[Federal Register Volume 79, Number 165 (Tuesday, August 26, 2014)]
[Rules and Regulations]
[Pages 50835-50838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-20214]



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  Federal Register / Vol. 79, No. 165 / Tuesday, August 26, 2014 / 
Rules and Regulations  

[[Page 50835]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-5360-F-02]
RIN 2502-AJ17


Federal Housing Administration (FHA): Handling Prepayments: 
Eliminating Post-Payment Interest Charges

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: This rule revises FHA's regulations that allow an FHA-approved 
mortgagee to charge the mortgagor interest through the end of the month 
in which the mortgage is being paid. The final rule allows mortgagees 
to charge interest only through the date the mortgage is paid, and 
prohibits the charging of interest beyond that date.

DATES: Effective Date: January 21, 2015.

FOR FURTHER INFORMATION CONTACT: Ivery Himes, Director, Office of 
Single Family Asset Management, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street SW., Room 9172, 
Washington, DC, 20410; telephone number 202-708-1672 (this is not a 
toll-free number). Persons with hearing or speech impairments may 
access this number through TTY by calling the toll-free Federal Relay 
Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--the March 13, 2014 Proposed Rule

    On March 13, 2014, HUD published a proposed rule in the Federal 
Register, at 79 FR 14200, to eliminate post-payment interest charges to 
borrowers resulting from FHA's monthly interest accrual amortization 
method for calculating interest. This change was responsive to the 
final rule of the Consumer Financial Protection Bureau (CFPB) entitled 
``Ability-to-Repay and Qualified Mortgage Standards under the Truth in 
Lending Act (Regulation Z)'' (CFPB final rule) \1\, which broadly 
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,'' thus including charges 
resulting from FHA's monthly interest accrual amortization method (see 
12 CFR 1026.32(b)(6)).\2\
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    \1\ This rule was first issued on the CFPB's Web page at http://files.consumerfinance.gov/f/201301_cfpb_final-rule_ability-to-repay.pdf and subsequently published in the Federal Register on 
January 30, 2013, at 78 FR 6408.
    \2\ Prior to enactment of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Pub. L. 111-203, approved July 21, 2010) 
(Dodd-Frank Act), the Federal Reserve Board (Board) had 
responsibility for lenders' compliance with the Truth in Lending Act 
(TILA). (This responsibility was transferred to the CFPB in July 
2011.) In a September 2009 interpretive letter to Secretary Donovan, 
Board staff advised that they had not addressed whether monthly 
interest accrual amortization is a prepayment penalty and, 
therefore, would not prohibit such practice without further review. 
(See http://www.aba.com/Compliance/Documents/da4a00df3ffb4650b7c9154adbc1418aFedLtrtoHUD2009.pdf.) In a proposed 
rule published on September 24, 2010, at 75 FR 59539, the Board 
proposed to amend Regulation Z, which implements TILA and the 
Board's accompanying staff commentary. In this proposed rule, the 
Board stated that based on further review and analysis the monthly 
interest accrual amortization method should be treated as a 
prepayment penalty for TILA purposes. (See 75 FR 58586.) The CFPB's 
final rule on ability-to-repay continued the analysis that the Board 
provided in its September 24, 2010, proposed rule and categorized 
FHA's monthly interest accrual amortization method as a prepayment 
penalty, but not for FHA loans consummated before January 21, 2015. 
(See 78 FR 6445.) The CFPB offers examples of the monthly interest 
accrual amortization method at page 78 FR 6600. In its discussion at 
this page, the CFPB recognized that FHA would need rulemaking to 
change this practice and the amount of time needed to complete the 
rulemaking.
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    HUD's March 13, 2014, rule proposed to revise the regulations in 24 
CFR 203.558 to provide that, with respect to FHA-insured mortgages 
closed on or after the effective date of the proposed regulatory 
amendments, and notwithstanding the terms of the mortgage, the 
mortgagee shall accept a prepayment at any time and in any amount and 
shall not charge a post-payment charge. The March 13, 2014, rule 
proposed to require 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.
    While the CFPB final rule permits limited prepayment penalties for 
``qualified mortgages'' (as that term is defined in the CFPB final 
rule) during the first 36 months following consummation of the mortgage 
(see 12 CFR 1026.43(g)), such penalties are not permitted for higher-
priced mortgage loans or for loans that have an adjustable interest 
rate.\3\ As a result of these restrictions, and in order to maximize 
consistency among FHA-insured single family mortgage products and 
provide the same protections for all borrowers, HUD's March 13, 2014, 
rule proposed to prohibit prepayment penalties in all FHA-insured 
single family mortgages.
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    \3\ See HUD's March 13, 2014, proposed rule for additional 
information related to this prohibition; see also 12 CFR 
1026.43(g)(1)(i)(A).
---------------------------------------------------------------------------

