Bank Regulatory Compliance Update - Issue 200

Points, Fees and Loan Level Price Adjustments

Blair Rugh

by Blair Rugh


January 15, 2014 


Almost all of the new mortgage lending rules are difficult to understand, but I think that the most confusing is the definition of points and fees. An understanding of the definition is not only important for determining which loans are high cost mortgages but also for which may qualify as qualified mortgages.  I am confident that on the day a person at the CFPB wrote the definition, he or she had a monumental fight with his or her spouse before leaving the house, was bitten twice by the family dog, got stuck in traffic for two hours and spilled a cup of boiling hot coffee in his or her lap.  Only a person in that foul a mood could have come up with such a definition.  We have received more questions about the points and fees test than any other topic; well maybe it's tied with other ability to repay and qualified mortgages questions.


The issue is complicated by lenders giving a borrower credit for accepting an interest rate that is higher than the market rate.  For example, if the rate is 5% without any points or fees and the borrower is accepting an interest rate of 5 1/4%, the lender pays the borrower a credit of one point or 1% of the loan amount, in effect, the opposite of the points the borrower would normally pay for a reduced rate.  In the industry, this is generally known as a loan level price adjustment (LLPA).  How does this affect the points and fees test?Is it in effect negative points?  Can it be subtracted from the other points and fees that were charged?The answer to both is no.  Just as there is no provision inRegulation Z for a negative finance charge, there is no provision for negative points and fees.


But, that is not the end of the story. If rather than applying the credit as a credit, the lender uses it to reduce or eliminate the cost of other items that are in the points and fees test, it can have the effect of reducing the points and fees.  For example, a lender uses one of its employees rather than an outside third party to do evaluations for which it charges the borrower a fee of $250. That $250 would be a part of the points and fees because it is a finance charge, and it is not eliminated from the points and fees test because it is retained by the lender.  But, if rather than charging the borrower the $250 evaluation fee, it simply eliminates the fee and reduces the loan level price adjustment by an equal amount, then, the fee goes away, and there is no fee to include in the points and fees test. The same would be true of a document preparation fee or any other fee that would be a finance charge or that would be retained by the lender oran affiliate of the lender and therefore included in the points and fees test.


If you are a lender that offers products where there is a loan level price adjustment that you normally just credit to the borrower, and you are struggling to keep the points and fees within the qualified mortgage allowance, consider applying the credit to the fees that are being charged and then just dropping the applied charges. It may give you some relief.


While I am talking about points and fees, let me get one more thing off of my chest. I think the definition demonstrates the CFPBʼs distrust of the lending industry and its lack of understanding of community banking.  Let's go back to the evaluation fee. Many community banks do in-house evaluations rather than using outside third parties to reduce the cost to the borrower and to speed up the appraisal process.The CFPB believes that if the lender is keeping the fee, it must be overpriced and an excessive charge to the borrower.  Just the opposite of the truth.The same is true for a document preparation fee.Should the lender prepare the documents from its doc prep system and charge the borrower $100 or have its attorney prepare them at a cost to the borrower of $500?The regulation puts a disincentive on any lender provided services even though they are to the consumer's benefit.


Also, the CFPB apparently does not understand how much it costs a lender to put a loan on the books.It takes a significant amount of employee time to take an application,provide all of the disclosures, underwrite and to close the loan.  If the lender is going to stay in business, it has to make enough money to pay those costs.  It can do that in one of two ways: either charge the borrower points on the front side of the loan or through the interest rate charged over the life of the loan.  But, where the regulation virtually prohibits a prepayment penalty, there is no certainty in the life of the loan recoupment.  So, charging the customer upfront points, which may not be to the benefit of the consumer borrower, is the only alternative.


I frequently quote Pogo the Possum, the sage of the swamp: "We has met the enemy and they is us."

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