South Carolina Code of Regulations
Chapter 15 - STATE BOARD OF FINANCIAL INSTITUTIONS CONSUMER FINANCE DIVISION
Article 1 - BANKING, COMMERCIAL PAPER AND FINANCE
Section 15-31 - Graduated-payment and Reverse-annuity Mortgages

Universal Citation: SC Code Regs 15-31

Current through Register Vol. 48, No. 9, September 27, 2024

State chartered savings and loan associations are authorized to offer graduated-payment mortgages and reverse-annuity mortgages in accordance with the provisions of Subparagraph (a)(8) of Section 545.6-1 of the Federal Home Loan Bank Board Regulation Regulation 545 adopted by the Board on December 14, 1978, effective January 1, 1979.

The text of the Federal Home Loan Bank Board Regulation is as follows:

1. Section 545.6-1 is amended by adding a new subparagraph (a)(8), as follows:

Section 545.6-1 Lending powers.
(a) Homes or combinations of homes and business property.
(8) Real-estate loans with pledged savings accounts as additional security.

Loans may be made under paragraphs

(a)(4) and (5) of this section in excess of the maximum dollar, percentage-of-value, or percentage-of-purchase-price limitations thereof, with such excess secured by savings accounts, subject to the following restrictions:

(i) The loan shall not exceed the lesser of purchase price or value of the real estate;

(ii) The savings account shall consist only of funds belonging to the borrower, members of his family, or his employer;

(iii) The association shall fully disclose to the prospective borrower the difference (including interest, private-mortgage-insurance costs, and equity interest) between a loan secured by real estate and savings and a loan secured by real estate alone; and

(iv) The loan shall comply with section 545.6-2 as it relates to graduated payment mortgages.

2. The text of Section 545.6-2 is deleted and a new text added, as follows:

Section 545.6-2 Alternative mortgage instruments.
(a) General.

Associations making loans pursuant to Section 545.6-1(a) of this Part may use the alternative mortgage instruments described in this section, which allow certain payment and other provisions different from those required elsewhere in this Subchapter. All prospective borrowers offered such instruments must also be offered a standard instrument, as described in this section. An association using an alternative mortgage instrument shall obtain and retain in the loan application file a certification signed by the prospective borrower indicating that s/he has received the disclosure materials specified in this section before electing to take the alternative mortgage instrument.

(b) Graduated-payment mortgage.
(1) Description. This instrument's scheduled payments begin at a level lower than that of a comparable standard mortgage instrument, and gradually rise to a predetermined point, after which they remain constant; the graduation period and rate of increase and the interest rate are fixed at loan origination.

(2) Graduation period, rate, and frequency.

Graduation periods are limited to ten years, with maximum rates of increase in mortgage payments as follows:

(i) 7.5 percent annually for a graduation period of five or fewer years;

(ii) 6.5 percent annually for six years;

(iii) 5.5 percent annually for seven years;

(iv) 4.5 percent annually for eight years;

(v) 3.5 percent annually for nine years; and

(vi) 3 percent annually for ten years.

Payment amounts may not be changed more than once a year, and the first change may not occur less than one year after the date of the first regular loan payment.

(3) Borrower option to convert.

Borrowers under this plan shall be given a right to convert, at a time chosen by the borrower, to a standard mortgage instrument, provided that the borrower is then eligible for such instrument under the association's normal underwriting standards. No assessment of penalties or fees shall be made if the borrower chooses to convert at the interest rate and outstanding maturity of the graduated-payment mortgage.

(4) Interest capitalization resulting from any negative amortization of these instruments does not deny the loan first-lien status under Section 541.9 of this Subchapter; such debt is considered to be contracted for at the time of loan origination.

(5) Loan-to-value limitations under Section 545.6-1(a) of this Part shall be complied with throughout the loan terms.

(6) Disclosure.

