An Under-the-Radar Win for Common Sense

By Robert Freedman, Senior Editor, REALTOR® Magazine

It’s a small thing, but it’s impact could have been big. Some new federal lending rules take effect tomorrow (under HOEPA—the Home Ownership and Equity Protection Act) and among them is a restriction on prepayment penalties, something anyone who’s taken out a mortgage would certainly appreciate. No one likes to pay a prepayment penalty, and certainly not when they’re abusive.

But lenders were concerned that the rule, which imposes the prepayment restriction on higher-priced loans (those with an interest rate 1.5 percent above prime), would snag higher-priced FHA loans. FHA requires borrowers, when they pay off their loan, to pay the entire month’s interest, no matter when during the month the pay-off occurs.

Depending on how you look at it, that extra interest payment has the character of a prepayment penalty, and indeed, NAR has been trying to get FHA to change that policy.

Lenders said they would stop making those higher-priced loans rather than risk a HOEPA violation for charging the full month’s interest in a pay-off. Since the loans represent an estimated 20 percent of the FHA market, such a move by lenders would have been a blow to borrowers.

But common sense prevailed. NAR President Charles McMillan raised the matter with the Federal Reserve and FHA Commissioner David Stevens, who then also raised the matter with the Federal Reserve. (The Fed’s HOEPA rules take effect tomorrow.) The Fed responded to HUD quickly and clarified that it didn’t intend to classify the FHA interest charge as a prepayment penalty. Case closed. All within just a couple of days.

Again, a small issue, but certainly one that threatened to pack a lot of punch. Because everyone handled the issue so professionally, it’s one less thing lenders, borrowers, and real estate professionals have to worry about.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at

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  1. Gladys Gort

    I know a person that did a refinance with a lender a little over a year ago, his rate was high but he was glad at that time to be able to refinance his land contract to pay off the seller. He was told by the lender he could refinance in a year and get a lower rate wih them. But if he refinanced with a different company he has a 3 year pre payment penalty.
    Because of the times right now especially he went to his lender and asked to get his rate lowered, (9.8%) and they told him even if he refinances with them, his current lender, he would have to pay the pre payment penalty. That is crazy, and he can not get through to any one at the lender to discuss this further, they just get smart, and say, sorry all you can do is sell your house if you don’t want to pay the pre payment penalty, that he has 2 more years to wait to refi.
    I thought lenders were to help people, this lender was helped but they wont help him.

    I have never heard of a lender still charging the pre payment penalty if they did the refi.

    Any help would be appreciated.

    Thank you,


  2. Geo. J. Donaldson Jr.

    Bunk and some more bunk. Like lenders are going to stop making these loans. Banks and savings and loan companies only stay in business when they make loans, no lending no business. It was just an empty threat. Why wasn’t their bluff called? Because it’s politics stupid. Politicians and those folks who are appointed by them are motivated by income as in CASH.

  3. tom

    ms. Gort,
    Lenders cannot arbitrarily “charge” a prepayment penalty. If your freind cannot read, he should have gotten someone to read the contract to him. The terms are in the contract.
    If he didn’t agree to a prepayment provision, he should have said so when getting the loan. This is an example of people thinking they should be able to agree to a contract and then change it to suit them later, becaause they were too lazy to read it. Why don’t you tell your freind to go find a shyster lawyer to sue the lender, and help him be unethical? After all, people who have assets should be sued, and people should only adhere to what they agreed to if they continue to feel like it suits them. Your freind has poor credit that he created, or he would not have had to agree to this provision to start with. Without the prepayment penalty, his interest rate would have been higher, or he would have been denied the loan.
    Moral of the story: It’s your responsibility to read the contract BEFORE you sign it.

  4. M.Gaynor

    A hearty high-ho to Mr. Donaldson. Whose side is the NAR on anyway? Why should the banks be allowed to tack on up to 30 days extra interest? Didn’t they collect enough in upfront fees? And why does the person who closes on the last day of the month not have to pay an extra 30 days interest? Of course lets not tell anyone pre-paying will lower your credit score bacause credit scores are really about how much you will make the bank rather than how likely you are to repay your loan…….SHHHHHHHHHH!