    In addition to amending Sec.  203.558, the March 13, 2014, proposed 
rule offered two technical conforming changes to the regulations in 24 
CFR part 203. See the March, 13, 2014, proposed rule for a greater 
discussion on the technical changes.

II. This Final Rule

    This final rule follows publication of the March 13, 2014, proposed 
rule and adopts that proposed rule without change. The public comment 
period for the proposed rule closed on May 12, 2014, and HUD received 
four public comments. Section III of this preamble discusses the 
comments received on the proposed rule.

III. Discussion of Public Comments Received on the March 13, 2014, 
Proposed Rule

    The public commenters included a mortgage company and trade 
associations. Commenters were over-all supportive of HUD's proposal to 
prohibit the charging of post-payment interest on FHA loans.
    Comment: Maintain proposed implementation language and publish a 
final rule as soon as practicable. A commenter requested that HUD 
maintain the implementation language, ``closed on or after [the 
effective date of the rule]'', as opposed to using case number 
assignment or some other date. The commenter explained that the 
technological and procedural changes needed to implement this rule will

[[Page 50836]]

require a long lead time and any change to the implementation language 
may delay lenders' abilities to fully comply with the rule. The 
commenter also requested that the final rule be published as soon as 
practicable to provide the industry with clarity and certainty.
    HUD Response: HUD appreciates the industry's support of this rule 
and desire for a quick implementation, and is not making any changes to 
the implementation language.
    Comment: Concern that lenders will recoup the costs of not 
collecting post-payment interest by charging higher interest rates or 
servicing fee differential is overstated. In response to HUD's 
statement in the preamble to the proposed rule that HUD expects lenders 
will simply look elsewhere to recoup funds lost by not being able to 
charge interest beyond the mortgage payment date, a commenter explained 
that lenders continue to offer Veterans Administration (VA) and Rural 
Housing Service (RHS) loans, which are securitized by Ginnie Mae and, 
these loans do not have prepayment penalties, but offer interest rates 
similar to current FHA rates. The commenter also stated that FHA loans 
are attractive to investors, regardless of the excess interest 
payments, because they carry the guarantee of the federal government.
    HUD Response: The commenter raises a good point, which HUD 
appreciates and hopes reflects how lenders will handle FHA-insured 
loans that now prohibit post-payment interest, and that is by 
continuing to offer the same interest rates that they offer now.
    Comment: Publish additional information in the final rule or in a 
concurrent Mortgagee Letter. A commenter asked HUD to publish revised 
maximum mortgage calculations, for FHA refinance transactions, to 
include the actual amount of interest to be paid and financed. The 
commenter also asked that HUD consider a closing date change, and the 
impact on the maximum mortgage calculation, to be included in the 
existing policy for minor adjustments at closing.
    HUD Response: HUD appreciates this concern, but believes the 
current policy provides adequate flexibility in calculating the maximum 
mortgage eligible for FHA refinance transactions. FHA policy permits 
interest due on the previous mortgage to be financed into the new FHA 
mortgage. The amount of interest that is permitted to be financed 
varies based upon the refinance program. However, each program that 
limits the financing of interest allows for a flexibility of $500 in 
determining the maximum mortgage amount. HUD expects that this 
