The U.S. Department of Agriculture’s Rural Housing Service (RHS) today published a final rule implementing the new annual fee that will be charged on all RHS-guaranteed single family housing loans obligated on or after October 1, 2011.
The Housing Act of 1949 was amended in July 2010 to authorize RHS to charge an annual fee. The purpose of the annual fee is to make the RHS loan guarantee program “subsidy neutral,” meaning that it will not require taxpayer funding to continue operating at its current size. While RHS acknowledges that the annual fee will increase the cost of RHS-guaranteed loans for borrowers (by approximately $20 per month for the average loan), RHS believes that the annual fee is necessary to avoid a reduction in the size of the program, which would result in fewer RHS-guaranteed loans being made.
RHS will charge the annual fee in addition to the up-front guarantee fee that it already charges, and the fee will apply to both purchase loans and refinance loans. Unlike the monthly mortgage insurance premium (MIP) charged by the Federal Housing Administration (FHA), the RHS annual fee will be charged for the life of the loan regardless of the loan-to-value ratio. The annual fee will be calculated at closing and every 12 months thereafter based on the average annual scheduled unpaid principal balance of the loan. For fiscal year 2012, the annual fee is 0.3 percent. That number may change over time, but the Housing Act currently limits the annual fee to no more than 0.5 percent. RHS notes that because the RHS annual fee rate is much lower than the current monthly MIP rate, RHS-guaranteed loans are still less expensive for borrowers than FHA-insured loans.
The annual fee will accrue monthly on a prorated basis, but RHS will bill lenders and collect the fee on an annual basis. In January of this year, RHS reminded lenders not to attempt to pay the annual fee on a monthly basis as they would with FHA MIP payments. RHS will bill the servicing lender of record on the 3rd business day following the 15th calendar day in the anniversary month in which the loan closed. The fee will be due to RHS on the 1st day of the following month. For example, if a loan is closed on October 25, 2012, then in subsequent years (2013 through the life of the loan), RHS will bill the lender on October 18 (adjusted as necessary to account for non-business days) and the annual fee payment will be due to RHS on November 1. This marks a change from the proposed rule published on October 28, 2011.
RHS may also charge a late fee of 4 percent if the annual fee is not paid by the 15th of the month in which it is due. In the example above, a late fee would be assessed if the payment was not made by November 15. However, in recognition of the system and process changes that may be required for lenders to implement the annual fee, RHS will not impose a late charge on the initial annual fee due for loans obligated in fiscal year 2012.
RHS will charge the lender for the annual fee, but the lender may pass the fee on to the borrower. Lenders have the option of collecting 1/12th of the annual fee from the borrower each month; if a lender chooses to do so, however, it must include the monthly annual fee payment amount when calculating the borrower’s PITI (principal, interest, taxes, and insurance) ratio. While RHS is not responsible for interpreting and enforcing the Real Estate Settlement Procedures Act (RESPA), the final rule states that RHS does not believe it would violate RESPA to escrow the annual fee.
Related guidance, including a Guarantee Fee and Annual Fee Calculator, Annual Fee FAQs, and an Annual Fee Implementation Guide, is available online.