Q & A | Revision of the “Prepayment Penalty”

Q: The FHA has always required borrowers to pay interest through month end, irrespective of the actual date the payoff was received by the lender, when a borrower paid a loan off prior to maturity.  Did the CFPB revision of the definition of “prepayment penalty” under the Ability to Repay and Qualified Mortgage rules mean that the FHA regulation which authorized the collection of interest through month end on payoffs was prohibited as a prepayment penalty under CFPB rules?

A: Yes, effective January 21, 2015, the FHA policy of requiring a borrower to pay interest through the end of the month if they paid off the loan before maturity was terminated.  Prepayment penalties are prohibited on Qualified Mortgages and the CFPB found that charging interest after a principal balance payoff “is the functional equivalent of a prepayment penalty.”   The new regulation will apply on loans closed on or after January 21, 2015.