flexibility provides sufficient leeway to account for changes in the 
interest due on the previous mortgage as a result of changes in the 
closing date.
    Comment: Passing costs on to borrowers is not a consumer 
protection. One commenter raised a concern that if servicers of FHA 
loans continue to be obligated to pay investors charges that the 
servicers may no longer collect from consumers, as required by Ginnie 
Mae, originating lenders and servicers will need to price that charge 
into the cost of the loan, raising costs for FHA borrowers, which is 
not a consumer protection. The commenter requested that HUD, FHA, 
Ginnie Mae, and the CFPB coordinate actions so that the intended 
consumer protections can be implemented.
    Another commenter explained that under current regulations, 
borrowers could choose to avoid paying post-payment interest by paying 
off the loan at the end of the month. Under the proposed rule, however, 
all borrowers would have to pay more, including those borrowers who 
would have strategically avoided paying post-payment interest under the 
current regulations.
    HUD Response: HUD appreciates this concern, but emphasizes that any 
cost passed on to the consumer by the servicer, as a result of the 
ability for security holders to continue to collect interest through 
the end of the month, is expected to be minimal. In addition, not all 
consumers will experience additional costs. For example, consumers who 
would have prepaid their mortgages and would have been subject to post-
payment interest charges under FHA's regulations, prior to amendment by 
this rule, will no longer be subject to those charges. These consumers 
may end up paying slightly more in interest each month or a higher 
servicing fee differential, but will avoid a post-payment charge when 
prepaying their mortgage later on, off-setting the cost of slightly 
increased interest rates or servicing fee differentials.
    In addition, as another commenter mentioned, lenders continue to 
offer VA and RHS loans, which are securitized by Ginnie Mae and permit 
security holders to collect interest through the end of the month, but 
do not allow for prepayment penalties. The interest rates on these VA 
and RHS loans are similar to current FHA rates, illustrating that costs 
are not being passed on to borrowers in the manner of higher interest 
rates.
    Comment: Pressure placed on mortgage servicers. A commenter 
explains that the proposed rule would place further pressure on 
mortgage servicers, at a time when servicing costs continue to rise. 
The commenter explained that servicers will have higher direct costs, 
and that the rule would impact the value of FHA mortgage servicing 
rights.
    HUD Response: HUD appreciates this concern; however, the impact on 
servicers is consistent with prevailing industry practice. As discussed 
previously, GSE, VA, and RHS loans do not require borrowers to pay 
post-payment interest.
    Comment: FHA should work with Ginnie Mae to transition to a daily 
simple interest calculation structure. This structure would calculate 
interest daily based on outstanding principal balance, rather than as a 
predetermined monthly amount, and align the cash flows from the 
underlying loans with the payments made to investors in the mortgage-
backed securities.
    HUD Response: At this time, FHA declines the suggestion to work 
with Ginnie Mae to transition to a daily simple interest calculation 
structure. The simple interest calculation structure poses unnecessary 
risks to borrowers. For example, interest accrues daily on the unpaid 
principal balance instead of monthly, so there is no grace period for 
payments. In addition, the loan will not fully amortize over the stated 
term if the borrower makes payments later than the scheduled due date.

