support). It's too much information- the borrower is already overloaded with information- they don't need an additional notice. But that's just what the critics say (not us)! What do you think?
Some final notes on ARM adjustments:
There's no exception for small servicers here. This applies to financial institutions of ALL sizes.
Who is responsible for sending the 20(d) notice? That's an interesting question--all the regulations say is that either the creditor, assignee, or servicer need to do it (and only once). All the CFPB has said is,"those parties may decide among themselves which of them will provide the required disclosures" (actual quote from Official Preamble).
Other news/thoughts/trivia:
Maybe (just maybe!) we can start to get some credibility back - the CFPB says consumer complaints fell by almost 30% YoY.
Just to clarify something regarding the "small servicer" exception-- if you're a small servicer, you have an exemption over all loans that you service, including, for example, any loans you service for Fannie/Freddie. Contrary to the belief of some- the small servicer exemption extends to protect investors, assignees/owners that themselves would never qualify as a "small servicer."
"Never Argue With Children."
"A little girl was talking to her teacher about whales. The teacher said it was physically impossible for a whale to swallow a human because even though it was a very large mammal its throat was very small. The little girl stated that Jonah was swallowed by a whale. Irritated, the teacher reiterated that a whale could not swallow a human; it was physically impossible. The little girl said, 'When I get to heaven I will ask Jonah.' The teacher asked, 'What if Jonah went to he**?' The little girl replied, 'Then you can ask him.'"
What's the benefit of having someone taking a second look at something you're working on? Whether that's another person, another department, or another company. We talk about this a lot at SCA, where we see some clients making the same mistakes over and over again (and we learn from that with internal operations). Maybe this isn't a news flash to some:
"Problems cannot be solved with the same level of thinking that created them."
- Albert Einstein
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**These are our opinions. We're not authorized, or willing, to express those of others.**
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