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.