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Thursday, September 25, 2014

FHA Elimination of Prepayment Penalties and Changes to ARMs


QUESTION
I heard that there are some impending changes concerning FHA loans involving prepayment penalties and Adjustable Rate Mortgages.  Would you please clarify?

ANSWER
On August 26, 2014, FHA announced changes under 24 CFR 203 involving (1) the elimination of “post-payment” interest aka “prepayment penalties” on FHA-insured loans, and (2) notice requirements concerning interest rate changes on FHA-insured Adjustable Rate Mortgages (ARM). 

The announcements are summarized as follows:

Effective with loans that close on or after January 21, 2015, lenders will be prohibited from collecting post-payment interest on all FHA-insured Single Family mortgage products. Lenders will be required to accept a borrower’s prepayment “at any time and in any amount” without charge to the borrower for the prepayment.  Lenders will also be prohibited from requiring 30 days advance notice of any prepayment by the borrower and must calculate prepayment interest solely on the unpaid principal balance as of the date the borrower prepays the loan.

Currently, under FHA’s monthly interest accrual amortization method, FHA-approved lenders may generally charge interest through the end of the month in which the mortgage is prepaid, although other provisions and restrictions may apply.  The new requirements also include provisions that impact FHA-insured loans that close before January 21, 2015.  For example, lenders are required to notify borrowers of the privilege “to prepay the mortgage in whole or in part at any time and in any amount” without being charged to do so.

Effective for FHA-insured Adjustable Rate Mortgages (ARMs) that close on or after January 10, 2015, lenders must notify borrowers of impending monthly payment adjustments no later than 60 days before the scheduled change in monthly payments, but no earlier than 120 days before the scheduled monthly payment adjustments.  In addition, monthly payments must be adjusted based on the corresponding index value at the earliest 45 days prior to the scheduled change – the look back period.

FHA currently requires a 30-day look back period for monthly payment adjustments and a 25 day-advance notice to the consumer regarding the impending change in monthly payments.  This expanded notification and look back requirement is expected to provide greater protections to the consumer who will have additional time to respond to impending monthly payment adjustments on ARM loans. 

[Federal Register, 79/165, 8-26-14; 24 CFR Part 203, FHA: Handling Prepayments: Eliminating Post-Payment Interest Charges, Final Rule; FHA: Adjustable Rate Mortgage Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages]

Wendy Bernard
Director/Legal & Regulatory Compliance
Lenders Compliance Group