Q: We recently returned to Washington after an extended foreign service tour. We want to buy a house in the District, and have been told that there is no usury law now limiting interest rates on first mortgages. Does that mean that all the other consumer protections that used to benefit home buyers have also been lifted?
A: There is an overall 8 percent usury ceiling in the District, but there are numerous exceptions, including for mortgage loans. As you correctly indicate, the D.C. City Council recently enacted emergency legislation that effectively removed any usury ceiling on first mortgage loans. However, the consumer protections enacted several years ago by the council have not bee repealed, and still remain very much a part of District law.
For your information, the usury law now contains the following provisions.
There is no interest ceiling (often referred to as a usury law) on first mortgages or first deeds of trust on residential real property in the District. Lenders are permitted to charge any rate whatsoever. This is not as shocking as it might sound, however, since an element of competition among the many mortgage lenders in this area does tend to keep rates more or less standard.
In order to charge a rate above the general 8 percent usury law however, mortgage lenders must adhere to the following consumer protections for loans in the city.
The borrowers must be permitted to prepay the loan, without penalty, at any time after three years from the original date of the loan. While mortgage lenders are permitted to charge penalties within the first three years, generally speaking the prepayment penalty -- if any -- is not assessed if the borrowers sells the property in three years. Under most standard mortgage documents (deeds of trust) used by lending institutions in the District, a prepayment penalty will only be charged if the borrower refinances from another lender within that first three-year period.
Under no circumstances, can a prepayment penalty be charged after the three years.
Borrowers who make a down payment of 20 percent of more of the total purchase price of the property must be permitted the opportunity to pay their own taxes and insurance. Mortgage lenders prefer to escrow monies on a monthly basis so that when the taxes and insurance premium are due, the lender will have accumulated sufficient funds to make these payments.
However, in the absence of legislation, such as exists in Maryland, the lenders do not pay interest on these accumulted funds. In effect, lenders have the use of the borrowers' money, interest free. In Maryland, many lenders (specifically savings and loan associations) must pay interest at passbook rate on these escrowed funds.
In the District the situation is somewhat different. If a borrower puts down 20 percent or more, the lender must give that borrower an opportunity to pay his or her own taxes and insurance. If the borrowers elect not to pay their own taxes and insurance, however, lenders are not obligated to pay any interest on these escrowed funds.
This consumer protection applies to all mortgage lenders in the District of Columbia.