Truth-in-Lending Prepayment Penalty Disclosure for FHA
Written By: Stacey Sprain, Certified Ambassador Loan Processor (CALP)
With the recent changes to Regulation Z Truth-in-Lending disclosure law, I’ve been questioned on numerous occasions as to why the Truth-in-Lending disclosure must state that if the borrower pays off his or her loan early, he/she may have to pay a penalty.
Between you and me, I still think the Truth-in-Lending disclosure is a waste of paper. Name one person who can explain every single item within it, how every figure is calculated and exactly what it means with complete accuracy and I’d be completely amazed. In 18 years I’ve never met a single person who can meet that challenge and I certainly myself can’t claim to completely understand it. To me, it’s confusing, it doesn’t mean a darn thing to the average consumer and it’s a waste. However, at the same time, I also do my darndest to make sure I am complying with all rules and regulations associated with it and I’m sure that you all do the same.
On that note, I’ve been getting a common question lately that warrants explanation. Several people have asked “why it is that the TIL must reflect that an FHA loan may be subject to prepayment penalty?”
Though it generally understood that FHA loans do not permit prepayment penalties, if the borrower pays his or her loan off on a date other than the regularly scheduled due date (which would be the first of each month), he or she may be required to pay the interest up to the next month’s due date (the first of the following month). For Regulation Z purposes, the possibility that additional interest may be charged is treated as a prepayment penalty. Specifically, Regulation Z Section 226.18(k)(1) requires a statement in the TIL disclosure "whether or not a penalty may be imposed if the obligation is prepaid in full." The commentary to Regulation Z Section 226.18(k)(1) provides in relevant part that "penalties include, for example...interest charges for any period after prepayment in full is made." This is WHY the prepayment section of the Truth-in-Lending Disclosure on an FHA loan should look like this:
Prepayment: If you pay off your loan early, you X may □ will not have to pay a penalty.
About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.
SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)
posted by Editor in Chief at 10:07 AM
5 Comments:
Hi Stacy:
I now have questions about if the 30 days interest collected on an FHA payoff is a prepayment penalty or not. Reg Z says yes, HUD says no. I looked at the "Frequently asked questions about RESPA and HUD-1" and HUD says it is not a prepayment penalty. Any clarification?
good info
i teach tila for the wa assoc of mortgage prof and i bring this point up. i now have the source.
go easy on tila. it does have a place in our dislosure world, more so than many of the countless forms we have to provide.
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Susan
http://pay-dayadvance.net
Thank you Stacy. I asked my loan officer more than once about this. He couldn't directly answer the question, but he did say that I would not have a prepayment penalty. Thanks again for the clarification!
Stacey, we are contemplating borrowing $ against our home to purchase a motorhome. In approximately 2 years after that, we plan to sell our home and buy a smaller, less maintenance required home. We have both just turned 60 and will have less time for maintaining our large home. When we sell, how can we avoid the prepayment penalty dragon on our loan without getting burned too bad?
Post a Comment
<< Home