QUESTION
Our federal regulator recently advised us to issue a payment shock notice to our borrowers. Actually, we never even knew such a notice existed. What is a payment shock notice? What are the format and procedures?
ANSWER
The Payment Shock Notice is a voluntary notice that a lender or servicer provides to a borrower in order to alert the borrower about the potential increase in the property taxes for a home.
The disclosure is often used in new construction financing. For instance, with a newly constructed home the property taxes for the first year may be based on the unimproved value or only partially on the improved value. If this is the case, there can be a substantial increase in the property taxes once the taxes are fully based on the improved value.
There are Best Practice solutions associated with the Payment Shock Notice, as follows:
- Notify borrowers in advance and provide an opportunity to make voluntary payments ahead of schedule to avoid payment shock.
- Offer consumers extended repayment plans, even beyond those required under the Real Estate Settlement Procedures Act (RESPA), to make up substantial shortages associated with payment shock. [63 Federal Register (1998) 3214, 3233, 3237-3238]
Many of our clients, both lenders and servicers, implement the foregoing Best Practices – even without a regulatory recommendation to do so.
The Payment Shock Notice can be a relatively simple form, which was adopted as a public guidance document. [See 63 Federal Register (1998) 3214, 3237-3238, Appendix G]
The notice should contain some basic elements, such as advising the borrower of the potential for a substantial increase in bills paid out of the escrow or impound account because of property taxes (or another applicable item) after the first year, as well as a statement that the borrower could elect to voluntarily make higher payments into the account during the first year to help offset the payment shock.
The rule of thumb for a timeline to issue the Payment Shock Notice would be when a lender or servicer anticipates a substantial increase in the bills paid out of the escrow or impound account after the first year. It could be delivered with, or separate from, an initial escrow account statement.
With respect to the method of delivery, although the Payment Shock Notice is a Best Practice and not specifically required by RESPA, nor is it a mandate under RESPA’s implementing regulation, Regulation X, there is general recognition in Regulation X that ESIGN (Electronic Signatures in Global and National Commerce Act) can be used for RESPA-related documents, as Regulation X provides that ESIGN applies to Regulation X.
The Payment Shock Notice is a type of notice covered by ESIGN. Consequently, the notice may be provided by facsimile, email or other electronic means if the consumer consents and the other requirements of ESIGN are met. [24 CFR § 3500-23]
Jonathan Foxx
Managing Director
Lenders Compliance Group
