The Office of Thrift Supervision (OTS) pulled the string and issued its long anticipated revision to regulations, http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2002_register&docid=02-24407-filed.pdf prohibiting state chartered savings associations and mortgage companies to charge prepayment fees and late payment fees irrespective of state laws. Beginning January 1, 2003, residential mortgage loans originated by state chartered institutions that qualify as "alternative mortgage transactions" will be subject to state limits on prepayment fees and late payment fees. In Michigan, the maximum prepayment fee permitted by law for loans originated by non-depository institutions is 1% of the prepayment during the first three years of the loan, and no prepayment fee thereafter. See MCL 438.31c(2)(c) at http://www.michiganlegislature.org/mileg.asp?page=getObject&objName=mcl-438-31c&userid= . Other usury rates permitted to Michigan regulated lenders are summarized in a table published at http://www.michigan.gov/documents/cis_ofis_ceilings_24956_7.pdf by the Office of Financial and Insurance Services. In addition, the OTS revised its regulations under DIDMCA to increase the maximum late payment fee for manufactured housing loans from $5 to 5% of the installment amount. Finally, the OTS clarified in its regulations that reverse mortgages include loans that pay a periodic amount or a lump sum to the borrower.

The OTS also summarized the various opinions that define an "alternative mortgage transaction." The preamble states (footnotes omitted):

* Interest rates that reduce if the borrower pays on time. OTS has opined that loans that permit rate adjustments to reflect a borrowers' actual payment performance can be alternative mortgage transactions under paragraph (A) or (C) of the definition.

* Balloon payments. To the extent that a loan has a fixed rate, but permits rate adjustments by having the debt mature at the end of an interval shorter than the term of the amortization schedule (e.g., a balloon loan), a loan may be an alternative mortgage transaction under paragraph (B).42

* Shared appreciation. Shared appreciation loans are specifically included in the definition at paragraph (C) and can be an alternative mortgage transaction.

* Prepayment penalties and late charges. While prepayment penalties and late fees may affect a creditor's rate of return on a loan, conventional prepayment penalties and late charges are ''common to traditional fixed-rate, fixed-term transactions'' and do not transform a fixed-rate, fixed-term loan into an alternative mortgage transaction.

* Negative amortization. Some mortgages, such as ARMs and graduated payment loans, are designed to negatively amortize or have the potential to negatively amortize, in the absence of delinquency or default. OTS believes that these transactions are alternative mortgages under AMTPA.

Prepayment fees have become an integral part of loan pricing for many subprime loan investors. The revised OTS rule may thrust loan pricing above the reduced Section 32 threshold for many lower credit quality borrowers, but allow a shorter turnover time for borrowers who wish to refinance their loans upon improving their credit score. Sophisticated mortgage brokers may be better able to refinance subprime loans, and they will have to - their per loan income is likely to drop as yield spread premiums for subprime loans are reduced due to the likelihood of refinance transactions. We may see some lenders reintroduce exotic loan program features, such as limited term shared appreciation clauses, to substitute for prepayment fees.

Does that have any effect on federally chartered savings banks and nationwide lending?

I believe the rule did not change for OTS regulated institutions (federal savings associations). The OTS merely deleted 12 CFR 560.33 and 560.34 from the list of regulations applicable to state financial institutions that rely on the Parity Act.

Is there a difference between a state chartered savings bank vs. a state chartered commercial bank? As I understand national commercial banks are regulated by OCC. Do state chartered commercial banks (that are not national association banks) fall under the OCC? Also, I thought that the state chartered savings bank falls under the OCC regulation. I just want to make sure who are actually affected by the demise of the Parity Act. Thanks.

State chartered banks fall under the OCC Parity Act rule. State chartered savings associations (savings banks in Michigan), and mortgage companies organized and licensed under state law, fall under OTS Parity Act rules.

Thanks for the quick response. My next question is how can we identify whether the company is a state chartered savings association or a state chartered bank (eg, national banks would have the initials "N.A." after the bank's name) . Obviously, we are not a bank, we are a wholesale lender and the issue we have is in some situations, it is the wholly owned subsidiary of a federally chartered bank or a state chartered bank that is availing itself of the preemption such as having no limitation on prepayment penalty charges. Now, with the demise of the parity act, some banks like the state chartered savings association will no longer be allowed to avail of the preemption but a state chartered commercial bank would still have the ability to charge prepayment penalty on an ARM loan under the OCC regulation. Is this a correct interpretation?

The application of the Parity Act and prepayment fees under OCC rules does not extend to all mortgage loans as it does with the OTS rules. Read the definitions in OCC rules that I posted earlier in another thread.

Most state banking departments post lists of their licensees on their web site. Many lenders post information about where they are licensed on thier web sites. You can look for charters or incorporation in the state (Secretary of State or Commerce Department) where the lender has its main office, and check the common states for charters (e.g. Delaware) if you do not find the charter or articles of incorporation in the state where they have a main office. Publicly traded entities also have info on thier organization at the SEC site and at Hoovers.

If this is for your wholesale lending program, why not just ask the lender for the information and copies of licenses and articles of incorporation, assumed name filings, etc. You are probably going through another round of annual recertifications, and you probably will be asking about information security procedures before the FTC regulations become effecting next spring.

If you want to determine the type of charter that a financial institution has look at the FDIC directory at :
http://www3.fdic.gov/idasp/main.asp
It allows you to look up fdic insured institutions and has a field called "Class" which will tell you if it's state v. federal, bank v. savings institution.