FHA Insurance Creating “Subprime” Loans
Greetings from the Turning Stone where I will shortly be going downstairs to attend the second day of the Association’s Annual Legal and Compliance Conference. To no one’s surprise, the biggest issue in the room is how to comply with the Dodd-Frank mandated, CFPB proposed mortgage regulations.
Even before these changes, however, the regulatory environment continues to result in unintended consequences. For example, on August 30th New York State’s Department of Financial Services extended a temporary order excluding FHA mortgage premium increases that took effect earlier this year from subprime loan calculations under New York State law.
As I have written in previous blogs, the FHA has been running short on cash, raising concerns that it would have to get a bailout from the U.S. Treasury. One of the things it has done to put itself on firmer footing is to increase the premiums FHA borrowers pay. These increased premiums are included in the APR calculations used under New York State law to determine if a loan is subprime. As a result, if these new calculations are included in the terms, there are many New York lenders making subprime loans without any change in underwriting policy, violating section 6-m of the Banking Law.
Fortunately, the Department of Financial Services has issued an order excluding these new premiums from the subprime loan calculation. But clearly, this is a problem in search of a long term solution. My hope is that when the CFPB comes out with its combined posting disclosures, which are expected to include new fees in the calculation of the APR, that both federal and state regulators will raise the threshold for what constitutes so-called “high-cost” or “subprime” loans. In the meantime, keep your eyes open. There are an awful lot of moving parts and things probably won’t settle down for the next several months.