January 2011 Legal Briefs

January 1, 2011

Federal S.A.F.E. Act Registry Will (Probably) Be Up By January 31, 2011

Banks May Not Accept Tax Deposit Coupons after December 31, 2010

FDIC Insurance Coverage Changes Effective January 1, 2011

Regulators Increase HMDA, CRA Thresholds Effective January 1, 2011

New Reg Z Interim Final Rule Regarding Appraisal Independence Places Major New Burdens on Banks

MDIA Interim Rule effective January 30, 2011 Changed Again

Compliance Dates Roundup

Federal S.A.F.E. Act Registry Will (Probably) Be Up By January 31, 2011

In terms of taking up space in the Legal Update, the Federal S.A.F.E. Act and corresponding Oklahoma S.A.F.E. Act have been the gift that keeps on giving. The federal regulators finally adopted a final rule implementing registration of mortgage loan originators under the Federal S.A.F.E. Act in 2010. Details of the final rule and registration and other bank requirements were detailed in the August 2010 Legal Update. However, one important detail was not provided in the final rule: when registration for mortgage loan originators under the central federal registry would begin.

On January 4, 2011, the FDIC announced that federal registration of mortgage loan originators is expected to be operational “on or about January 31, 2011.” The announcement, published at http://www.fdic.gov/news/news/financial/2011/fil11001.pdf, indicates that the January 31 date is still subject to change and that another final announcement of the beginning registration date will be given.

Under the final rule, mortgage loan originators will have 180 days from the date the system begins accepting registrations to register. Assuming the January 31 date is not changed, mortgage loan originators will have until July 29, 2011 to register within the initial registration period.

As discussed in the August 2010 Legal Update, there are registration requirements for both mortgage loan originators AND the banks that employ them. Stay tuned for the final final date confirmation. In the meantime, federal registry information can be found at http://mortgage.nationwidelicensingsystem.org/fedreg/Pages/default.aspx.

Banks May Not Accept Tax Deposit Coupons after December 31, 2010

On December 7, 2010, the IRS announced that effective January 1, 2011, it is discontinuing the federal tax deposit program that allows taxpayers to present paper coupons and checks to bank branches for federal tax payments. Beginning January 1, 2011, all payments more than $2,500 must be made via electronic funds transfer. Payments less than $2,500 may still be made via paper check through a new lockbox program established by the IRS.

Beginning January 1, banks may not accept payment coupons or checks. The final day for processing coupons via the program is January 3, 2011. The final day to submit an adjustment request will be February 28, 2011. After January 1, 2011, most businesses will be required to use the Electronic Federal Tax Payment System (www.eftps.gov) to pay their taxes.

FDIC Insurance Coverage Changes Effective January 1, 2011

We covered important changes in FDIC insurance coverage that are effective at the end of this year in the October 2010 Legal Update. Since then, the FDIC published its final rule implementing insurance coverage changes on November 15, 2010, at 75 F.R. 69577. There were a couple of minor changes from the interim rule. In addition, the U.S. Senate passed a bill backed by the American Bankers Association (H.R. 6398) on December 22, 2010, that provides temporary unlimited deposit insurance for IOLTA accounts beginning January 1, 2011. President Obama signed the bill into law on December 29. Here is a summary of the provisions and requirements that affect all Oklahoma banks:

1. The standard maximum deposit insurance amount (SMDIA) is permanently raised to $250,000.

2. For banks that were participating in the TAG program, this special unlimited coverage ended effective December 31, 2010.

3. The FDIC Guaranty for Non-Interest Bearing Transaction Accounts is raised to UNLIMITED, through December 31, 2012. This coverage is separate from and in addition to the SMDIA of $250,000. Importantly, NOW accounts are excluded from this unlimited coverage. Due to the passage of H.R. 6398 into law, this temporary unlimited coverage is also extended to IOLTA accounts.

