On October 1, new federal lending rules took effect under HOEPA–the Home Ownership and Equity Protection Act. One that will benefit consumers most is a restriction on prepayment penalties for higher-priced loans (those with an interest rate 1.5% above prime). No longer will borrowers need to worry about an excessive penalty for paying off their loan early. Great, right? Well, believe it or not, this good deed on the part of the federal government could have led to a bit of a fiasco if sound logic hadn’t reigned supreme.
You see, lenders were worried that the rule would apply to higher-priced FHA loans, which require borrowers to pay the entire month’s interest when they pay off their loan, regardless of which day of the month the pay-off takes place.
Their position was that depending on how it’s viewed, the extra interest payment could be considered a prepayment penalty, and they would rather stop making those higher-priced loans altogether than risk violating HOEPA for charging it. That would have been most unfortunate for consumers, since those loans account for 20% of the FHA market.
Luckily, though, the president of the National Association of Realtors (who, by the way, have also been lobbying the FHA to change their extra interest payment policy for quite some time)–Charles McMillan–brought the issue to the attention of the Federal Reserve and FHA Commissioner David Stevens. Stevens then took the issue up with the Fed as well, who promptly replied and explained that it had no intention of designating the FHA interest fee as a prepayment penalty.
So, thankfully, it looks like a new rule that could have ended up being a blessing for some borrowers and a curse for others will instead be good for everyone. And, all thanks to a little sound judgment on the part of the federal government–who would have thought?