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C-2.1-02, Notifying the Borrower Regarding Interest Rate and/or Payment Changes (11/12/2014)

Introduction
This topic contains the following:

General Requirements for All ARM Change Notices

The servicer of an ARM loan must notify the borrower before the effective date of any change to the mortgage loan interest rate or monthly payment in accordance with applicable law and the mortgage loan security instrument. When the interest rate and the monthly payment change at different intervals, separate notices are required for each change.

All ARM notices must comply with the disclosure requirements set forth in the TILA and the individual mortgage loan documents.

Additional Notice Requirements Specific to Plans with Payment Caps

In addition to the information noted in General Requirements for All ARM Change Notices, notices for ARM plans that have payment change limitations must also include all of the information listed in the following table.

✓ Notice Requirements
 

The monthly payment required to fully amortize the mortgage loan, if different from the new monthly payment amount.
 

The difference between a full payment amount and a limited-payment amount.
 

The borrower’s option to choose the limited-payment amount, and if applicable:

  • any limitations on their right to exercise this option,

  • the effect that their failure to exercise this option will have on future options, and

  • the amount of negative amortization that will occur if the option is exercised.
 

The date by which the borrower must notify the servicer if they choose to pay the limited-payment amount.

Note: Notices for mortgage loans that have an option to convert to a fixed rate mortgage loan must also include an explanation of this option and the requirements for its execution.

When the Interest Rate Changes More Frequently Than the Payment

The following table provides a list of additional information that must be included in the notice for an interest rate change for ARM plans in which the interest rate changes more frequently than the payment.

✓ Notice Requirements
 

The method used to determine the full payment amount and why the monthly payment will not be changed to that amount (if applicable).
 

The amount of any negative amortization that will occur until the next interest change date when the monthly payment is not being changed to keep pace with the mortgage loan interest rate.

If the servicer gives the borrower an option of limiting the payment increase, the notice must also include all of the details listed in the following table.

✓ Notice of the option to limit the payment increase
 

An explanation of why the offer is being made.
 

The method used to determine the limited payment amount.
 

The amount of negative amortization that will occur if the borrower chooses to limit the payment increase.
 

The limited payment amount and the date on which it will become effective.
 

The date by which the borrower must notify the servicer if they choose to pay the limited payment amount.
 

A request that the borrower indicate their acceptance of the offer by signing and returning the notice to the servicer for inclusion in its permanent records.
 

The date the next payment change will occur if the borrower chooses the limited payment amount.

When the Payment Changes More Frequently Than the Interest Rate

The following table provides a list of additional information that must be included in the notice for a payment change when the monthly payment changes more frequently than the interest rate.

✓ Notice Requirements
 

The amount of any negative amortization that will occur (when the monthly payment is not sufficient to fully amortize the mortgage loan), until the next payment change date.
 

The date the monthly payment will change if the negative amortization limit will be reached before the next scheduled payment change.

When the notice also serves as notification of an interest rate change, it must also explain the additional details noted in the following table.

✓ Notice of interest rate change
 

The difference between a full payment amount and a graduated-payment amount.
 

The borrower’s option to choose the graduated-payment amount if the full payment amount represents more than a 7.5% increase over the previous monthly payment amount.
 

The amount of negative amortization that will occur if the borrower requests a subsequent graduated-payment period.

Note: Notices for mortgage loans that have an option to convert to a fixed rate mortgage loan must also include an explanation of this option and the requirements for its execution.

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