An Under-the-Radar Win for Common Sense

By Robert Freedman, Senior Editor, REALTOR® Magazine

It’s a small thing, but it’s impact could have been big. Some new federal lending rules take effect tomorrow (under HOEPA—the Home Ownership and Equity Protection Act) and among them is a restriction on prepayment penalties, something anyone who’s taken out a mortgage would certainly appreciate. No one likes to pay a prepayment penalty, and certainly not when they’re abusive.

But lenders were concerned that the rule, which imposes the prepayment restriction on higher-priced loans (those with an interest rate 1.5 percent above prime), would snag higher-priced FHA loans. FHA requires borrowers, when they pay off their loan, to pay the entire month’s interest, no matter when during the month the pay-off occurs.

Depending on how you look at it, that extra interest payment has the character of a prepayment penalty, and indeed, NAR has been trying to get FHA to change that policy.

Lenders said they would stop making those higher-priced loans rather than risk a HOEPA violation for charging the full month’s interest in a pay-off. Since the loans represent an estimated 20 percent of the FHA market, such a move by lenders would have been a blow to borrowers.

But common sense prevailed. NAR President Charles McMillan raised the matter with the Federal Reserve and FHA Commissioner David Stevens, who then also raised the matter with the Federal Reserve. (The Fed’s HOEPA rules take effect tomorrow.) The Fed responded to HUD quickly and clarified that it didn’t intend to classify the FHA interest charge as a prepayment penalty. Case closed. All within just a couple of days.

Again, a small issue, but certainly one that threatened to pack a lot of punch. Because everyone handled the issue so professionally, it’s one less thing lenders, borrowers, and real estate professionals have to worry about.