Pre-Payment Penalties (especially in Massachusetts)
The first few days of TRID are over - some lenders are struggling (some are actually closed for business), but we'll all get through it. Looking for a laugh, Google image search "TRID meme." But now we're moving on to new topics - like the difference between a true pre-payment penalty and just a reimbursement.
So here is the scenario:
You plan to offer a No Closing Cost home equity loan (not line). You'll cover the fees paid to 3rd parties, such as the appraisal, credit report, and closing agent. But what if the borrower repays the loan within 2 years? Can you recover those fees or charge a pre-payment penalty to cover your expenses? Or is this just a risk you'll have to take? Would you disclose the reimbursement of those fees as a "pre-payment penalty" on the Loan Estimate? Is this a pre-payment penalty for calculating QM points and fees and/or high-cost?
Sorry, that question took on a life of its own! Let's dig in ...
Remember Strict New Federal Requirements
Pause for a moment to appreciate how hard it is to actually require a pre- payment penalty post-2014. Very few lenders have kept true pre-payment penalties because they can only be offered where the following requirements are met: (a) the loan is QM, (b) it's a fixed rate loan, and (c) an alternative loan is offered without a pre-payment penalty. (These only apply to closed-end loans).
Not to mention the fact that pre-payment penalties affect the QM points + fees and high cost tests - even though there's no way for a lender to know whether the borrower will actually be assessed a late fee.
Federal Definition
Under Federal law, a charge by a lender to recover "bona fide third party charges" that were paid by the lender on the condition that the loan did not repay within the first three years is NOT a pre-payment penalty. So in our example? Those fees to cover the appraisal, closing agent, and credit report could be recovered under Federal law.
What else this means -
Not listed on the Loan Estimate as a pre-payment penalty
Not subject to the requirements listed above (e.g., this can be on an ARM and even a non-QM)
See 1026.37(b)(4) (and commentary), 1026.32, and 1026.43.
Massachusetts Overlay
Don't celebrate yet - although the Feds don't consider the recovery of bona fide 3rd party fees within 3 years to be a true "pre-payment penalty," there is a Massachusetts rule to worry about.
Under Massachusetts law, "no additional amount" can be required because a borrower pays off a loan early unless both conditions are met:
It is within 3 years (same as Federal rule)
The additional payment is no more than the lesser of (a) the balance of the first year's interest or (b) 3 months interest.
See Chapter 183, Section 56.
In Other News:
Hey if you're near the South Shore tomorrow (Thursday the 8th), swing by the SNECG's breakfast event and we can talk TRID (or anything else). The MassCEC and DOER are giving an overview of their new Massachusetts Solar Loan Program - come over and learn about the loan and the technology behind solar panels. Sign up for the meeting here - it's at the Fireside Grille in Middleboro.
Some Massachusetts banks are taking more than a casual interest in Uber's displacement of traditional cabs. Why? Because they finance the cab medallions!
Fannie issued its TRID letter last night - available here. Is it any help? Well, some would summarize it like this: Fannie won't be auditing for TRID compliance for now, so they'll take (and profit from) the loan until/if things go bad, when they can force the lender to repurchase the loan.
By the way, you know we're supposed to call TRID the "Know Before You Owe Rule" now, right?
What does it take to run a more effective auditing or quality control department? Maybe it takes a change in mindset; a shift away from the "gotcha" mentality and towards an effort to use report findings to educate others. Instead of constantly being the bearer of bad news, perhaps the person looking for mistakes should also be reporting good things ("we're shooting for a 95% success ratio, Jim, not a 5% defect ratio"). Instead of just hearing, "here's what you did wrong" - going the extra mile to recommend - "and here is how I think you could fix that" (or just making time to respond when someone does ask).
"Dependability is sincerity plus will-power. It is merely an outcropping of character. One does not need to be brilliant to be dependable. If you are a person of dependability, you are worth more than if you were clever. Cultivate dependability and you will always have responsibilities. Dependability is more important than talent. Dependability is a talent, and it is a talent all can have."
- Roy L. Smith
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