4. The Final Rule imposes 3 Notice Requirements on banks:

All banks offering non-interest bearing deposits must post the following notice in the lobby of its main office, in each branch and if it offers Internet deposit services, on its Web site by December 31, 2010 [Note: This notice is not identical to the version published in the interim proposed rule. If your bank has published the original version of this notice, please make sure it is revised to match the new version. Also, as of the printing of this article, the FDIC has not updated this notice to reflect the coverage now provided to IOLTA accounts. Expect the notice to be updated again.]:

NOTICE OF CHANGES IN TEMPORARY FDIC INSURANCE COVERAGE FOR TRANSACTION ACCOUNTS
All funds in a ”noninterest-bearing
transaction account” are insured in full by
the Federal Deposit Insurance Corporation
from December 31, 2010, through December
31, 2012. This temporary unlimited coverage
is in addition to, and separate from, the
coverage of at least $250,000 available to
depositors under the FDIC’s general deposit
insurance rules.
The term ”noninterest-bearing transaction
account” includes a traditional checking
account or demand deposit account on which
the insured depository institution pays no
interest. It does not include other accounts,
such as traditional checking or demand
deposit accounts that may earn interest,
NOW accounts, money-market deposit
accounts, and Interest on Lawyers Trust
Accounts (”IOLTAs”).
For more information about temporary
FDIC insurance coverage of transaction
accounts, visit www.fdic.gov.

· Insured depository institutions currently participating in the TAG Program must notify NOW account (who were previously protected under the TAG Program) that beginning January 1, 2011, their NOW accounts will no longer be eligible for unlimited protection. The final regulation provides that this notice may be in the form of notice that is required to be posted in banking branches and online. This notice must be mailed or otherwise provided to the customer by December 31, 2010. The FDIC has clarified that such notice DOES NOT need to be sent to IOLTA account holders. Banks that have already sent notices to IOLTA account holders may provide a revised notice advising them that they will receive unlimited coverage on the account through December 31, 2012.

· Insured depository institutions must notify customers of any action they take to affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts. This notice requirement is intended primarily to apply when banks begin paying interest on demand deposit accounts when allowed under Section 627 of the Dodd-Frank Act (beginning July 22, 2011). Thus, if your bank modifies its deposit agreement such that interest is payable after July 22, 2011, such a notice would be required. This notice requirement would also apply when a bank uses a sweep account to sweep funds from a non-interest bearing account to an interest bearing account.

· January 3, 2010 was the deadline for banks to display the updated FDIC official signage, reflecting the permanent increase to $250,000 coverage. To order signs, go to: https://vcart.velocitypayment.com/fdic/.

Regulators Increase HMDA, CRA Thresholds Effective January 1, 2011

Federal Regulators have issued two new final rules on December 20 and December 21 related to increases in HMDA and CRA threshold amounts that are tied to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPIW), which increased by a rate of 2.21 percent for the period ending November 2010. As a result, the following thresholds have been changed:

1. HMDA threshold raised to $40 million — The Federal Reserve has issued a final rule that raises the asset-sized exemption for depository institutions from $39 million to $40 million. Banks with assets of $40 million or less as of December 31, 2010, are exempt from collecting HMDA data in 2011.

2. CRA small bank thresholds raised — The federal regulators have issued a joint final rule raising the thresholds for banks that are considered “small banks” and “intermediate small banks” under the Community Reinvestment Act. In general, these banks are subject to more streamlined recordkeeping and CRA evaluation standards. Under the final rule, these definitions are changed as follows:

· “Small bank” or “small savings association” means an institution that, as of December 31 of either of the prior two calendar years, had assets of less than $1.122 billion; and

· “Intermediate small bank” or “intermediate small savings association” means a small institution with assets of a least $280 million as of December 31 of both of the prior two calendar years, and less than $1.122 billion as of December 31 of either of the prior two calendar years.

New Reg Z Interim Final Rule Regarding Appraisal Independence Places Major New Burdens on Banks

Byron’s Quick Hit: One of the first new heavy regulatory burdens imposed by the Dodd-Frank Act will go into effect on April 1, 2011. Under the Dodd-Frank Act, TILA is amended to add new requirements for appraisal independence. In addition, the changes will put a new burden on lenders to ensure that licensed appraisers that are paid a fee for each appraisal (as opposed to being salaried) are compensated fairly. Finally, these changes will require banks to report when they have reason to know of appraiser misconduct. The final interim rule was published on October 28, 2010. It became effective on December 27, 2010, but compliance with its provisions is not mandatory until April 1, 2011. The requirements of these provisions are quite extensive and quite burdensome. Banks should not wait until the last minute to ensure compliance.

