FHA Eliminates Post-Payment Interest Charges

QUESTION

Is it true that FHA modified the manner in which interest is to be calculated when a FHA loan is paid in full by a borrower, allowing mortgagees to charge interest only through the date a mortgage is paid and not beyond that?

ANSWER  

Yes. The new rule, called “Handling Prepayments: Eliminating Post-Payment Interest Charges”, applies for FHA-insured mortgages closed on or after January 21, 2015. For FHA loans that close on or after January 21, 2015 mortgagees may only charge interest through the date the mortgage is paid off; that is, mortgagees will be prohibited from charging interest beyond the date the mortgage is paid in full. Previously, FHA charged interest for the entire month at the beginning of the month. Therefore, if a borrower paid off their FHA mortgage at the beginning of the month they still paid interest for the entire month. 

Additionally, for all FHA mortgages that close on or after January 21, 2015 a borrower will not be subject to a prepayment penalty at any time or in any amount. The rule explicitly prohibits lenders from charging borrowers post settlement interest, which the Consumer Financial Protection Bureau broadly defines as a "prepayment penalty" for all FHA single-family mortgage products and programs. 

Monthly interest on the mortgage will be calculated on the actual unpaid principal balance of the loan as of the date the prepayment is received, and not as of the due date for the next mortgage payment.

Again, please note that these changes will only be effective for FHA loans that close on or after January 21, 2015. 

Michael Barone

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Communicating with Third Party for Debt Collection

QUESTION

We are a large mortgage banker. Our concern involves our servicing unit trying to collect a debt and the prohibitions against communications with third parties in debt collection. We often are not sure about the guidelines for communicating with the consumer in such circumstances. Please let us know what prohibitions affect these kinds of communications?

ANSWER

The Fair Debt Collection Practices Act (FDCPA) sets forth certain guidelines for communicating with the consumer via a third party. The FDCPA is Title VIII of the Consumer Credit Protection Act, which also includes other federal statutes relating to consumer credit, such as the Truth in Lending Act (Title I), the Fair Credit Reporting Act (Title VI), and the Equal Credit Opportunity Act (Title VII).

Although there are a few exception cases, for the most part, in collecting any debt, a debt collector may not communicate with any person other than:

1.     The consumer;

2.     The consumer’s attorney;

3.     A consumer reporting agency if otherwise permitted by law;

4.     The creditor;

5.     The creditor’s attorney; or

6.     The debt collector’s attorney.

[15 USC § 1692c(a)-(d), inter alia; also see Federal Trade Commission Staff Commentary on the Fair Debt Collection Practices Act]

The debt collector may communicate with other persons, as follows:

1.     With the consumer’s prior consent given directly to the debt collector;

2.     With the express permission of a court of competent jurisdiction; or

3.     As reasonably necessary to effectuate a post-judgment judicial remedy. [Idem]

Please note that “consumer” includes a consumer’s spouse, parent (if the consumer is a minor), guardian, executor, or administrator. [Idem]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

UDAAP Violations

QUESTION

We have been told that our advertising is unfair, deceptive, and abusive. Now we’re facing administrative action. The Consumer Financial Protection Bureau seems to be really looking for these violations. But we had no intention of being “deceptive” at all! What criteria is used to determine if there is a violation of this kind with regards to mortgage companies?

ANSWER

In the current iteration of the rules relating to unfair, deceptive, and abusive practices, Dodd-Frank transferred to the Bureau the FTC’s authorities to adopt rules with respect to mortgage loans. The FTC’s authorities resided in the Omnibus Appropriations Act of 2009. Prior to the transfer and thereafter, several developments took place, such as rules that address mortgage assistance relief services, mortgage advertising, marketing, appraisals, origination, and servicing.

Dodd-Frank authorized the Bureau to meet two goals:

(1) Take any actions to enforce the prevention of a mortgage company or service provider from committing or engaging in unfair, deceptive or abusive acts or practices, commonly known by its acronym “UDAAP,” under federal law in connection with any transaction with a consumer involving a financial product or service or offering a consumer financial product or service.

(2) Promulgate rules to address unlawful, unfair, deceptive or abusive acts or practices under federal law by a mortgage company or service provider in connection with any transaction with a consumer involving a financial product or service or offering a consumer financial product or service. [PL 111-203, § 1031(a), (b)]

To determine what constitutes an unfair act or practice, the Bureau must have a reasonable basis to conclude that (1) the act or practice causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers, and (2) such substantial injury is not outweighed by the countervailing benefits to consumers or to competition. [PL 111-203, § 1031(c)]

This position is entirely in keeping with the FTC’s position.

[15 USC § 45(n); also FTC Policy Statement on Unfairness (December 17, 2980)]

The Bureau will determine if an act or practice is a UDAAP violation by forming a reasonable basis for showing that the act or practice:

(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) Takes unreasonable advantage of:

a.     A lack of understanding on the part of the consumer of the material risk, costs or conditions of the product or service;

b.     The inability of the consumer to protect his or her interests in selecting or using a consumer financial product or service; or

c.      The reasonable reliance by the consumer on a covered person (i.e., mortgage company, service provider) to act in the interests of the consumer. [PL 111-203, § 1031(d)]

While Dodd-Frank did not specifically denote what is considered a “deceptive” act or practice in its directive to the Bureau, the FTC’s definition is still the most precise. According to the FTC, an act or practice is deceptive if there is a representation, an omission of information or practice that is likely to mislead consumers who are acting reasonably under the circumstances, and the representation, omission or practice is material.

[FTC Policy Statement on Deception (October 1983)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Requesting Spousal Information

QUESTION

It is my understanding that a lender is not permitted to request information about a spouse or former spouse of an applicant during the underwriting process. Surely, there are some exclusions where this prohibition does not apply. In what situation is a lender allowed to get such information?

ANSWER

Regulation B, the implementing regulation of the Equal Credit Opportunity Act (ECOA), does provide certain exceptions. However, except as permitted by Regulation B, the lender may not request information regarding the spouse or former spouse of an applicant. [12 CFR § 202.5(c)]

There are generally five situations that permit exceptions. These are:

1. The spouse will be permitted to use the account;
2. The spouse will be contractually liable on the account;
3. The applicant is relying on the spouse’s income as a basis for repayment of the credit requested;
4. The applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested; or,
5. The applicant is relying on alimony, child support, or separate maintenance payments from a spouse or former spouse as a basis for repayment of the credit requested.

So, a lender may request any information concerning an applicant’s spouse (or former spouse as noted in the situation above, describing reliance on alimony, child support, or separate maintenance payments), if the foregoing situation(s) apply. [12 CFR § 202.5(c)(2)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group