by Timothy Raty
The Federal Housing Agency (FHA) has recently proposed and enacted several radical changes to their insurance procedures, in an attempt to conform with recent regulatory changes instituted by the Consumer Financial Protection Bureau (CFPB), to update their loan program policies to more adequately “align” with general mortgage processes, and to more closely follow the procedural steps taken by the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Effective this past January, the CFPB amended their Regulation Z to require a disclosure to be provided to consumers, in connection with an adjustable-rate mortgage, a certain number of days “before the first payment at the adjusted level is due” (12 CFR § 1026.20[c]). Generally, the notice must be given at least 60, but no more than 120, days before the first payment at the adjusted level is due. This notice would inform, inter alia, the consumers of what their payments at the new adjusted level would be.
At the time this rule was proposed, finalized, and enacted, FHA-insured and Department of Veterans’ Affairs (VA)-guaranteed loans had a 30 day “lookback” period, where the adjusted interest rate would be based on the index value 30 days prior to adjustment – thus, quite often, the adjusted interest rate would not be known at least 60 days prior to the first payment under the adjusted rate, thus frustrating the notice timing requirements.
Due to this discrepancy, the CFPB inserted a temporary exemption to the timing requirement, allowing disclosures for “ARMs originated prior to January 10, 2015 in which the loan contract requires the adjusted interest rate and payment to be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date” to be provided at least 25, but no more than 120, days before the first payment date at the adjusted level (Ibid.; see also 78 FR 10926 ). This temporary exemption was provided to allow the FHA and VA sufficient time to modify their “lookback” period requirements.
Both have, to different extents, recently done so. FHA has proposed final amendments to 24 CFR § 203.49 stipulating that the “current index figure” be the most recent index figure available 45 days before the rate adjustment, for forward mortgages “originated” (i.e. closed) on or after January 10, 2015, as well as requiring that the servicing notice provisions of Regulation Z be complied with (see 79 FR 50838 ).
VA, while yet to publish final rules, has provided notice that they are in the process of creating such rules, but stipulate that should such rules not be implemented by January 10th, “all lenders and servicers must comply with the terms of the 2013 TILA Servicing Rule” (see VA Circ. 26-14-25).
Prepayment penalties, as colloquially understood, are prohibited in connection with FHA-insured loans. However, if a prepayment is made on such loans on a date other than a scheduled payment date, the borrower may still be required to pay any accrued interest for the remainder of the month in which the prepayment was made.
Under the CFPB’s version of Regulation Z, a prepayment penalty is also prohibited in connection with “qualified mortgages” which are also higher-priced mortgage loans or loans with adjustable interest rates (see 12 CFR § 1026.43[g][ii][A]). Notably, a “prepayment penalty” is defined (in connection with closed-end loans) as “a charge imposed for paying all or part of the transaction’s principal before the date on which the principal is due, other than a waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction’s principal sooner than 36 months after consummation, provided, however, that interest charged consistent with the monthly interest accrual amortization method is not a prepayment penalty for extensions of credit insured by the Federal Housing Administration that are consummated before January 21, 2015.” (12 CFR §§ 1026.32[b][i] & 1026.43[b])
This definition effectively qualifies FHA’s post-prepayment interest charge scheme as a prepayment penalty, hence the reason for the short-term exemption for FHA loans, which was included in order to allow FHA to change their rules within two years (see 78 FR 6917 ). Due to this, plus the prepayment disclosure requirements for the new Integrated Disclosures (see Ibid. § 1026.37[b] & 12 CFR Pt. 1026, Supp. I, Paragraph 37[b] – [i]), FHA will be amending, inter alia, 24 CFR § 203.558 to stipulate that a borrower may make a prepayment at any time, in any amount, without a 30 days’ advance notice. It further stipulates that “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.”
This change applies to FHA loans closed on or after January 21, 2015.
New FHA Handbook
The biggest change of all is the implementation of new FHA Single Family Handbook 4000.1 “that, when complete, will be a single, authoritative source of policy, uses clear, consistent, more direct language, aligns the flow of the SF Handbook to the mortgage process, and makes it easier to understand and implement policy changes” (Ibid., Transmittal Page)
This drastically (and fortunately) changes the way FHA promulgates their rules and procedures. Currently, they do so by providing and maintaining a hodge-podge of Handbooks, Mortgagee Letters dating as far back as the 1970s, Bulletins, and other publications, which lenders frequently and painstakingly have to research in order to figure out how to get their loans approved for insurance by the FHA.