On October 28, 2010, the Federal Reserve Board published an Interim Final Rule to implement the appraisal independence provisions added to the Truth In Lending Act (TILA) by Section 1472 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The Interim Final Rule was published at 75 F.R. 66554. The Interim Final Rule became effective December 27, 2010. However, compliance with its provisions is not mandatory until April 1, 2011. The Interim Final Rule adds a brand new Section 226.42 to Reg Z. In addition, it removes existing subsection 226.36(b) (which prohibits coercion of appraisers), effective April 1, 2011, when compliance with the provisions of Section 226.42 is mandatory.

Dodd-Frank mandated that new appraisal independence rules be issued within 90 days of its passage. Pursuant to the Congressional mandate, the interim rule aims to ensure that real estate appraisers use independent professional judgment in assigning home values, without influence or pressure from parties with interests in the transactions. Also, the rule implements new legislative provisions to ensure that appraisers receive “customary and reasonable” payments for their services. As per the Dodd-Frank Act, upon the promulgation of the interim final rule, the Home Valuation Code of Conduct (the HVCC was outlined in the August 2009 Legal Update) will have no further force or effect.

Scope of the Interim Final Rule

The Interim Final Rule applies to “any consumer credit transaction secured by a consumer’s principal dwelling.” See Section 226.42(a). The Interim Final Rule applies to appraisals for any consumer credit transaction secured by the consumer’s principal dwelling, including home-equity lines of credit (HELOCs). Persons who are bound by the Interim Final Rule’s provisions include anyone who (i) extends credit or (ii) provides settlement services in connection with a covered transaction. The definition of a settlement service is the same as provided by RESPA at 12 U.S.C. § 2602(3).

The Official Staff Interpretations to Section 226.42(b)(1) state that the following persons are covered by this rule: “creditors, mortgage brokers, appraisers, appraisal management companies, real estate agents, and other persons who provide ‘settlement services’ …” Further, the Interpretations clarify that the following persons ARE NOT “covered persons”: (i) the consumer who obtains credit through a covered transaction; (ii) a person secondarily liable for a covered transaction, such as a guarantor; and (iii) a person that resides in or will reside in the consumer’s principal dwelling but will not be liable on the covered transaction, such as a non-obligor spouse.

The rule is not limited “just to a licensed or certified appraiser” an “appraisal management company,” or to a formal “appraisal.” Thus, the Interim Final Rule applies broadly to acts or practices that compromise the independent value estimation of a consumer’s principal dwelling, without regard to whether the creditor uses a licensed or certified appraiser or another person to produce a valuation.

The term “valuation” is defined at § 226.42(b)(3) as “an estimate of the value of the consumer’s principal dwelling in written or electronic form, other than one produced solely by an automated model or system.” The Official Staff Interpretation to § 226.42(b)(3)-1 clarifies that a “valuation” is “an estimate of value prepared by a natural person, such as an appraisal report prepared by an appraiser or an estimate of market value prepared by a real estate agent. The term includes photographic or other information included with an estimate of value.”

Prohibitions Against Coercion and Mischaracterization of Value (12 C.F.R. § 226.42(c))

The Interim Final Rule contains broad restrictions designed to guard against improper influence, providing that:

[N]o covered person shall or shall attempt to directly or indirectly cause the value assigned to the consumer’s principal dwelling to be based on any factor other than the independent judgment of a person that prepares valuations, through coercion, extortion, inducement, bribery or intimidation of, compensation or instruction to, or collusion with a person that prepares valuations or valuation management functions.

See Section 226.42(c)(1). Specific examples of prohibited conduct are given as follows:

1. Seeking to influence the appraiser to report a minimum or maximum value for the consumer’s principal dwelling;

2. Withholding or threatening to withhold timely payment because the person does not come back with a value at a certain amount;

3. Implying to the appraiser that current or future retention of the person depends on the amount at which the person estimates the value of the dwelling;

4. Excluding a person that prepares a valuation from consideration for future engagement because the person reports a value that does not meet or exceed a predetermined threshold; and

5. Conditioning appraiser compensation on consummation of the covered transaction.

Section 226.42(c)(2) contains specific restrictions on mischaracterizing value, as follows:

1. No misrepresentation: No person that prepares valuations shall materially misrepresent the value of the consumer’s principal dwelling in a valuation. See Section 226.42(c)(2)(i). A “misrepresentation” is deemed “material” if it is likely to significantly affect the value assigned to the consumer’s principal dwelling. A bona fide error shall not be a misrepresentation.

