As new housing finance regulations take effect and even more are set for the beginning of 2010, a number of questions have arisen on the impact to Federal Housing Administration (FHA)-insured loans. A bill that calls for an increase to the down payment requirement for FHA loans from 3.5% to 5% would also prohibit borrowers from including closing costs in the principal of the mortgage. But, is this provision actually a practice already in place? Many originators have told HousingWire they’ve operated for the last year under a directive from the Department and Housing and Urban Development (HUD) prohibiting the practice. According to Department of Housing and Urban Development Mortgagee Letter 2008-23, dated Sept. 5, 2008, the Housing and Economic Recovery Act of 2008 amended the National Housing Act to eliminate “down payment simplification” — the variable loan-to-value (LTV) limits that were based on the combination of the property value and the average closing costs of the state where the property is located — federal housing commissioner Brian Montgomery wrote. “Closing costs may not be used to help meet the minimum 3.5% down payment requirement. Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages,” Montgomery wrote. A spokesperson for the bill’s author, Rep. Scott Garrett (R-NJ), said the changes brought by the Housing and Economic Recovery Act of 2008 prohibits certain sources of funds for closing costs (like seller-funded closing costs), not stop the financing of closing costs into FHA loans. The new bill would insert language that would codify the prohibition, the spokesperson said. But Garrett’s bill amends language in a different subsection than the section changed by the Housing and Economic Recovery Act of 2008, and it is unclear how the legislation would clear up what lenders are telling HousingWire is a confusing situation. While Garrett’s proposal is still a bill and not law, changes to the Truth in Lending Act (TILA) that put restrictions on prepayment penalties and require escrow accounts on higher-priced loans, among other things, went into effect this month. In a panel discussion on the TILA changes at the CRA & Fair Lending Colloquium in New Orleans this week, the topic of prepayment penalties came up and a panelist brought up the question that if FHA interest penalties can be considered prepayment penalties, is FHA is in violation of TILA? The panel didn’t resolve the question, further highlighting the confusion felt by the industry. Write to Austin Kilgore.