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