2. No Falsification or alteration: No covered person may “falsify” a valuation, or materially alter a valuation. However, the preparer of a valuation is not prohibited from altering a previously prepared valuation based on legitimate reasons. An alteration is deemed “material” if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.

3. No Inducement: No covered person may induce a person to misrepresent or falsify, as set forth above.

As an example of prohibited conduct, the Official Staff Interpretation states that “a loan originator may not coerce a loan underwriter to alter an appraisal report to increase the value assigned to the consumer’s principal dwelling.”

Conversely, the rule and Official Staff Interpretations set out examples of actions that DO NOT constitute unlawful coercion or mischaracterization. Examples include:

1. Asking a person that prepares a valuation to consider additional, appropriate property information, including information about comparable properties, to make or support a valuation;

2. Requesting that a person that prepares a valuation provide further detail, substantiation, or explanation for the person’s conclusion about the value of the consumer’s principal dwelling;

3. Asking a person that prepares a valuation to correct errors in the valuation;

4. Obtaining multiple valuations for the consumer’s principal dwelling to select the most reliable valuation;

5. Withholding compensation due to breach of contract or substandard performance of services; and

6. Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

Prohibition Against Conflicts of Interest (12 C.F.R. § 226.42(d))

Some additional definitions come into play in relation to the Interim Final Rule’s prohibition of conflicts of interest:

“Loan production function” is defined as “an employee, officer, director, department, division, or other unit of a creditor with responsibility for generating covered transactions, approving covered transactions, or both.” This term includes retail sales staff, loan officers, and any other employee with responsibility for taking a loan application, offering or negotiating loan terms or whose compensation is based on loan processing volume. However, a person solely responsible for credit administration or risk management is not considered part of a creditor’s loan production function. The Official Staff Interpretation clarifies that credit administration and risk management includes, loan underwriting, loan closing functions (loan documentation), disbursing funds, collecting mortgage payments and otherwise servicing the loan, monitoring loan performance, and foreclosure processing.

Also, the term “affiliate” is defined as having the same meaning as provided at Reg Y, 12 CFR § 225.2(a), i.e., “any company that controls, is controlled by, or is under common control with, another company”.

A person who prepares a valuation or performs valuation management services for a consumer credit transaction secured by the consumer’s principal dwelling may not have a direct or indirect interest, financial or otherwise, in the property or the transaction. Examples given of prohibited conflicts of interest include when:

1. a person has any ownership or reasonably foreseeable ownership interest in the property;

2. a person or an affiliate of that person also serves as a loan officer of the creditor, mortgage broker, real estate broker, or other settlement service provider for the transaction, and the safe harbor conditions (see discussion below) for settlement service providers under § 226.42(d)(4) are not satisfied; and

3. a person is compensated or otherwise receives financial or other benefits based on whether the transaction is consummated.

Pursuant to § 226.42(d)(1)(ii)(A), an employment relationship or affiliation does not, by itself, violate the prohibition against conflicts of interest. Moreover, the rule clarifies that a person who prepares a valuation or performs valuation management functions for a covered transaction may perform another settlement service for the same transaction. See Section 226.42(d)(1)(ii)(B). In either case, whether an employee or affiliate has an interest that creates a prohibited conflict depends on the facts and circumstances of a particular case, including the structure of the employment or affiliate relationship.

Importantly, the Interim Final Rule creates two “safe harbors” for individuals who prepare valuations or perform valuation management functions and are also employees or affiliates of the creditor. If the safe harbor provisions are satisfied, the creditor may rely on valuations prepared by its in-house staff or for which its affiliate performed valuation management functions for any covered transaction without violating the Interim Final Rule. The safe harbor provisions differ depending on the size of the creditor.