IV. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), 
agencies must determine whether a regulatory action is significant and, 
therefore, subject to review by the Office of Management and Budget 
(OMB) in accordance with the requirements of the order. Executive Order 
13563 (Improving Regulations and Regulatory Review) directs executive 
agencies to analyze regulations that are ``outmoded, ineffective, 
insufficient, or excessively burdensome, and to modify, streamline, 
expand, or repeal them in accordance with what has been learned.'' 
Executive Order 13563 also directs that, where relevant, feasible, and 
consistent with regulatory objectives, and to the extent permitted by 
law, agencies are to identify and consider regulatory approaches that 
reduce burdens and maintain flexibility and freedom of choice for the 
public. At the proposed rule stage, this document was determined to be 
a ``significant regulatory action'' as defined in section 3(f) of the 
Executive order (although not

[[Page 50837]]

an economically significant regulatory action, as provided under 
section 3(f)(1) of the Executive order). While this rule remains a 
significant regulatory action, HUD is adopting the proposed rule 
without change, and therefore further review of this rule under EO 
12866 is not necessary. Additionally, the regulatory impact of this 
rule, specifically the costs and benefits of this rule, as presented in 
the preamble to the proposed rule at 79 FR 14202 through 14203 remain 
applicable to this rule.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
As noted above in this preamble, even without rulemaking by HUD, the 
circumstances in which a small entity could charge a prepayment penalty 
have been significantly limited by the CFPB final rule. The CFPB final 
rule implements the Dodd-Frank Act provisions that generally prohibit 
prepayment penalties except for certain fixed-rate, qualified mortgages 
where the penalties satisfy certain restrictions and the creditor has 
offered the consumer an alternative loan without such penalties. The 
CFPB final rule categorizes the post-payment interest charge resulting 
from FHA's monthly interest accrual amortization method as a prepayment 
penalty. Therefore, the use of post-payment interest charges on all FHA 
loans closed on or after January 21, 2015, will be considered 
prepayment penalties. This is true, irrespective of any economic 
impacts of the rule.
    In any event, even if HUD were to issue a rule allowing prepayment 
penalties, the CFPB final rule requires that lenders that offer loans 
with prepayment penalties also offer loans without such penalties (see 
12 CFR 1026.43(g)(3)). As of January 21, 2015, all small lenders \4\ 
would have to be prepared to offer loans without prepayment penalties 
and, therefore, be prepared to bear, or transfer, the cost of interest 
(or more) from the prepayment date to the end of the month.
---------------------------------------------------------------------------

    \4\ Of HUD's 1,459 supervised lenders, 598 are considered, by 
HUD, to be ``small supervised lenders.'' HUD defines ``small 
supervised lenders'' as those depository institutions regulated by 
the Federal Reserve, the Office of the Comptroller of the Currency, 
the Federal Deposit Insurance Corporation, or the National Credit 
Union Administration that have a depository asset base of less than 
$500 million.
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    Under this final rule, those borrowers who would pay post-payment 
interest under the previous regulations will be expected to pay a 
slightly higher rate for FHA-insured financing, but they will also 
receive full benefit from lower interest costs when they prepay later, 
in most cases more than offsetting the cost of the higher rate. 
Borrowers who avoided paying post-payment interest under the previous 
regulations, however, face the slightly higher rate for FHA-insured 
financing and receive no offsetting post-payment interest savings. 
Since HUD expects the increase in the pricing of FHA-insured loans 
under the proposed rule to be set to compensate lenders for the loss of 
post-payment interest from borrowers, the primary effect of this final 
rule is a transfer of funds from those who would not prepay mid-month 
under the current rule to those who would.
    Accordingly, the undersigned certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities.

Environmental Impact

    The rule does not direct, provide for assistance or loan and 
mortgage insurance for, or otherwise govern or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this rule 
is categorically excluded from environmental review under the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either (i) imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (ii) preempts 
state law, unless the agency meets the consultation and funding 
requirements of section 6 of the Executive order. This rule does not 
have federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This rule would not 
impose any Federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the UMRA.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for Mortgage 
Insurance-Homes is 14.117.

Paperwork Reduction Act

    This rule reduces information collection requirements already 
submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In accordance 
with the Paperwork Reduction Act, an agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless the collection displays a currently valid OMB control number. 
The cost savings of this rule, in time, are estimated to be 0.0036 
burden hours.

