HUD Proposes Eliminating Certain Post-Payment Interest Charges

by Shannon Allen

The Department of Housing and Urban Development (“HUD”) proposes a new rule to revise the Federal Housing Administration’s (“FHA’s”) regulations that currently allow an FHA approved “mortgagee to charge the mortgagor interest through the end of the month in which the mortgage is being paid.”  The new rule would prevent mortgagees from “charging post-payment interest,” allowing them to charge interest “only through the date the mortgage is paid.” This would require FHA lenders to bear the “entire cost of interest from the pre-payment date to the end of the month.”  HUD anticipates this proposal will result in an “estimated transfer of $13 million from those borrowers who would not pre-pay mid-month under the current rule to those who would.”

HUD’s proposed rule is in response to changes regarding the definition of a “pre-payment penalty” under Regulation Z, “the final rule” of the Consumer Financial Protection Bureau (“CFPB”) called “Ability-to-Repay and Qualified Mortgage Standards under the Truth and Lending Act” (“CFPB’s final rule”).  The CFPB’s final rule defines “prepayment penalty” in “closed-end transactions” as the “charge imposed for paying all or part of the transaction’s principal before the date on which the principal is due.”  This includes “charges resulting from FHA’s currently allowable monthly interest accrual amortization method” (see 12 CFR 1026.32(b)(6)).

The CFPB final rule states that interest charged “consistent with” the monthly interest accrual amortization method “is not a pre-payment penalty” for FHA loans completed before January 21, 2015.  The issue, however, is that for all FHA loans consummated on or after January 21, 2015, a “post-payment interest charge” resulting from the monthly interest accrual amortization method “will be considered a pre-payment penalty.” Hence the necessity for FHA to amend its regulations (see 12 CFR 1026.32(b)(6)(i)).  HUD’s new rule proposes to remove the option provided to FHA-approved mortgagees to “to charge pre-paying mortgagors post-payment interest payments.”

A list of what HUD’s proposed rule would accomplish includes, but is not limited to:

1. Revision of the regulations in 24 CFR 203.558: which currently provide that, if prepayment is offered, the mortgagee may require payment of interest up to the date of the next installment due date; and instead provide that the mortgagee shall accept a prepayment at any time and in any amount and shall not charge a post-payment charge;
2. Requiring that monthly interest on the debt be calculated on the actual unpaid principal balance of the loan as of the date the prepayment is received and not as of the next installment due date;
3. Requiring that post-payment charges using the monthly interest accrual amortization method not be considered prepayment penalties;
4. Continuing not to permit mortgagees to require advance notice of prepayment; and
5. Making two technical conforming changes to the regulations in 24 CFR part 203.

Interested parties are invited to submit comments (referencing Docket ID: HUD-2014-0019-0001 and Title: Federal Housing Administration Handling Prepayments: Eliminating Post-Payment Interest Charges) by May 12, 2014, by one of the following two methods: (NOTE: No Facsimile Comments (faxed) comments will be accepted.)

• by Mail: Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500; OR
• Electronically (strongly encouraged): through the Federal eRulemaking Portal at: www.regulations.gov.