Subsequent to our last announcement concerning FHA promissory note changes, HUD announced that they will be requiring such notes to use the language found in their Model Forward Fixed Rate Mortgage Note and Model Forward Adjustable Rate Mortgage Note located on their website (see FHA INFO # 14-74). The new FHA Model Notes are very similar to the FNMA Uniform Notes in language and substance, thus following HUD’s new policies which require the notes to be based on the FNMA Uniform Notes, with changes being made as set forth in the Model Notes (see FHA Single Family Handbook 4000.1, tit. II, ch. A.6.b).
Due to this, we will be modifying our FHA promissory notes to match the model notes, rather than making the changes set forth in our previous announcement. Although not mentioned in the FHA INFO bulletin, but being done as a matter of necessity, the FHA ARM Riders will also be modified in conjunction with these changes, since the ARM Riders incorporate the language concerning adjustments to the interest rate from the note into the security instrument. FHA has not published a model ARM Rider, but one is required by FHA under both current and future rules (see FHA Single Family Handbooks 4155.2 ch. 6.B.4.c and 4000.1, tit. II, ch. A.8.f).
We will, therefore, be editing the following documents to match the language found in the FHA Model Notes, with certain deviations (described below):
- FHA Note Fixed (Cx36)
- FHA ARM Note – Treasury (Cx861)
- FHA ARM Rider – Treasury (Cx901)
- FHA ARM Note – LIBOR (Cx13045)
- FHA ARM Rider – LIBOR (Cx13046)
- NY CEMA GAP – FHA Note Fixed (Cx16243)
- FL Housing – FHA Note (Cx15130)
- AK Housing – FHA Note Fixed (Cx19047)
For fixed-rate notes, the new text will print when “Closing Date” (Field 678) is January 21, 2015 or later.
For adjustable-rate notes, it is a bit trickier. Due to the fact that rules regarding “lookback” periods and prepayments take effect on different dates (see the aforementioned article for details), the language in the notes will change as follows:
- If “Closing Date” is before January 10, 2015, the current text will continue to print.
- If “Closing Date” is January 10, 2015 or later, but before January 21, 2015, the new language from the Model ARM Note (September, 2014 version) will print, with such deviations as described below. This version of the Model Note is the same as the January 10, 2015 version, except that its section concerning prepayments is compatible with FHA’s current prepayment rules, which remain in effect until January 21st.
- If “Closing Date” is January 21, 2015 or later, the language from the Model ARM Note (January 10, 2015 version) will print (including the section on prepayments which is compatible with the new regulations concerning such), with such deviations as described below.
For ARM riders, the new text will print if “Closing Date” is January 10, 2015 or later.
In order to comply with state laws and ensure the enforceability of the note, some of the language of the FHA Model Notes will be deviated from by either including language required by state law, or modifying the note’s terms in order to comply with such law. Such language is already present in our FHA notes.
Deviations being made out of necessity include modifying the language concerning late charges. According to the Model FHA Notes, a late charge is calculated based upon the amount of the principal and interest portion of a delinquent payment. However, under HUD administrative law, a late charge may be calculated based upon the full amount of the delinquent payment (see 24 CFR § 203.25). This is currently FHA’s policy (see FHA Single Family Handbook 4330.1 REV-5, ch. 4-2) and it appears that this will continue to be FHA’s policy if the provisions concerning late charges in draft Chapter B of the new FHA Handbook are adopted without change (see FHA Single Family Handbook 4000.1, tit. II, ch. B.3.c.ii).
Nevertheless, some states require late charges to be calculated based on the principal and interest portions of a delinquent payment, so we will be modifying the second-to-last sentence of Subsection 7(A) of the notes to state the following:
- Massachusetts – “The amount of the charge will be X.XXX% of the amount of principal and interest overdue.”
- West Virginia – “The amount of the charge will be X.XXX% of the overdue amount of each payment, but not more than U.S. $X.XX.”
- All other states – “The amount of the charge will be X.XXX% of my overdue payment, unless such amount exceeds the maximum amount allowed by applicable state law, in which case the Lender may collect the maximum amount allowed by such law.”
Subsection 4(B) of the Model ARM Note strangely references both U.S. Treasury Securities and the London Interbank Offered Rate as being the basis for the index of the loan. No provision is given to determine which of these two indices would apply to the borrower’s loan. Our conclusion is that this text in the Model Note was meant to be instructional; that only one or the other index should be listed. Therefore, we will continue to provide two different ARM notes, which each reference one or the either index.
Subsection 4(C) of the Model ARM Note states that “the Note Holder will calculate my new interest rate by adding a margin of percentage points (_______%) to the Current Index.” No space is provided to add a number between the words “of” and “percentage.” Our conclusion was that this was done in error and we will be adding such number, in order to improve the language of the clause.
Subsection 4(D) of the Model ARM Note hardcodes text setting forth an annual cap of one percentage point on interest rate changes, with a lifetime cap of five percentage points, for all ARMs. However, these caps only apply to 1-, 3-, and 5-year ARMs while annual caps of two percentage points and a lifetime cap of six percentage points apply to 5-, 7-, and 10-year ARMs (5-year ARMs can use either set of caps), under both current and future rules (see FHA Single Family Handbooks 4155.1, ch. 6.B.5.e & 6.B.5.f and 4000.1, tit. II, ch. A.8.f). This being the case, we will be modifying this Subsection to dynamically print the appropriate percentage point caps based on the type of ARM being extended.
Finally, Subsection 11 of the Model ARM Note makes a cross-reference to Section 15 of the security instrument, in regards to providing notices. This is incorrect. Under the current FHA Model Mortgage, the section regarding notices is Section 13, while under the new FHA Model Mortgages it is Section 14. We will be revising the cross-reference to refer to Section 13, until the new FHA Model Mortgages are implemented, at which time the cross-reference will be updated to Section 14.
The format of our ARM Riders will substantially be similar to FNMA Forms 3108 and 3111, albeit the language referenced from the note will be the same as what will appear in our FHA notes. We will also be excluding Section B of the FNMA ARM riders from appearing in our FHA ARM riders, since this section was included by FNMA to allow ARMs to be assumable (all FHA loans are assumable, so it is not necessary to modify their security instrument to allow them to assumed). These changes not only make our FHA ARM Riders compatible with the new FHA Model Notes, but also complies with the upcoming requirements concerning FHA ARM Riders (see FHA Single Family Handbook 4000.1, tit. II, ch. A.8.f).
These changes will be available in ConformX production January 3, 2015, but will only take effect for loans with a Closing Date On or After 01/10/2015 and/or a Closing Date On or After 01/21/2015, as applicable. If the Closing Date is not entered, Today’s Date will be used to determine which version of each document prints. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.
January 2, 2015