Federal Reserve Tweaks New Rule to Avert FHA Stoppage

The Federal Reserve Board has agreed to tweak its interpretation of prepayment penalties so the new HOEPA rule that goes into effect this Thursday (Oct. 1) will not disrupt the origination of higher-priced Federal Housing Administration loans. The Department of Housing and Urban Development and industry groups were concerned HOEPA restrictions on prepayment penalties would stop lenders from making higher-priced FHA loans and cut production by an estimated 20%. The potential landmine involves a Ginnie Mae policy of paying its investors a full month's interest when a FHA borrower prepays a loan. Fed attorneys concluded that the borrower's payment of this extra interest for the remaining days of the month is a prepayment penalty under HOEPA and Regulation Z, contrary to HUD's interpretation. Under pressure from industry groups, the Fed agreed to go along with HUD's interpretation. "Lenders that engage in this practice would not be required to treat the interest charged from the date of repayment until the next installment due date as a prepayment penalty for any purpose under Regulation Z," the Fed said in a letter released late Tuesday. The Fed letter hints that HUD is considering changes to its repayment policies and it could lead to the lenders paying the extra interest.