B2-1.4-05: Principal Curtailments (06/30/2015)
- Marsha Freeman
- Kacey Olson
© Fannie Mae Single Family Selling Guide
Overview
A principal curtailment is the application of funds that are used to reduce the unpaid principal balance of the mortgage loan. Fannie Mae permits certain curtailments prior to loan delivery provided that the delivery data reflects the curtailment as described below.
Acceptable Curtailments
Fannie Mae permits curtailments for the following reasons:
The lender may apply a curtailment to refund the overpayment of fees or charges paid by the borrower, in any amount, in accordance with applicable regulatory requirements.
If the borrower receives more cash back than is permitted for limited cash-out refinances, the lender can apply a curtailment to reduce the amount of cash back to the borrower to bring the loan into compliance with the maximum cash-back requirement. The maximum amount of the curtailment cannot exceed the lesser of $2,500 or 2% of the original loan amount for the subject loan. For example, if the borrower received $3,500 cash back at closing on a loan amount of $200,000, the lender could apply a $1,500 curtailment prior to delivery to Fannie Mae. This would result in “net cash back” to the borrower of $2,000, thus meeting Fannie Mae’s limited cash-out refinance requirement.
Lenders must apply these curtailments prior to delivery of the loan to Fannie Mae. Such curtailments may not be held until after whole loan delivery or for application in the month subsequent to issuance of an MBS.
Fannie Mae also allows additional principal payments remitted by a borrower to prepay the mortgage loan as permitted by the loan documents. All borrower-remitted curtailments received by the lender prior to delivery of the loan to Fannie Mae (or MBS issuance) must be applied prior to delivery and may not be held until after loan delivery or MBS issuance. Curtailments received after loan delivery must be applied in accordance with the Servicing Guide.
Documentation
If the curtailment is made at the time of closing, the amount must be clearly documented on the settlement statement. If the curtailment is applied after closing, but before delivery, the mortgage loan file (or servicing file) must be documented with the amount of the curtailment and the reason or source of the curtailment (for example, lender refund or borrower).
Delivery Instructions
The following table describes the requirements for the delivery of certain data elements that may (or may not) be impacted by a curtailment applied prior to the delivery of the loan to Fannie Mae:
| Loan Delivery Field Name | Delivery Requirements Due to Curtailment |
|---|---|
| Original Loan Amount (Sort ID 319) | The loan amount as disclosed on the note (without reduction for any principal curtailment). |
| P & I (Fixed-rate) (Sort ID 268) P & I (ARMs) (Sort ID 436) | The principal and interest amount as reflected on the note without reduction for any principal curtailment. Note: If a principal curtailment has been applied and the loan has been recast over the remaining term prior to delivery to Fannie Mae, the loan is not eligible for delivery. |
| Issue Date UPB (Sort ID 385) | The scheduled unpaid principal balance including reductions for any principal curtailment applied prior to delivery. |
| Last Paid Installment Date (Sort ID 440) | Do not advance the last paid installment date to account for the application of a principal curtailment. |
| Current UPB (Sort ID 442) | The current unpaid principal amount including reductions for any principal curtailment applied prior to delivery. |
| Maturity Date (Sort ID 256) | The maturity date as reflected on the note without regard to the effect of any principal curtailment that has been applied. |
| Aggregate Curtailment Amount (Sort ID 438) | The dollar amount of any principal curtailment applied to the loan prior to loan delivery. |
Refer to C1-2-02, Loan Data and Documentation Delivery Requirements (04/03/2018), for additional information and resources regarding loan delivery.