Each prospective borrower shall receive materials explaining in reasonably simple terms the graduated payment mortgage offered and a comparable standard mortgage instrument (with a fixed interest rate, level payments, and full amortization). Such materials shall include:

(i) a side-by-side comparison of differing interest rates and other terms;

(ii) payment schedules for both types of instruments and the total payment in dollars over the full term of each loan;

(iii) a description of the conversion option; and

(iv) a statement prominently displayed, that borrowers have the option to elect a standard mortgage instrument.

(c) Variable-rate mortgage.
(1) Description. The interest rate of this instrument is tied to a reference index; thus, actual future payments are not known at the time of loan origination. Except as provided in subparagraph (c)(6), interest rates are subject to adjustment every year.

(2) Restrictions.
(1) Geographic limitation. A federal association may make, purchase, or participate in variable rate mortgage loans on real estate located in its home State if the Board has determined that such associations require authority to invest in such loans to maintain competitive balance with other financial institutions lending in such State. Associations authorized to make these investments in their home States may also invest in them in other States where the Board has made similar determinations.
(a) The facts which the Board will take into account in determining a need for competitive balance include: the number of financial institutions offering such loans, the asset size and mortgage market share of such institutions, the dollar amounts of such loans originated in the State, the rate of growth of such loans, or a finding of economic or other factors which may necessitate authorization of such loans. Qualification will be made on a case-by-case basis; in some States a single factor may be determinative, while in others a combination of factors may affect the Board's decision.
(ii) Percentage-of-loans limitation. Not more than 50% of an association's home-mortgage loans by dollar amount made or purchased in any calendar year shall be in variable rate mortgages.

(iii) "Sunset" provision. Authority to invest in variable rate mortgages under this section will cease as of December 31, 1982, unless renewed or rescinded at an earlier date by the Board.

(3) Index.

Associations shall use the latest cost-of-funds index published by the Federal Home Loan Bank in the district where the property securing the loan is located.

(4) Interest-rate adjustments.
(i) Frequency; grace period. Interest-rate adjustments (and loan payment changes resulting from them) may not be made more than once a year, and the first adjustment may not occur less than one year after the date of the first regular monthly payment.

(ii) Calculation and timing of adjustments. The association shall specify the following in the mortgage contract:
(a) the month when rate review will take place, basing the new calculation on the most recent index information then available;

(b) the date when notification of any adjustment will made to the borrower; and

(c) the annual monthly payment date when any such adjustment shall take effect.

(iii) Minimum adjustments. The smallest adjustment (up or down) shall be one tenth percent (0.10 percent).

(iv) Maximum adjustments. The maximum amount of rate adjustment (up or down) shall be one-half of one percent (0.5 percent) a year, with a maximum net increase of 2.5 percent over the life of the loan. Downward adjustments must be made, but increases are at the lender's option. Changes in the index rate which are not taken (either at lender's option in the case of increases or because they are too small or too large, i.e., less than 0.10 or over 0.5 percent in a given year) may be accumulated by the lender in the case of increases, and must be accumulated in the case of decreases, and taken at a later time (but never more than 0.5 percent per year), or used to offset other changes.

(v) Actions relating to rate increases. Upon notification of an increase, the borrower shall have the following options:
(a) Not respond to the notice; payments will be adjusted upward to reflect higher interest rate;

(b) Request that loan maturity be extended up to a maximum of one-third of the original loan term; or

(c) Within 60 days of such notification, prepay the loan, either in full or in part, without penalty if the new rate is above the initial loan rate.

(vi) Actions relating to rate decreases. Rate decreases shall be applied first to reduction of extended loan maturity (but not below original maturity) and then to reduction of monthly payments; however, loan terms shall not be reduced to such an extent that monthly payments would be increased.

(vii) Notification requirements. The borrower shall receive written notification of any rate adjustment at least one month before the date the new rate will take effect. The notification shall include:
(a) current and new rates;

(b) old and new index rates;

(c) accumulated but unused rate changes;

(d) current monthly payment and remaining maturity;

(e) for increases, a description of borrower's options, including the new payment and maturity if the loan is extended to the maximum; and

(f) for decreases, a description of the way the decrease will be applied.