List of Subjects in 24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians-lands, Loan programs-
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

    Accordingly, for the reasons discussed in this preamble, HUD amends 
24 CFR part 203 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for 24 CFR part 203 continues to read as 
follows:

    Authority:  12 U.S.C. 1709, 1710, 1715b, 1715z-16, 1715u, and 
1717z-21; 42 U.S.C. 3535(d).


0
2. Revise the last sentence of Sec.  203.9 to read as follows:


Sec.  203.9  Disclosure regarding interest due upon mortgage 
prepayment.

    * * * This paragraph shall apply to any mortgage executed after 
August 22, 1991, and before January 21, 2015.


0
3. Revise Sec.  203.22(b) to read as follows:


Sec.  203.22  Payment of insurance premiums or charges; prepayment 
privilege.

* * * * *
    (b) Prepayment privilege. The mortgage shall contain a provision 
permitting the mortgagor to prepay the mortgage in whole or in part at 
any time and in any amount. The mortgage shall not provide for the 
payment of any charge on account of such prepayment.


0
4. Revise Sec.  203.558 to read as follows:

[[Page 50838]]

Sec.  203.558  Handling prepayments.

    (a) Handling prepayments for FHA-insured mortgages closed on or 
after January 21, 2015. With respect to FHA-insured mortgages closed on 
or after January 21, 2015, notwithstanding the terms of the mortgage, 
the mortgagee shall accept a prepayment at any time and in any amount. 
The mortgagee shall not require 30 days' advance notice of prepayment, 
even if the mortgage instrument purports to require such notice. 
Monthly interest on the debt must 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.
    (b) Handling prepayments for FHA-insured mortgages closed before 
January 21, 2015. (1) With respect to FHA mortgages insured before 
August 2, 1985, if a prepayment is offered on other than an installment 
due date, the mortgagee may refuse to accept the prepayment until the 
first day of the month following expiration of the 30-day notice period 
as provided in the mortgage, or may require payment of interest to that 
date, but only if the mortgagee so advises the mortgagor, in a form 
approved by the Commissioner, in response to the mortgagor's inquiry, 
request for payoff figures, or tender of prepayment. If the installment 
due date (the first day of the month) falls on a nonbusiness day, the 
mortgagor's notice of intention to prepay or the prepayment shall be 
timely if received on the next business day.
    (2) With respect to FHA mortgages insured on or after August 2, 
1985, but closed before January 21, 2015, the mortgagee shall not 
require 30 days' advance notice of prepayment, even if the mortgage 
instrument purports to require such notice. If the prepayment is 
offered on other than an installment due date, the mortgagee may refuse 
to accept the prepayment until the next installment due date (the first 
day of the month), or may require payment of interest to that date, but 
only if the mortgagee so advises the mortgagor, in a form approved by 
the Commissioner, in response to the mortgagor's inquiry, request for 
payoff figures, or tender of prepayment.
    (3) If the mortgagee fails to meet the full disclosure requirements 
of paragraphs (b)(1) and (b)(2) of this section, the mortgagee may be 
subject to forfeiture of that portion of the interest collected for the 
period beyond the date that prepayment in full was received and to such 
other actions as are provided in part 25 of this title.
    (c) Mortgagee annual notice to mortgagors. Each mortgagee, with 
respect to a mortgage under this part, shall provide to each of its 
mortgagors not less frequently than annually a written notice, in a 
form approved by the Commissioner, containing a statement of the amount 
outstanding for prepayment of the principal amount of the mortgage. 
With respect to FHA-insured mortgages closed before January 21, 2015, 
the notice shall describe any requirements the mortgagor must fulfill 
to prevent the accrual of any interest on the principal amount after 
the date of any prepayment. This paragraph shall apply to any 
outstanding mortgage insured on or after August 22, 1991.

    Dated: August 20, 2014.
Carol J. Galante,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2014-20214 Filed 8-25-14; 8:45 am]
BILLING CODE 4210-67-P