1. Safe Harbor for Creditors with Assets of more than $250 million as of December 31st for both of the past two calendar years (12 C.F.R. § 226.42(d)(2)). The safe harbor will be satisfied so long as:

a. The compensation to the person preparing the valuation or performing valuation management functions is not based on the value arrived at in any valuation;

b. The person preparing the valuation or performing valuation management functions reports to a person who is not part of the creditor’s loan production function and whose compensation is not based on the closing of the transaction to which the valuation relates; and

c. No employee, officer or director in the creditor’s loan production function is directly or indirectly involved in selecting, retaining, recommending or influencing the selection of the person to prepare a valuation or perform valuation management functions, or to be included in or excluded from a list of approved appraisers.

2. Safe Harbor for Creditors with Assets of $250 million or less as of December 31st for either of the past two calendar years (12 C.F.R. § 226.42(d)(3)). The safe harbor provisions will be satisfied so long as:

a. The compensation of the person preparing a valuation or performing valuation management functions is not be not based upon the value arrived at in any valuation; and

b. The creditor requires that those employees, officers or directors of the creditor who order, perform, or review a valuation for a covered transaction must abstain from participating in any decision to approve, not approve, or set the terms of that transaction.

The safe harbor provisions of § 226.42(d)(2) and (d)(3) also apply to protect multiple settlement service providers (e.g., instances where persons performing valuations or valuation management functions is also performing another settlement service, or whose affiliate performs another settlement service). See Section 226.42(d)(4).

Prohibitions Against Certain Extensions of Credit (12 C.F.R. § 226.42(e))

The Interim Final Rule prohibits a creditor from extending credit based on a valuation if the creditor knows, at or before consummation, that either (i) coercion or other similar conduct has occurred, or (ii) the person who has prepared a valuation or who performed valuation management services has a prohibited interest in the property or the transaction. However, even if one of these two prohibitions applies, the creditor may still extend the credit provided it must use reasonable diligence to determine that the valuation does not materially misstate the value of the property. In order for this exception to apply, the creditor must document that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of the dwelling. The rule does not mandate specific due diligence procedures for creditors to follow when they suspect a violation of Section 226.42(c) or (d).

Customary and Reasonable Rate of Compensation for “Fee Appraiser”(12 C.F.R. § 226.42(f))

Incredibly, the Interim Final Rule contains a brand new requirement that a creditor or its agent pay a “fee appraiser” at a rate that is reasonable and customary in the geographic market where the property is located. Generally, a “fee appraiser” is a licensed appraiser who gets paid a fee to do an appraisal (as opposed to one who is salaried). See 12 C.F.R. § 226.42(f)(4)(i).

The Interim Final Rule provides two presumptions of compliance for the reasonable compensation requirement. First, a creditor or its agent is presumed to have paid a customary and reasonable fee if the fee is “reasonably related to recent rates paid for comparable appraisal services performed in the geographic market of the property being appraised.” Factors that are to be considered in reaching this determination include: (i)the type of property, (ii) the scope of work, (iii) the time in which the appraisal services are required to be performed, (iv) fee appraiser qualifications, (v) fee appraiser experience and professional record, and (vi) fee appraiser work quality. IN ADDITION, in order to meet this first presumption of compliance, the creditor may not have engaged in any anticompetitive actions in violation of state or federal law that affect the appraisal fee, such as conspiring to fix prices, etc.

The second presumption of compliance will be satisfied if the creditor or its agent in determining the fee, relies on rates established by third-party information. Although specific acceptable surveys or studies are not identified, three conditions must be met in order to qualify:

i. The information must be based upon objective third-party information, including fee schedules, studies, and surveys prepared by independent third parties (e.g., government agencies, academic institutions, and private research firms);

ii. The information must be based on recent rates paid to a representative sample of providers of appraisal services in the geographic market of the property being appraised or the fee schedules of those providers; and

iii. Studies and surveys or information derived from them must exclude compensation paid to fee appraisers for appraisals ordered by appraisal management companies.

According to the commentary provided with the Interim Final Rule, the requirement to pay reasonable fees does not prohibit negotiations between a creditor and an appraiser that are in good faith. Further, it is not intended to prohibit a creditor from communicating to a fee appraiser the rates that have been submitted by other appraisers solicited for the assignment as part of such a negotiation.

