In the current interest rate environment, we have noticed a resurgence of a loan feature which has been dormant for most of the past decade – temporary buydowns. A buydown temporarily reduces the loan interest rate, typically for only the two-to-three-year period following consummation, with the largest difference in the first year and adjusting slowly back up to the loan’s interest rate. This is called a “Step Rate” loan as the rate adjusts on a periodic basis but not on the basis of adjustments to any underlying interest rate like an adjustable-rate mortgage would. As a result of the resurgence, we have received many questions about how these buydowns should display on the disclosures.

How the Buydown is Displayed Depends on Who Pays for it

The main area of confusion for buydowns involves understanding when to expect to see the effect of the buydown in disclosures related to the payment and rate, specifically on the Loan Estimate and Closing Disclosure.

The TRID rule states that disclosures must reflect the terms of the legal agreement between the parties. It is for this reason that you will see a difference in how the payments and rate are disclosed based on who is paying the buydown subsidy at closing. When the buydown subsidy is paid by the borrower, the terms of the legal agreement between the lender and the borrower are that the buydown subsidy will be made available to reduce the regularly scheduled payments. In this case, the LE and CD will show the full effects of the buydown.

In a scenario where someone other than the borrower, e.g., the Lender or the Seller, or any other party, pays for the buydown, the terms of the Temporary Buydown Agreement must include a provision which states that, if for whatever reason the subsidy is not available for any payment, the borrower is responsible for the full payment of principal and interest (as if there were no buydown). Because of this provision (which is required under FNMA/FHLMC guidelines), when someone other than the borrower pays for the buydown, the payment and rate are not disclosed showing the effect of the buydown. Because of the possibility that the terms of the agreement between the parties would make the borrower responsible for the full payment amount at the actual interest rate, the worst-case scenario must be disclosed to the borrower on the LE and CD. In this case, the disclosures will ignore the effect of any buydown.

Showing a Buydown on the LE/CD

There are three areas where one may see an impact from a temporary buydown: the Loan Terms section, the Projected Payments, and the AIR Table.

When there is a temporary buydown paid by the borrower, the Loan Terms will reflect the fact that the payment and rate may change after consummation. Both the Payment Amount and Interest Rate will show a “YES” indicating these may change, with associated bullets to explain the changes that may occur. The rate disclosures will indicate that the rate may change with the frequency as indicated by the buydown, typically on an annual basis but it may also occur over a shorter period such as 6 months, and the point at which the highest rate will be achieved and what that rate would be, which typically would be the loan’s actual interest rate from which the rate was bought down.

A temporary buydown paid by anyone other than the borrower will show no difference in the Loan Terms section, disclosing no changes to the payment or rate after consummation.

For a fixed loan with a bought down rate and subsidy paid by the borrower, the Projected Payments will show the effects of the buydown on the adjustment period as set in the buydown, e.g., showing a payment adjustment on an annual basis as a result of the step rate, until the loan’s interest rate is achieved.

When a temporary buydown is paid by anyone other than the borrower there will be no change shown in the Projected Payments.

When a temporary buydown is paid by the borrower, the effects of the buydown must be disclosed in an AIR Table on the LE and CD. The AIR Table will indicate the number of adjustments that will occur during the temporary buydown, the starting rate and the minimum and maximum rates, as well as the frequency of the change in the rates and difference between each adjustment. If the subsidy is paid by anyone other than the borrower, the AIR table will not appear to show a buydown.

Related Content:

• CFPB Issues Circular Regarding Data Protection Security (9/21/2022)

• US House Passes The Secure Notarization Act (8/10/2022)

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The Consumer Financial Protection Bureau (“CFPB”) published Circular 2022-04 on August 11, 2022 which confirmed that financial institutions may violate the prohibition on unfair acts or practices under the Consumer Financial Protection Act (“CFPA”) by having insufficient data protection or information security.

“Financial firms that cut corners on data security put their customers at risk of identity theft, fraud, and abuse,” said CFPB Director Rohit Chopra. “While many nonbank companies and financial technology providers have not been subject to careful oversight over their data security, they risk legal liability when they fail to take common-sense steps to protect personal financial data.”

The circular provides that under the CFPA an unfair act or practice would be one that (1) causes or is likely to cause substantial injury to consumers, (2) is not reasonably avoidable by consumers, and (3) is not outweighed by countervailing benefits to consumers or competition. Additionally, an actual injury is not required to prove an unfair act or practice under the CFPA. Examples of data security practices which are widely used to protect consumer data are provided in the Circular.

Further, three examples of data security measures which are indicated to reduce the likelihood of a violation of unfair act or practices include multi-factor authentication, password management policies and practices, and timely software updates. Not using these types of security measures may indicate a financial institution has inadequate data protection.

Circulars are a new tool being used by the CFPB to provide supervisory guidance on individual topics. For more information on this type of guidance, see DocMagic’s prior compliance article here.

Related Content:

• US House Passes The Secure Notarization Act (8/10/2022)

• FEDERAL AGENCIES ISSUE UPDATED INTERAGENCY FLOOD INSURANCE Q&AS (8/5/2022)

• DocMagic makes loan documents ADA accessible (7/20/22)

A well-known industry expert in mortgage banking compliance and law, Ales tackles some of the most challenging compliance issues facing the industry with loan documents and eClosings. In the last 12 months, he has successfully taken on multiple impactful company and industry-based projects, which the judges at HousingWire examined closely and determined Ales’ most recent contributions.

“It is refreshing to see that my efforts on the compliance and legal side of mortgage software are having an operational impact,” stated Ales. “We are constantly doing outstanding things at DocMagic to move the industry forward. Both my team and I are honored to be recognized.”

Winners of HW’s Insiders accolade represent a wide range of occupations within the housing economy, from lending and real estate to fintech. According to HW, Insiders are the internal professionals that their companies turn to with their most important or challenging behind-the-scenes projects, and their contributions and hard work lead to superior results.

Among some of Ales’ key contributions were his assistance in developing DocMagic’s e-Eligibility solution, eDecision™. He also added functionality to DocMagic’s loan generation solution that supports the Americans with Disabilities Act (ADA) for the visually impaired to read mortgage loan documents. In addition, Ales worked on the Affordable Housing Initiative (AHIT) for Freddie Mac that helped create first-ever instruments to include subordinate liens.

And always at the top of Ales’ list of business-critical compliance initiatives is to move the mortgage industry toward going paperless. Looking ahead, Ales seeks to add compliance guidelines and functionality for use by Limited English Proficiency (LEP) borrowers to assist them in better interpreting loan documents.

“Each year, the HW Insiders award represents a versatile group of unsung heroes who are vital to the smooth functioning of their organizations,” HousingWire Editor in Chief Sarah Wheeler said. “While they may operate behind the scenes, the tireless work of these honorees has a huge impact on the larger housing ecosystem. We are honored to recognize this impressive group of industry experts.”

The complete list of HousingWire 2022 Insiders winners can be found at https://www.housingwire.com/articles/361547/.

Related Content:

• NMP Selects DocMagic Chief eServices Executive Brian D. Pannell for 2022 Most Connected Mortgage Professionals Award (7/25/2022)

• Mortgage Banker Magazine taps DocMagic CEO with Legends of Lending Award (7/14/2022) 

• PROGRESS in Lending Names DocMagic’s Director of Client Services to 2022 Most Powerful Women in Fintech List (5/19/2022)