Skip to main content

FHA Elimination of Prepayment Penalties and Changes to ARMs

Wendy Bernard
Sep 25, 2014

Question: I heard that there are some impending changes concerning FHA loans involving prepayment penalties and adjustable-rate mortgages (ARMs). Would you please clarify? Answer On Aug. 26, 2014, FHA announced changes under 24 CFR 203 involving (1) the elimination of “post-payment” interest aka “prepayment penalties” on FHA-insured loans, and (2) notice requirements concerning interest rate changes on FHA-insured Adjustable Rate Mortgages (ARM).  The announcements are summarized as follows: Effective with loans that close on or after Jan.21, 2015, lenders will be prohibited from collecting post-payment interest on all FHA-insured Single Family mortgage products. Lenders will be required to accept a borrower’s prepayment “at any time and in any amount” without charge to the borrower for the prepayment. Lenders will also be prohibited from requiring 30 days advance notice of any prepayment by the borrower and must calculate prepayment interest solely on the unpaid principal balance as of the date the borrower prepays the loan. Currently, under FHA’s monthly interest accrual amortization method, FHA-approved lenders may generally charge interest through the end of the month in which the mortgage is prepaid, although other provisions and restrictions may apply. The new requirements also include provisions that impact FHA-insured loans that close before Jan. 21, 2015.  For example, lenders are required to notify borrowers of the privilege “to prepay the mortgage in whole or in part at any time and in any amount” without being charged to do so. Effective for FHA-insured Adjustable Rate Mortgages (ARMs) that close on or after Jan. 10, 2015, lenders must notify borrowers of impending monthly payment adjustments no later than 60 days before the scheduled change in monthly payments, but no earlier than 120 days before the scheduled monthly payment adjustments. In addition, monthly payments must be adjusted based on the corresponding index value at the earliest 45 days prior to the scheduled change—the look back period. FHA currently requires a 30-day look back period for monthly payment adjustments and a 25 day-advance notice to the consumer regarding the impending change in monthly payments. This expanded notification and look back requirement is expected to provide greater protections to the consumer who will have additional time to respond to impending monthly payment adjustments on ARM loans.  [Federal Register, 79/165, 8-26-14; 24 CFR Part 203, FHA: Handling Prepayments: Eliminating Post-Payment Interest Charges, Final Rule; FHA: Adjustable Rate Mortgage Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages] Wendy Bernard is director of legal and regulatory compliance for Long Beach, N.Y.-based Lenders Compliance Group.  
Published
Sep 25, 2014
'A Long Road To Normal'

Nominated again to lead The Fed, Powell tells Senate committee to expect three rate hikes, but 'if we have to raise interest rates more over time, we will.'

Regulation and Compliance
Jan 11, 2022
CFPB: Complaint Response Worsens At Big 3 Credit Bureaus

Report claims Equifax, Experian, and TransUnion routinely failed to fully respond to consumers with errors.

Regulation and Compliance
Jan 10, 2022
The Fed Names Chairs, Deputy Chairs For 12 Reserve Banks

In recent years, the Federal Reserve System has worked to increase the overall diversity of the Reserve Bank and branch boards of directors and continues to build on those efforts.

Regulation and Compliance
Jan 06, 2022
The Fed: Rate Hike Likely Coming in June

Federal Open Market Committee's December minutes reveal discussion of first hike in federal funds rate in 2Q of 2022, as well as of ending asset purchases by March.

Regulation and Compliance
Jan 05, 2022
AARMR No Protection For Savanah Scares

Conference provides opportunity for regulators to interact, discuss common topics

Regulation and Compliance
Jan 04, 2022
McCargo Sworn In As Ginnie Mae President

Former HUD official becomes the first female to lead the Government National Mortgage Association.

Regulation and Compliance
Jan 04, 2022