(5) Disclosure.

Each prospective borrower shall receive materials explaining in reasonably simple terms the type of variable rate mortgage offered and a comparable standard mortgage instrument (with a fixed interest rate, level payments, and full amortization). Such materials shall include:

(i) a side-by-side comparison of differing interest rates and other terms;

(ii) payment schedules for both types of instruments, including a "worst case" schedule for the variable rate mortgage showing every maximum increase at the time it could first occur, the highest possible payment during the loan term, and the total payment in dollars over the full term of each loan (with a notation stating that the total payment for the VRM would be greater in the event of loan extension);

(iii) information regarding the index used;

(iv) a description of borrower's options in the event of an interest-rate increase;

(v) a statement, prominently displayed, that borrowers have the option to elect a standard mortgage instrument; and

(vi) a statement that if the prospective borrower has questions regarding the disclosures, s/he may contact (title, telephone number, and address of officer) at the Federal Home Loan Bank of (________).

(6) Multi-year variable rate mortgage.

Variable rate mortgages complying with all of the requirements of this paragraph (c) may be made with contractual adjustment periods exceeding one year, in multiples of twelve months. Index-rate changes are accumulated over the period, but the increase or decrease made at adjustment time may not exceed the specified maximum annual percent multiplied by the number of years in the adjustment period. Maximum increase is 2.5 percent over the life of the loan; there is no maximum decrease. The minimum period for prepayment without penalty shall be 120 days after notification for these instruments.

(d) Reverse-annuity mortgage.
(1) Description. This instrument provides periodic payments to homeowners based on accumulated equity; the payments are made directly by the lender or through purchase of an annuity from an insurance company. The loan becomes due either upon a specific date or when a specified event occurs, such as sale of the property or death of the borrower.

(2) Application. Proposed mortgage plans shall be submitted to the Board for review. If objection is not taken within 60 calendar days from receipt of the proposed plan, the association may proceed to offer mortgages pursuant to such plan.

(3) Requirements.
(i) Loan applicants shall not be bound for seven days after the loan commitment is made.

(ii) Associations shall obtain a statement signed by the borrower acknowledging disclosure of all contractual contingencies which could force a sale of the home.

(iii) If the mortgage has a fixed term, refinancing shall be made available at market rates current at the time payment is due.

(iv) The instrument shall provide for prepayment without penalty at any time during the loan term.

(v) If payments are to be made to the borrower through purchase of an annuity, the association shall use an insurance company authorized to engage in such business, and supervised, by the State in which it is incorporated.

(vi) Interest rates shall be fixed at loan origination; variable rate mortgages are prohibited.

(4) Disclosure. Each prospective borrower shall receive written materials explaining in reasonably simple terms the type of mortgage being offered and its specific terms, including:
(i) schedule and explanation of payments to the borrower and whether property taxes and insurance are to be deducted;

(ii) schedule of outstanding debt over time;

(iii) repayment date if a fixed-term loan, or event (such as sale of home or death of one or more mortgagors) which causes loan to become due;

(iv) method of repayment, and schedule if any;

(v) all contractual contingencies, including lack of home maintenance and other default provisions, which may result in forced sale of the home;

(vi) interest rate, annual percentage rate, and total interest payable on the loan;

(vii) effective interest rate and interest earned or expected to be earned on purchased annuities, based on standard mortality tables;

(viii) name and address of insurance company issuing a purchased annuity;

(ix) initial loan fees and charges;

(x) description of prepayment and refinancing features; and

(xi) inclusion of a statement that such mortgages have tax and estate-planning consequences and may affect levels of, or eligibility for, certain government benefits, grants, or pensions, and that applicants are advised to explore these matters with appropriate authorities.

3. Section 555.4 is deleted.

Statutory Authority: 1976 Code Section 34-1-110

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