Written By: Stacey Sprain
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.
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About The Author
Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: contact@mortgageprocessor.org.
