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Nancy Starczyk: Post-payment interest changes

Posted: April 9, 2014 2:00 a.m.
Updated: April 9, 2014 2:00 a.m.
 

In a dispute dating back more than a decade, the Federal Housing Administration on March 13 proposed eliminating a rule that has had sellers paying interest on a loan for days or weeks after the principal had been paid in full.

Realtors nationwide have been pushing for elimination of this prepayment penalty since 2003, but it took the federal Consumer Financial Protection Bureau to bring it to an end — sort of.

Before it can take effect, the proposed rule change must go through a comment period.

The National Association of Realtors will submit a letter to HUD on the proposal prior to the due date of May 12.

Even if the rule is ultimately adopted in its current form, the change will not take effect until Jan. 21, 2015. For all FHA loans consummated on or after Jan. 21, 2015, a post-payment interest charge resulting from the monthly interest accrual amortization method will be considered a pre-payment penalty, which is specifically outlawed under new Qualified Mortgage rules issued by the Consumer Financial Protection Bureau.

That means FHA loans consummated prior to that date—covering about 7.8 million existing and new loans—may still have interest charged through the end of the month in which the mortgage is prepaid, even if the loan is paid in full on the first of the month.

While sellers typically hold sway over the precise date escrow closes, all parties in transactions involving FHA-insured loans would be wise to negotiate to close at the end of the month, not the beginning.

While FHA insists the practice enables them to issue loans with a lower interest rate, Realtors through NAR believe the practice snatches many millions of dollars in unjustified interest charges from sellers.

By some estimations, the primary beneficiaries of this long-standing practice have been loan servicers who could earn interest on the excess payments until they had to pay bond investors.

According to NAR, borrowers shelled out more than $587 million in excess interest charges in 2003 alone.
Since then, efforts to calculate payment on a per diem basis and ban full-month interest charges through legislation failed to garner support.

“FHA’s antiquated policy has placed an unreasonable and often unexpected burden on FHA consumers who already face high housing and closing costs,” NAR stated in a written comment on the FHA proposal.

The Association has been urging FHA and Ginnie Mae to remove this prepayment penalty for more than ten years.

Conventional loans, including loans from the Veterans Administration’s Loan Guaranty Program and the U.S. Dept. of Agriculture’s Rural Housing Service loan program, do not have post-payment interest charges.

Even though NAR will submit a letter prior to the deadline, anyone wishing to comment on the change can write by mail or via electronic submission.

Send mail to: Regulations Division, Office of General Counsel, Dept. of Housing and Urban Development, 451 7th St. SW, Room 10276, Washington, D.C. 20310-0500. Electronic submissions may be sent through the federal eRulemaking Portal at www.regulations.gov. Submit comments prior to the deadline of May 12.

Nancy Starczyk is President of the Santa Clarita Valley Division of the Southland Regional Association of Realtors. David Walker, of Walker Associates, co-authors articles for SRAR. The column represents SRAR’s views and not necessarily those of The Signal. The column contains general information about the real estate market and is not intended to replace advice from your Realtor or other realty related professionals.

 

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