Mandatory Reporting of Appraiser Misconduct(12 C.F.R. § 226.42(g))

Creditors involved in covered transactions under § 226.42 that have a reasonable basis to believe that an appraiser has not complied the Uniform Standards of Appraisal Practice (USPAP), or otherwise has not complied with ethical or professional requirements for appraisers under applicable federal or state law, are required to report such failure to comply to the appropriate state licensing agency under the Interim Final Rule, provided that the failure to comply is “material.” For purposes of § 226.42(g), a failure to comply will be considered “material” if it is “likely to significantly affect the value assigned to the consumer’s principal dwelling.” A covered person must report within a “reasonable period of time” after the person determines that there is a reasonable basis to believe that such a material failure to comply has occurred.

According to the Official Staff Interpretation, a person has a “reasonable basis” to believe an appraiser has not complied with the law or applicable standards, “if the person possesses knowledge or information that would lead a reasonable person in the same circumstances to conclude that the appraiser has materially failed to comply with USPAP or such statutory or regulatory requirements.”

MDIA Interim Rule effective January 30, 2011 Changed Again

You may recall that in our September 2010 Legal Update, we covered certain changes under Reg Z by way of an interim rule adopted by the Federal Reserve Board (referred to herein as the “September Interim Rule”). While the FRB sought comments regarding the September Interim Rule for 60 days, compliance with the September Interim Rule is nevertheless mandatory for loan applications received on or after January 30, 2011. Now, the Federal Reserve Board has issued yet another interim rule, clarifying the September Interim Rule, and again is seeking comment (the “December Interim Rule”). The December Interim Rule is effective January 30, 2011. However, compliance with the December Interim rule is not mandatory for loan applications that are received before October 1, 2011. Thus, banks must be prepared to comply with the September Interim Rule for applications received on or after January 30, 2011. As of January 30, banks may comply with the provisions of the December Interim Rule, but are not required to do so until October 1, 2011.

The September and December Interim Rules are designed to address compliance with provisions of MDIA, having an effective date of January 30, 2011. Specifically, the Interim Rules address disclosures that are required if the loan’s interest rate or payments can change. As described below, disclosures are required in a tabular format describing possible changes. In addition, the September Interim Rule addresses the MDIA requirement that consumers be given a statement that there is no guarantee the consumer will be able to refinance the loan transaction in the future.

September Interim Rule’s New Disclosure Requirements for Consumer Transactions Secured by Real Property or a Dwelling

Existing Section 226.18(g) (part of Reg Z) applies to closed-end consumer credit transactions and requires the disclosure of a current payment schedule. The September Interim Rule revises Section 226.18(g), exempting out from its application consumer transactions secured by real property or a dwelling (other than interests in a timeshare plan). The new disclosure requirements for such transactions are contained within a new provision, Section 226.18(s).

Section 226.18(s)(1) requires that the new disclosures for transactions secured by real property or dwelling must be in the form of a TABLE, having no more than 5 columns, and with headings and format substantially similar to new examples provided in Appendix H to Reg Z. Further, the information that may be included in the table is specifically limited to the information required by Section 226.18(s). It must be placed in a “prominent location” and must use a minimum 10-point font.

The September Interim Rule contains six categories of information that must be included in tabular format (For a complete discussion of these categories, please refer to the September 2010 Legal Update): (1) interest rate information; (2) payments for amortizing loans; (3) payments for interest-only loans; (4) payments for negative amortization loans; (5) payments for loans with balloon payments; and (6) additional disclosures for loans with negative amortization.

September Interim Rule’s Requirement of “No-Guarantee-to-Refinance” Statement

In addition to the new table and other requirements above, the September Interim Rule revises Section 226.18 by adding a new Section 226.18(t). Like the new provisions of 226.18(s), Section 226.18(t) applies to closed-end consumer transactions secured by real property or a dwelling, other than a consumer’s interest in a timeshare plan. Section 226.18(t) provides that the creditor disclose a statement that “there is no guarantee the consumer can refinance the transaction to lower the interest rate or periodic payments.” This statement must be in a form substantially similar to Model Clause H-4(K), contained in Appendix H to Reg Z.

