Tampa Bay Times – Kenneth R. Harney
Pressured by consumer protection regulators, the Federal Housing Administration is expected to end one of its most controversial practices: Charging borrowers interest on their home mortgages for weeks after they’ve paid off the balance. Though FHA officials declined to discuss the matter, the agency will have to eliminate its policy of collecting a full month’s worth of interest — sometimes hundreds of dollars — even when borrowers terminate their loans earlier. For instance, if you pay off your FHA loan on July 3 in order to buy a new house with a conventional mortgage, FHA currently will demand interest charges on your mortgage through July 31, collecting it out of the settlement proceeds.
But under the Consumer Financial Protection Bureau’s "qualified mortgage" rules, charging interest after a principal balance payoff "is the functional equivalent of a prepayment penalty," according to the bureau.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the bureau, prohibits prepayment penalties on "qualified mortgages," that is, residential loans that incorporate key consumer safeguards and are underwritten to limit risks for lenders and borrowers alike. Qualified mortgages are expected to become the gold standard for home loans in the coming years, and will offer the lowest rates and best terms available in the marketplace. The Dodd-Frank law designates the bureau as the federal government’s drafter of rules spelling out what constitutes a qualified mortgage. Among major players in the mortgage field, FHA is the only one that requires full-month interest payoffs. Fannie Mae, Freddie Mac and the Department of Veterans Affairs all stop collecting interest on the day of payoff.