Are Penalties Allowed?
QUESTION:
What’s the story with prepayment penalties? Are they allowed or not?
ANSWER:
Most mortgages come through federally regulated lenders, and federal rules have long allowed prepayment penalties except for FHA and VA loans. Now the situation has changed with passage of Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under the law, prepayment penalties are allowed for “qualified residential mortgages.” QRMs generally include FHA, VA and conventional mortgages, in addition to loans lenders hold in portfolio – in total about 80 percent of all mortgages. Prepayment penalties are not allowed for loans that are not qualified residential mortgages.
Effectively then, prepayment penalties are allowed for conventional and portfolio loans, while such fees remain banned for FHA and VA financing. Under Dodd-Frank, prepayment penalties are limited to 3 percent of the loan amount in the first year of the mortgage, 2 percent in year two and 1 percent in year three.
QUESTION:
Given the robo-signing scandal how do I know if my title has been correctly recorded?
ANSWER:
The robo-signing scandal involves improperly foreclosed homes, properties where the paperwork is questionable, unclear or simply wrong. So, if your property has not been foreclosed in the past five or six years the odds are overwhelming that your title is fine.
That said, when you bought did you get title insurance – both lender’s and owner’s coverage? Title insurance companies are plainly worried about claims regarding foreclosed properties. If there was an improper foreclosure, if the title is clouded, then who will pay? The title insurance company? The lender who foreclosed? The loan servicer? The attorneys who handled the foreclosure?
The bigger problem may be in the future. Will title companies want to offer coverage for the purchase of foreclosed homes? If not, how can such homes be sold? A possible answer is that lenders will offer loans for foreclosed properties – but only with steeper interest rates and bigger down payments. For specifics, speak with a real estate attorney in your community.
