Alternative Mortgage Instruments

PURPOSE: This rule provides for certain conditions, limitations, provisions, disclosures and notification requirements placed upon associations when making alternate mortgage instrument loans. Editor’s Note: Copies of all referenced federal regulations are available at a cost established by state law to any interested party at the Division of Finance, Room 630, 301 West High Street, Jefferson City, Missouri or the Office of the Secretary of State at a cost established by state law. (1) General. Associations originating, investing in, selling, purchasing, participating or otherwise dealing in residential real estate loans secured by borrower-occupied property may use the alternative mortgage instruments described in this rule, including their use in connection with the assumption or refinancing of loans authorized by other rules of this chapter, subject to the conditions set out as follows. An association using an alternative mortgage instrument described in this rule shall obtain and retain in the loan application file a certificate signed by the prospective borrower indicating that s/he has received the disclosure materials specified in this rule before electing to take the alternative mortgage instrument. An association using an alternative mortgage instrument described in this rule may not impose a penalty on any prepayment made within ninety (90) days following notice of an adjustment. In addition, in accordance with section 408.036, RSMo, no prepayment penalty shall be charged or exacted by an association when the full principal balance of the residential real estate loan is paid after five (5) years from the origination date and prior to maturity. In no event shall any prepayment penalty on a residential real estate loan exceed two percent (2%) of the balance at the time of prepayment. (2) Adjustable Mortgage Loans. An adjustable mortgage loan is a loan that permits adjustment of the interest rate, the payment amount, the outstanding principal balance, the loan term or a combination of these methods. An association is authorized to originate, invest in, sell, purchase, participate or otherwise deal in adjustable mortgage loans subject to the following limitations and disclosures: (A) Adjustments to the interest rate shall correspond directly to the movement of an interest-rate index or of a national or regional index that measures the rate of inflation or the rate of change in consumer disposable income, which index is readily available to and verifiable by the borrower and is beyond the control of the association. An association also may increase the interest rate pursuant to a formula or schedule that specifies the amount of the increase, the time at which it may be made and which is set forth in the loan contract. An association may decrease the interest rate at any time; (B) Adjustments to the payment and the loan balance that do not reflect an interest rate adjustment may be made if—1) the adjustments reflect a change in a national or regional index that measures the rate of inflation or the rate of change in consumer disposable income, is readily available to and verifiable by the borrower and is beyond the control of the association, 2) in the case of a payment adjustment, the adjustment reflects a change in the loan balance or is made pursuant to a formula or to a schedule specifying the percentage or dollar change in the payment as set forth in the loan contract, or 3) in the case of an open-end line-of-credit loan, the adjustment reflects an advance taken by the borrower under the line-of-credit and is permitted by the loan contract; (C) Any combination of indices or a moving average of index values may be used as an index, and an association may use more than one (1) index during the term of a loan, if set forth in the loan contract; (D) At least thirty (30) but not more than one hundred twenty (120) days prior to an adjustment and at least ninety (90) but not more than one hundred twenty (120) days prior to the expected maturity of a non- or partially-amortized loan, an association shall provide the borrower with notice of the adjustment or of maturity. However, where the loan contract provides that changes in the interest rate shall occur more frequently than changes in the payment, the association need not notify the borrower of changes in the rate, nor of changes in the loan balance or term resulting from a rate change, until notice of a payment adjustment is given. (For purposes of notification, a payment adjustment is considered to occur as of the date of the interestrate change immediately preceding the due date of the adjusted payment.) In addition, where the loan contract sets out a schedule of payment adjustments, notice need not be given of payment changes made pursuant to that schedule. In the case of an open-end lineof-credit loan, notice of an adjustment to the payment or the balance need not be given if the adjustment reflects advances taken by the borrower under the line-of-credit and notice of a change in the interest rate permitted by the loan contract (and any resulting change in the payment) need not be given; (E) The loan term may be adjusted only to reflect a change in the interest rate, the payment or the loan balance. A loan contract may provide an association with the right to call the loan due and payable either after a specified number of years has elapsed following closing or upon the occurrence of a specified event external to the loan; and (F) Not later than three (3) business days following receipt of a written application, an association shall disclose to each applicant the following: 1. The initial interest rate, if known, or the manner in which the initial interest rate will be established; 2. The amount of the initial payment, if known, and an explanation of how the amount of the payment is determined by reference to the initial loan balance, the interest rate and the term over which the balance is scheduled to be repaid; 3. A full explanation of how the adjustments may be made, including identification of the index(es) to be used and how index values may be obtained by the borrower and how the adjustment of one (1) item may affect the others; and 4. What information will be contained in each notice of an adjustment. (3) Roll-Over Mortgage Loans. A roll-over mortgage loan is a loan that provides for interest rate adjustments at regular intervals with any interest rate changes being implemented through changes in the payment amount or term of the loan. Roll-over mortgages may be either short- or long-term notes secured by long-term mortgages. A roll-over mortgage loan differs from an adjustable mortgage loan in that an association is not required to use an interest-rate index that is readily available to and verifiable by the borrower and is beyond the control of the association as is required in subsection (2)(A) of this rule. Associations are authorized to originate, invest in, sell, purchase, participate or otherwise deal in roll-over mortgage loans, provided, however, that roll-over mortgage loans on owner-occupied single-family dwellings and homes shall be subject to the following requirements: (A) The minimum term of the loan shall be six (6) months, during which time the interest rate and payments may be adjusted; (B) Payment adjustments shall be contemporaneous with any interest-rate adjustments in an amount sufficient to amortize the loan over its remaining term; (C) The borrower of a roll-over loan shall be given an option to renew the loan; (D) Not later than three (3) business days following receipt of an application, an applicant, under this section, shall be given materials explaining the basic terms of the rollover mortgage offered to them, a description of the options available to the borrower in the event of an interest-rate increase and the formula or schedule to be used by the association to determine interest-rate adjustments. The association shall obtain a signed statement from the borrower acknowledging receipt of these materials and retain this statement in the loan file; and (E) All notices of adjustment shall be provided to the borrower at least thirty (30) days before the adjustment becomes effective. (4) In addition to the other required disclosures, an association making adjustable rate mortgage loans under this rule shall provide a clear and concise description of the nature of adjustable rate mortgage loans to each applicant for this loan as is required in applicable federal regulations. The booklet entitled Consumer Handbook on Adjustable Rate Mortgages, published by the Federal Reserve Board or other appropriate federal agency, shall constitute a disclosure in compliance with this section. This disclosure is not required in connection with the extension of consumer credit even if it is secured by a home or in connection with any other loan if the home is not the primary security for the loan. (5) The disclosure provisions of this regulation shall apply only to alternative mortgage instruments used in connection with residential real estate loans secured by borroweroccupied property. Nothing in this regulation prevents the use of an adjustable-rate loan in connection with other real estate loans, commercial loans, consumer loans or other authorized loans. AUTHORITY: sections 369.144, 369.229, 369.249 and 369.299, RSMo 1994.* This rule originally filed as 4 CSR 260-8.072. This rule previously filed as 4 CSR 140-20.072. Original rule filed Nov. 4, 1986, effective Jan. 30, 1987. Changed to 4 CSR 14020.072, effective July 6, 1994. Amended: Filed Nov. 8, 1994, effective March 30, 1995. Moved to 20 CSR 1140-20.072, effective Aug. 28, 2006. *Original authority: 369.144, RSMo 1971, amended 1982, 1983, 1984, 1989, 1994; 369.229, RSMo 1971, amended 1983, 1994; and 369.249 and 369.299, RSMo 1971, amended 1994.