A lender must provide the borrower, at the time of loan application, a written explanation of the features of the adjustable rate mortgage consistent with requirements applicable to variable rate mortgages secured by a principal dwelling under the Truth-In-Lending Act (TILA), Regulation Z, at 15 USC 1601, 12 CFR 226.18. FHA will not provide these disclosures.
1. At Application. Before signing the application, the borrower must receive and sign an ARM disclosure statement prescribed by the Federal Reserve Board.
2. Annually. The lender must send the borrower a notice at least 25 days before the change date (i.e., 25 days before the new payment amount is due). The notice must include the following:
a. Prior year's interest rate, monthly payments, and governing index
b. Current value of the index, loan margin, new interest rate, and new monthly payments
c. An explanation of how the new interest rate was calculated
With regard to Hybrid ARMs, lenders must make available to the borrower, at the time of loan application, a written explanation of the features of an ARM consistent with the disclosure requirements applicable to variable rate mortgages secured by a principal dwelling under TILA.
Since mortgage lenders already prepare their own disclosures for FHA 1-year ARMs as well as conventional ARMs, FHA will rely upon lenders to comply with TILA and will not provide disclosures for these products. On the date of the loan application, the lender must explain fully and in writing to the prospective borrower, the nature of the proposed obligation. A hypothetical monthly payment schedule that displays the maximum potential increases in monthly payments for the term of the ARM must be provided to the applicant. For example, a 7-year ARM payment schedule would show the maximum potential increases over the three years following the initial fixed interest rate period of 7 years.
Note: Examples will differ depending on the caps, i.e., 1/5 vs. 2/6. The hypothetical payment schedule will illustrate the maximum increases over the shortest possible time frame.
For additional information see 15 USC 1601, 12 CFR 226.18 at: https://www.govinfo.gov/content/pkg/CFR-2018-title12-vol3/xml/CFR-2018-title12-vol3-part226.xml#seqnum226.18