New rule affects late fees and prepayments

September 30, 2002

By MortgageDaily.com staff

The Office of Thrift Supervision (OTS) announced last week that it is removing prepayment and late fee rules from the list of OTS regulations that apply to state housing creditors under the Alternative Mortgage Transaction Parity Act. OTS is the primary regulator of all federally chartered and many state-chartered thrift institutions, which include savings banks and savings and loan associations.

The Parity Act, passed in 1982, grants state-chartered housing creditors parity with federally chartered lenders when making alternative mortgages, such as adjustable rate mortgages loans, by permitting them to follow OTS rules.

The change affects state-chartered housing creditors, including state savings associations, state savings banks, mortgage bankers, certain HUD lenders, and others who make mortgage loans. They would once again be subject to state rather than OTS prepayment and late fee rules, according to the OTS announcement.

Not subject to the Parity Act, federally chartered thrifts are supervised by OTS and would continue to follow OTS rules.

Consumer protection concerns sparked the change, said OTS chief counsel Carolyn Buck in a Dow Jones Newswires interview. Thrifts and banks are subject to considerable regulator scrutiny, but oversight of other types of mortgage lenders isn’t as strict.

State regulators may be in a better position to notice problems and impose additional safeguards as needed, she reportedly said.

“After reviewing how the parity rules affect the ability of state housing creditors to make alternative mortgages, OTS determined that the provisions dealing with prepayment penalties and late fees were not essential to making alternative mortgages,” said OTS director James E. Gilleran. “Therefore, it is not necessary to continue to identify these provisions as applying to these loans. In addition, available data indicated that including late fees and prepayment penalty provisions may have allowed some state housing creditors to engage in lending practices outside of state consumer protection laws.”

Buck said that the agency doesn’t believe the abuses are occurring at the federal level, Dow Jones reported.

The 298 comments received by OTS on the proposed rule were almost equally divided between supporters and opponents of the change, according to the announcement. The comments came from state housing creditors and their representatives, consumer groups, states, financial institutions and trade organizations.

The new rule will be effective on January 1, 2003.