Pre-payment penalties post-2014
Dodd-Frank was not kind to pre-payment penalties. If you haven't already, it may be time to review any pre-payment penalties your institution has to make sure you're safe.
If you're going to look into your institution's pre-payment penalties, here are some general thoughts on how to go about doing so (as it applies to residential loans).
Open-End Home Equity Lines
There are fewer restrictions on pre-payment penalties with HELOCs, and they continue to be especially common when programs are offered with no closing costs. However, be careful that the pre- payment penalties aren't so high that loans become "high-cost" under HOEPA. One of our previous articles addressed the fact that, as of 2014, HELOCs are now subject to the HOEPA requirements, which, if triggered, would make a HELOC much more complicated (additional requirements such as running the loan through an ability- to-repay test, for example). A pre-payment penalty could trigger high-cost status on a HELOC if either (a) the potential penalty was too high, or (b) it could be given more than 36 months after account opening.
Closed-End Mortgages
Here's where the regulations get really tough. There are three things to worry about here: First- there are some places where pre-payment penalties are flat-out illegal. Second- even if permitted, the pre-payment penalty could be enough to cause the loan to fail the QM points + fees test (making it a "non-QM") or the HOEPA points
+ fees test (making it "high cost") (either way- this would also make the loan illegal). And third- an alternative offer is required.
A.When are pre-payment penalties not allowed at all?
A pre-payment penalty is allowed only in the following circumstances:
It is a fixed rate mortgage
It is a Qualified Mortgage
Is not an HPML
Also be aware of the following limitations on the amount of the pre-payment penalty:
Pre-payment penalty cannot apply 3 years after origination
Must not exceed following percentages of outstanding loan balance prepaid:
2% during first 2 years
1% during 3rd year
Note: Again- crossing these limits does not just mean you're subject to additional requirements (contrast- if a loan crosses HOEPA thresholds, it isn't illegal, it just needs to meet extra requirements); instead you actually aren't allowed to make the loan at all.
B.Effect on QM + HOEPA Tests
Even if a pre-payment penalty isn't enough to be illegal (see above), it could still be problematic if it makes the loan fail the points + fees test of either QM or HOEPA. As you know- QM generally requires 3% points + fees, while HOEPA goes up to 5%.
And Note: As a practical matter, if a pre-payment penalty causes a loan to fail the QM test (btw- if it fails HOEPA, it will fail QM), the loan will not be permissible either. Why? Remember- pre-payment penalties are only permitted for Qualified Mortgages! (see above)
C.Alternative Offer Required
When you have a product with a pre-payment penalty, you must offer an alternative loan without a pre-payment penalty. The requirements for this alternative loan are found in this rule ... but basically, it must (1) be a loan that meets QM points + fees, (2) has the same term as the loan with pre-payment penalty, and (3) you must have a "good faith" belief that the borrower could likely qualify for it. For your reference, most of the rules discussed here can be found in 12 CFR 1026.43(g).
In other news:
To anyone still catching up with the new mortgage servicing rules, the CFPB Director reminded us again on Monday that they will "vigorously" enforce those regs.
Is there anything stopping Wal-Mart from encroaching on traditional banking business?
Are you a member of the Southern New England Credit Grantors? We're sponsoring a blog for them called the "Compliance Corner" for anyone interested (and doesn't already get enough of this every Wednesday morning at 6:00 am). Our aim is to tackle issues that otherwise may be costly or confusing to smaller lenders in New England. SNECG.org
We've discussed the horrors of age discrimination before ... but as a reminder to everyone who has been writing in, I am fully aware that "there is a 't' in mortgage"--despite my age-- thank you all for your concern.
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No one knew this better than Jim Johnson. As FNMA chairman from 1991-99, he pioneered the "Trillion Dollar Commitment" wherein more than half of FNMA lending would go to low- and moderate-income borrowers. This was much more than the 30% that their regulator (HUD) required. Said Johnson:
"Meeting the HUD goals should be a byproduct of our work, not the point of it."
- Jim Johnson
Timothy Howard, in his 2014 book The Mortgage Wars, explained that Johnson's goals were "by design. Johnson believed it was imperative for Fannie Mae to be the one defining our affordable housing role, not Congress."
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