FHA to end controversial policy of ‘post’ payment penalty

The Federal Housing Administration is overhauling a long-held policy of charging extra interest payments on loans it insures to borrowers who have already paid off the principal debts on their mortgages.

FHA has permitted its lenders to charge borrowers a full month of interest when they sell or refinance a home, even if borrowers had paid off the mortgage weeks prior to the end of the month. As the Los Angeles Times explains, if borrowers went to closing on an FHA loan on September 3, lenders would be allowed to continue to charge them interest through September 30.

For years, critics have argued that the policy was unfair to borrowers. The Consumer Financial Protection Bureau raised the issue with FHA last year, asking why FHA was allowing its lenders to collect post-payment penalties from borrowers at closing.

FHA had argued that its bond investors, who purchase packages of insured mortgages, expected full-month payments of interest plus principal. FHA said that its lenders did charge borrowers slightly below market rates to help compensate for the post-closing payments.

Beginning January 21, 2015 new FHA mortgages will require lenders to collect interest only on the balance remaining on the date of closing for a home sale or refinancing. However, sellers and refinancers who currently have FHA loans and expect to close before January 21 likely won’t see much benefit from the new policy.)