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

Notice of Action Taken

QUESTION

We are a mortgage broker. Recently, we submitted an application to two separate lenders. One of the lenders originated the loan, but the other one did not send out the notice of action taken to our borrower. Isn’t the other lender required to send that notice?

ANSWER

When an application is made on behalf of an applicant to more than one creditor, such as when a mortgage broker submits an application to more than one creditor, if the applicant expressly accepts or uses credit offered by one of the creditors, notification of action taken by any of the other creditors is not required.

If no credit is offered or if the applicant does not expressly accept or use any credit offered, each creditor taking adverse action must comply with the ECOA notification requirements, directly or through a third party, such as a mortgage broker.

Any notice given by a third party must disclose the identity of each creditor on whose behalf the notice is given. [12 CFR § 202.9(g)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Consumer Inquiries about Interest Rates

QUESTION

We have loan officers that speak to consumers by phone or face-to-face and are constantly being asked the interest rate by these consumers. But we do not know if they are supposed to be quoting just the interest rate or also the Annual Percentage Rate (APR). Should we provide the interest rate in terms of the APR?

ANSWER

If a creditor responds orally to a consumer’s inquiry about the cost of credit, such as by phone or face-to-face, only the APR may be stated, with the exception that the creditor may, but is not required to, state the simple annual rate or periodic rate if the rate is applied to an unpaid balance.

However, if the APR cannot be determined in advance, the APR for a sample transaction must be stated, and other cost information for the consumer’s specific transaction may be given.

[12 CFR § 226.26(b)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Transferring a Loan Officer’s Pipeline

QUESTION 

Our company (“Company B”) offered a loan officer a position in our company. He had worked for a competitor (“Company A”). The loan officer has loans in his pipeline at this former employer and wants to bring them to our company. While he is licensed in the states where the loans in the pipeline were originated, it takes several days to transfer the loan officer’s status in the NMLSR to a new sponsored entity. During this time that the transfer of sponsorship is pending, how would you suggest we handle the pipeline loans?

ANSWER 

There are many issues to consider in this scenario. 

Make sure the affected borrowers are notified and have consented to the proposed “transfer” of their loan files - prior to the pipeline being moved. Failure to do so would be a violation of many regulations. A record of an affirmative withdrawal from Company A to Company B should be established in order to protect the company as well as the loan officer.

In this situation, the loans in the pipeline would technically be treated as “withdrawn” from Company A and would need to be set up as new applications by Company B. This would require the GFE, TIL and all other required disclosures to be issued within three business days.  No personal information may be transferred from Company A to Company B without the borrower’s written consent; to do so would violate federal and state privacy laws.

Another area of consideration is the stage of processing of the individual applications in the pipeline. Regulators would not look favorably on any situations where the consumer was negatively impacted by delays in closing or any other issues resulting from the “transfer” (i.e., the borrower having to re-lock at a higher rate or having to pay duplicate fees). Consumer complaints arising out of this situation could result in restitution, civil monetary penalties, and formal state banking department administrative orders, depending on the extent of consumer harm.

Lastly, Company B must make sure that the loan officer does not engage in unlicensed activity before being sponsored by Company B. Any activity that meets the definition of Mortgage Loan Originator by the incoming loan officer, prior to sponsorship, would be deemed “unlicensed activity.”

While these issues exist today, in order to provide uninterrupted service to the consumer, regulators and industry are working together to come up with solutions that would allow expeditiously transferring loan officers’ NMLSR licensing credentials.

At this year’s recently held conference of the American Association of Residential Mortgage Regulators, the NMLS Ombudsman, Robert Niemi, Deputy Superintendent for Consumer Finance, Ohio Division of Financial Institutions, posted an agenda that had some related topics, including the process for approving sponsorships of loan officers, uniform testing standards for all loan officers (including depository registrants), aligning HMDA and the Mortgage Call Report (MCR) Data Requests, and a variety of sponsorship Best Practices.

These Best Practices include timing of approving sponsorship of a loan officer who is in transition between employers on the same day, the effect on the license between sponsorships, and the concept that the loan officer could be kept in an active status so that consumers may continue to be served - provided that there are no pending material issues with the license. 

Alan Cicchetti

Director/Agency Relations

Lenders Compliance Group