The Origination through Post-Closing/Endorsement section of the Handbook has been published (a copy of which is available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/handbook_4000-1) and, with some minor exceptions, applies to loans with case numbers assigned on June 15, 2015 or later. Other parts of the Handbook, such as Servicing, will be published at a later date.
One very important change set forth in this Handbook is the promulgation of new, simplified rules concerning promissory notes and security instruments. Currently, FHA requires security instruments to be based on a mixture of their Model Mortgage and the 1990-version of the FNMA uniform security instruments (see FHA ML 2009-13 & 2002-03), with only certain modifications which may be made which are quite restrictive. In effect, this has led lenders to issuing security instruments with terms that are over 20 years old (particularly the Uniform Covenants, which may not be modified to conform with state law without prior approval from FHA; see FHA Single Family Handbook 4155.2, ch. 6.B.2 & 12.A.2 for details).
Under this new Handbook, the notes and security instruments will largely match the current FNMA/FHLMC uniform notes and security instruments, according to the following instructions:
“The mortgagee must develop or obtain a separate mortgage and Note that conforms generally to the Freddie Mac and Fannie Mae forms in both form and content, but that includes the specific modification required by FHA set forth in the applicable Model Note and Mortgage.” (FHA Single Family Handbook 4000.1, ch. 6.b)
The Model Forms referenced are available online (see http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/model_documents). This change will provide a much needed relief to document vendors, who will be able to maintain FHA documents with greater ease.
All of these changes affect documents in various ways and DocuTech has been working over the past months in editing our documents so that they comply with these changes. Our current plans for these changes are as follows:
- In regards to the “lookback” period changes, we will be:
- Modifying our FHA and VA ARM promissory notes and riders to change the definition of the “Current Index” to refer to the most recent index figure available 45 days before the Change Date, rather than 30 days. This language is set forth in the new model ARM Note, the version of which is effective January 21, 2015 (all new model forms cannot be used in their entirety until June 15, 2015; see below for further details).
- Changing the “Notice of Changes” section to match the equivalent section found in the model ARM Note, which provides greater flexibility with the notice timing requirements, but also complies with Regulation Z’s provisions.
- Modifying the clauses in the “Effective Date of Changes” section which refer to the 25-day timing period for the notice of changes, so that this clause matches the equivalent clause in the new model ARM Note.
- All of these changes will take effect for loans closed on January 10th. Note that these changes, as applied to the VA notes, may again be modified in the future, depending on what the VA’s final regulations require once they are promulgated.
- For the prepayment penalty changes, we will be:
- Changing the prepayment section in all FHA ARM promissory notes with the one provided in the new model ARM Note and Note Forward forms, the versions of which are effective January 21, 2015.
- This change will take effect for loans closed on or after January 21st.
- For the new FHA Handbook:
- We are looking into merging our current FHA security instruments with our conventional ones, with the appropriate language and modifications in the FHA Model Forward Mortgage printing based on whether the loan is insured by FHA or not. This will effectively mean that we will have one dynamic document for all first lien, closed-end loans in our system.
- We may also merge our FHA promissory notes into our conventional ones as well, though we are still researching to see whether, for configuration purposes, it is best to keep these separate. Either way, the language of the FHA notes will be updated to reflect the new model Notes, with revisions in accordance with the Handbook and the requirements of state law.
- We are reviewing other processes and procedures in the Handbook and determining what other parts of our system and procedures need to be updated (g. restricting FHA late charges to interest and principal payments only, providing commitment letters for loans secured by properties in all states, etc.).
- These changes will take effect for loans with case numbers assigned on or after June 15, 2015.
DocuTech Corp. (DocuTech) is the trusted partner & industry leader in providing loan documents that are fully compliant with Federal, State, Local, and Investor regulations and requirements. Our truly dynamic document engine coupled with 23 years of compliance expertise stand out as the two reasons several of the top 10 lenders in the US choose DocuTech. Our integration with 16 of the leading loan origination systems (LOS) drives rapid deployment, simplified workflows inserting system automation where possible. This means lenders can process more loans with less resources. DocuTech manages and secures all information needed for a loan, guaranteeing accuracy, security and compliance. For more information call us at 800.497.3584.