Prepayment & late fees at issue
By CHRISTY ROBINSON
12/24/2002

The National Home Equity Mortgage Association (NHEMA) sued a government agency Friday over new regulations affecting prepayment and late fee rules on mortgage loans.

Earlier this month, the U.S. Office of Thrift Supervision (OTS) granted NHEMA's request to push the implementation of the new rules from Jan. 1 to July 1. The subprime lending association said lenders were working frantically to meet the Jan. 1 implementation date, but many of them wouldn't have been able to meet it. Now NHEMA is hoping to have the new rules eliminated all together.

The OTS announced in late September that those rules will be removed from the list of agency regulations that apply to state housing creditors under the Alternative Mortgage Transaction Parity Act.

"NHEMA believes that these regulations are bad for the consumers [that] the mortgage lending industry serves," said Maury Shevin, general counsel of the subprime lending association. "They would effectively eliminate options available to borrowers now that lower interest rates make mortgages more affordable."

Shevin said NHEMA's goal is for the court to rule that the OTS acted beyond its authority in adopting the regulations.

By creating separate regulatory systems for state-chartered and federally-chartered institutions, the OTS rules would reduce competition among lenders and raise mortgage costs, Shevin said.

Prepayment and late fee options have been regulated by the federal government until now, and major regional and national lenders have been working under the single set of federal regulations. This system has maintained a "level playing field" among banks and lending institutions chartered by the federal government, NHEMA said.

Many borrowers may lose access to those options if state-chartered lenders must comply with different regulations in each jurisdiction where they do business, the announcement said. It could lead to an increase of 25 to 80 bps in the average loan interest rate for all consumers.

When the OTS announced the regulation changes in September, OTS director James E. Gilleran said the agency had reviewed how the parity rules affected state housing creditors' ability to make alternative mortgages.

"[The] OTS determined that the provisions dealing with prepayment penalties and late fees were not essential to making alternative mortgages," he said. "Therefore, it is not necessary to continue to identify these provisions as applying to these loans."

In doing this, NHEMA's Shevin said the OTS clearly exceeded its legal authority under the Parity Act.

"Its actions risk hurting the borrowers and the vibrant, competitive mortgage lending market that the OTS is charged with protecting."

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

The OTS, run by the U.S. Department of the Treasury, regulates all federally chartered and many state-chartered thrift institutions, which include savings banks and savings and loan associations.

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

NHEMA sued the OTS on Friday in the District of Columbia's U.S. district court. The case has been assigned to Judge Gladys Kessler.

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