High-Cost Loan Final Rule Temporarily Averts FHA Loan Crisis

by Ballard Spahr LLP

On January 10, 2013, the CFPB issued a final high-cost loan rule under Dodd-Frank that includes a modified version of a proposal that will temporarily avoid a crisis with FHA loans. The final rule also implements homeownership counseling-related requirements under Dodd-Frank. The final rule is effective January 10, 2014.

The final rule implements various changes to the Home Ownership and Equity Protection Act (HOEPA) provisions of the Truth in Lending Act (TILA) regarding high-cost home loans, including modifications to the scope and triggers. Among other changes:

  • The scope of the HOEPA provisions is expanded to include purchase money loans and home equity lines of credit secured by a consumer's principal dwelling.
  • The annual percentage rate (APR) triggers are now based on the average prime offer rate instead of the rates on United States Treasury securities.
  • A loan is a high-cost loan if the annual percentage rate exceeds the applicable average prime offer rate by more than 6.5 percentage points (8.5 percentage points for junior lien loans).
    • The points and fees trigger is lowered from 8 percent to 5 percent of the total loan amount for most loans. For loans less than $20,000, the trigger is the lesser of 8 percent of the total loan amount or $1,000 (with the dollar amounts being subject to annual adjustment based on Consumer Price Index changes). Also, the items that must be included in points and fees are expanded to include, among other items, loan originator compensation paid directly or indirectly by the consumer or creditor; the prepayment fee on the new loan; and the prepayment fee on the existing loan if the loan is being refinanced by the existing lender, a servicer acting on behalf of the lender, or an affiliate of either. Certain bona fide discount points may be excluded from points and fees.
    • A prepayment fee is trigger is added. Application of the HOEPA provisions is triggered if the prepayment fee may be imposed more than 36 months after the loan is made or the fee can exceed in total more than 2 percent of the amount prepaid.
    • There is a complete prohibition on prepayment fees for loans that are subject to the HOEPA provisions (under current law, a prepayment fee is permitted under limited circumstances).

In the proposed rule, the CFPB proposed to make a change not mandated by Dodd-Frank that would re-implement a prior position of the Fed under which any requirement to pay interest after a prepayment in full with an FHA-insured loan is considered to be a prepayment fee. If a full prepayment of an FHA loan occurs on a date other than a regularly scheduled payment due date, the consumer must continue to pay interest through the end of the month. The proposal, if implemented along with the proposed prepayment fee trigger and proposed prohibition on prepayment fees for high-cost loans, would have effectively prohibited FHA loans. This is because all FHA loans would be considered to provide for a prepayment fee that could be imposed more than 36 months after origination and, thus, all FHA loans would be high-cost loans, and prepayment fees would be prohibited for high-cost loans.

The CFPB decided to re-implement the prior Fed position in connection with the final ability to repay/qualified mortgage rule (the ATR Final Rule). In the supplementary information to the final HOEPA rule, the CFPB addresses the FHA loan issue as follows:

[W]ith respect to FHA practices relating to monthly interest accrual amortization, the Bureau has consulted extensively with HUD in issuing this final rule as well as the 2013 ATR Final Rule. Based on these consultations, the Bureau understands that HUD must engage in rulemaking to end its practice of imposing interest charges on consumers for the balance of the month in which consumers prepay in full. The Bureau further understands that HUD requires approximately 24 months to complete its rulemaking process. Accordingly, in recognition of the important role that FHA-insured credit plays in the current mortgage market and to facilitate FHA creditors’ ability to comply with this aspect of the 2013 HOEPA and ATR Final Rules, the Bureau is using its authority under TILA section 105(a) to provide for optional compliance until January 21, 2015.

FHA loans consummated before January 21, 2015, will not be subject to the provision under which any interest payable after a full prepayment is treated as a prepayment penalty. Thus, for the time being the potential crisis with FHA loans is averted, and FHA will need to implement a revision to its current requirement for the payment of interest after a full prepayment by January 21, 2015.

The final rule also modifies certain requirements applicable to high-cost loans, although the revisions likely will have little practical relevance. Very few high-cost loans are being made currently. Given that the ATR Final Rule will be implemented at the same time as the HOEPA final rule, the market for HOEPA loans will be even smaller, if not non-existent.

Two Dodd-Frank provisions related to homeownership counseling also are implemented by the final rule. Regulation X under RESPA is amended to require that no later than three business days after a lender or mortgage broker receives a mortgage loan application, or information sufficient to complete an application, a lender must provide the applicant with a clear and conspicuous written list of homeownership counseling organizations that provide relevant counseling services in the location of the applicant. The list provided must be a current list obtained from either a website maintained by the CFPB in connection with the notice requirement or data made available by the CFPB or HUD. Unless otherwise prohibited, the list can be combined and provided with other mortgage disclosures pursuant to Regulation Z under TILA. If a mortgage broker provides the list, the lender does not also have to provide a list, but is responsible for ensuring that the broker provided the list.

Regulation Z is amended to require a lender to confirm that a first-time borrower with a closed-end mortgage loan obtained homeownership counseling from a counseling organization or counselor certified or approved by HUD, if the loan may result in negative amortization. The lender may not steer or otherwise direct the consumer to choose a particular counselor or counseling organization.

Reverse mortgage loans are excluded from the new counseling-related requirements.

Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr’s Consumer Financial Services Group, which produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right.

For more information, contact Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, John D. Socknat at 202.661.2253 or socknatj@ballardspahr.com, or Michael S. Waldron at 202.661.2234 or waldronm@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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