DocMagic is updating our handling of disclosure of loans with a buydown subsidy paid by a combination of parties including the borrower. DocMagic currently does not allow processing of these types of loan transactions by use of a fatal audit. DocMagic is making an update to provide for a revised disclosure by default as well as offering other options that lenders may choose to utilize based on their own interpretation of the requirements of Regulation Z and the specific terms of their loan transaction documents.
Regulation Z requires disclosure of a consumer-paid buydown in its disclosures under 12 C.F.R. § 1026.17(c)(1) and its commentary. In the case of a split-payment buydown subsidy, including a consumer-paid portion, the disclosures should reflect the effect of the buydown in the disclosures to the extent of the consumer-paid proportion. The finance charge should reflect the same proportion, including the borrower paid subsidy amount in the finance charge, and reflect the multiple payment levels matching that proportion in a composite APR. Non-consumer paid buydowns and their portions are only to reflect in the payments and APR if they also reflect in the credit contract (which portion does not reflect in the credit contract under standard DSI plans and DocMagic calculations in line with investor loan guideline requirements, e.g., Fannie Mae and Freddie Mac).
In addition to the update to standard calculations and display of disclosures for the Loan Estimate and Closing Disclosure under Regulation Z, DocMagic will also be offering additional options that our clients may elect to use that modify the disclosure of split-payment buydown subsidies. The other two options will be to ignore the full impact of the buydown subsidy on the amortized payments and composite APR no matter who are the contributors to the buydown subsidy or to reflect the full impact of the buydown subsidy on the amortized payments and composite APR when payment of the buydown subsidy is split with the borrower. Both of these options would differ from standard calculations and disclosure by not using the proportion of the borrower-paid buydown subsidy to impact amortized payments. With all options, any borrower-paid buydown subsidy that is collected as part of the closing costs will be considered as a prepaid finance charge.
The default handling, without any option that uses the borrower-paid proportion, will result in noticeable differences to the disclosure on the LE and CD from the other options. Rates may not be reflected as rounded to the 1/8th percent as is typical with most loan transactions since the amount that the rate is impacted will be directly related to the proportion of the subsidy paid by the borrower. If that proportion is not rounded to the 1/8th percent, then the impact to the interest rate will also not be disclosed as rounded to the 1/8th percent. Thus, for example, if the borrower-paid buydown subsidy at closing reflects 18% of the overall subsidy, for a 1% buydown for 1 year, the initial interest rate would be reduced only by 0.18% rather than 1%. The multiple level of payments will reflect the reduction in payment according to the same proportional percentage. In this case, the composite APR would effectively reflect an offset finance charge impact from the borrower-paid buydown subsidy at closing being treated as a prepaid finance charge while simultaneously reflecting a reduction in the interest collected from amortized payments.
The options being provided to clients to disclose split-paid buydown subsidies modify the disclosures and the impact on the APR by simply ignoring the effect of a buydown on the amortized payments or showing the full effect of the buydown in the amortized payments. This will result in more familiar disclosures on the LE and CD with interest rates being bought down by whole or rounded percentage values. Users of these options should review Regulation Z’s disclosure requirements for buydowns and the requirements of their investor or other applicable guidelines to ensure compliance before applying the options, as well as to ensure appropriate conformity to the disclosure of the rate and payments in the credit contract or note.
Please note that in addition to the payments and rate disclosed on the LE and CD that will be impacted by these changes and options, other related disclosures will also be impacted, such as the In 5 Years amounts, Total of Payments, etc.
These updates with available options are expected to be available in DocMagic production by the end of March. Please monitor our Compliance Updates page for specific timing. The fatal audit disallowing split-payment buydown subsidies will also be removed to allow processing of these types of loan transactions at that time.