Additional Requirements/Clarifications of December Interim Rule

The December Interim Rule contains four primary adjustments to the September Interim Rules: (1) it clarifies the requirements for adjustable-rate transactions that are “5/1 ARM” loans; (2) it corrects the requirements for interest-only loans to clarify that the disclosures should reflect the date of the interest rate change, rather than the date the first payment is due under the new rate; (3) it revises the definition of “negative amortization loans” to clarify which transactions are covered by the special disclosure requirements for such loans; and (4) it clarifies how the provisions of the September Interim Rule apply to home construction loans.

1. Changes for Adjustable Transactions that are “5/1 ARM” loans

The December Interim Rule revises Section 226.18(s)(2)(i)(B)(2), which requires disclosure of the maximum possible interest rate at any time during the first five years after consummation and the earliest date the rate may apply. The wording of the September Interim Rule may lead to confusion because the first rate adjustment generally occurs more than five years after consummation. By way of example, assuming a ‘‘5/1 ARM’’ loan is consummated on August 16, 2011, the first payment due date typically is October 1, 2011. The first rate adjustment then occurs on the due date of the 60th regular payment, September 1, 2016, which is more than five years after consummation. The December Interim Rule clarifies the intent of this provision is that creditors disclose the first rate adjustment for a ‘‘5/1 ARM.’’ To ensure that the first rate adjustment will be disclosed for ‘‘5/1 ARMs,’’ the December Interim Rule revises § 226.18(s)(2)(i)(B)(2) to clarify that creditors should disclosure the maximum possible rate that will apply at any time during the first five years after the date on which the first regular periodic payment will be due, rather than after consummation.

2. Changes for Interest-Only Loans

The December Interim Rule revises comments to Section 226.18(s)(2)(i)(C)-1 to clarify that for interest only loans that a period of interest-only payments that do not provide for an interest increase, but do provide for a payment increase (i.e., for payment of both principal and interest). In this instance, Section 226.18(s)(2)(i)(C) requires that the creditor disclose the interest rate that corresponds to the first payment that includes principal as well as interest, even though the interest rate will not adjust at the time.

3. Changes to Clarify Negative Amortization Loans

The December Interim Rule revised Section 226.18(s)(7)(v) to clarify what loans are subject to special disclosures for as “negative amortization loans.” Specifically, the definition is changed to provide that a “negative amortization loan” will apply only to loan products that have minimum required payments that result in negative amortization. This will result in loans that provide for irregular periodic payments (e.g., designed for those with seasonal employment), no longer being considered negative amortizing just because no payment is required for one or more months.

4. Changes to Clarify Application to Construction Loans

The December Interim Rule adopts a new comment under Appendix D to Reg Z to clarify the application of § 226.18(s) for disclosing the “repayment schedule” when construction financing is secured by real property or a dwelling. For a creditor that might also permanently finance a construction loan, it will have the option of disclosing the construction and permanent phases as separate transactions OR as a single transaction. If the creditor elects to disclose them separately, the construction phase must be disclosed in accordance with § 226.18(s), as adopted by the September Interim Rule (disclosing applicable interest rate and corresponding payments in table format). Conversely, if the creditor elects to disclose both phases as a single transaction, the construction phase must be disclosed pursuant to Appendix D, Part II.C, which provides that the creditor shall disclose the repayment schedule without reflecting the number or amounts of payments of interest only that are made during the construction phase. However, the creditor must also disclose (outside of the table) the fact that interest payments must be made and the timing of such payments.

Compliance Dates Roundup

12/31/2010 – FDIC TAG Program Expires (for banks that did not opt out in April 2010) (See October 2010 Legal Update)

1/1/2011 – Deadline to Comply with New Final Rule for Notice of Transfer of Mortgage (See September 2010 Legal Update)

1/1/2011 – Deadline to Comply with Final Rule on Risk-Based Pricing (See October 2010 Legal Update)

1/1/2011 – Model Privacy Notices Safe-Harbor Under Reg P Changes to New Model Form (See November 2010 Legal Update)

1/3/2011 – Deadline to Display Updated FDIC Insurance Signage (See October 2010 Legal Update)

1/30/2011 – Deadline to Comply with New Reg Z Disclosures (§ 226.18(s) and (t)) (See September 2010 Legal Update