FHA Eliminates So-Called “Pre-payment Penalties” for Loan Payoffs
Yesterday, August 26, 2014, HUD modified its procedure for interest charges when an FHA loan is paid off. As of January 21, 2015, lenders will only be allowed to collect interest from a borrower up until and including the date on which the loan balance is paid in full.
Previously, FHA allowed lenders to charge borrowers for an entire month of interest regardless of the day during the month the loan was paid off. If the loan was paid off due to a refinance, this allowed borrowers to be charged interest twice: once from the old loan and once from the new loan.
For example, John has an FHA and is refinancing his loan this month. He refinanced on the 11th which means that his FHA loan was paid off on the 14th (after the 3-day rescission period expired). The FHA lender would be able to charge John interest on the loan for the entire month of August. The new lender would begin charging interest on the 14th, which is the date the loan funded. In this example, John would be responsible for the interest charges on both loans for 18 days.
When I was a mortgage broker, we would try to schedule FHA refinances as close to the end of the month as possible to lessen the effect of being double-charged interest.
Under the new procedure, FHA lenders will only be able to charge interest up to and including the date the loan is paid off. In our example above, the FHA lender would charge interest until the 14th and the new lender would charge interest from the 14th through the 31st. There is still overlap, but nothing like it was.
HUD made this procedural change because of the CFPB’s final rule regarding pre-payment penalty. This is broadly described as a “charge imposed for paying all or part of the transaction’s principal before the date on which the principal is due”.
HUD understood this to apply to FHA’s current method of collecting interest beyond the date the loan was paid in full and had to modify this procedure.
This is good news for borrowers, loan officers and lender’s closing departments. Because refinances of FHA loans would happen at the end of the month, the volume of closings in the last week of the month is much higher than the other weeks. This dramatically increases the workload of the closing department, which can also increase the likelihood of mistakes.
Without the need to close at the end of the month, I would suspect that FHA refinance loans would be more evenly broadcast throughout the month. This should decrease stress and the chances of mistakes occurring.
Image credit: (c) Can Stock Photo / AndreyPopov