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Beware the 3 Percent Cap on Fees and Points

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By Ken Trepeta

The Consumer Financial Protection Bureau (the Bureau) issued a somewhat final Ability to Repay (ATR) Qualified Mortgage (QM) rule in January. The pleasant surprise was the inclusion of a safe harbor for many QM loans. NAR and its industry partners fought for several months to ensure that the less safe “rebuttable presumption” was not adopted as the primary standard. The Bureau did not yield a pleasant surprise with another key part of the QM—the 3 percent cap on fees and points and its impact on affiliates. In fact, it made the situation marginally worse by including other items in fees and points that will make it more difficult for a mortgage firm with affiliates involved in the transaction to meet the test.

The Bureau essentially used the same excuse as the Federal Reserve for why they decided not to exclude affiliate title fees. Both relied on the last minute withdrawal of language fixing the problem as evidence Congress did not intend to address discrimination against affiliates. We all know this was less Congressional intent and more the perils of merging two massive pieces of legislation in a couple of days. So when calculating fees and points to determine if a loan is QM, companies with affiliates in the transaction must include title charges, as well as escrows for insurance, along with a number of other charges unaffiliated companies do not have to include.

What makes the situation worse than before is that the Bureau has chosen to include loan officer compensation and GSE loan level price adjustments (LLPAs) in the calculations as well. While this would apply to both affiliated and unaffiliated companies, it only serves to exacerbate the affiliate calculation and likely push more loans over the threshold.

The Bureau is still trying to decide whether the loan officer compensation portion should be offset by other charges paid by the consumer. In other words, if the consumer pays an origination charge of $2,000 and the loan officer is paid $1,000, should the $1,000 be counted as part of the $2,000 origination or counted separately? One proposal issued by the Bureau is to count the two together for $3,000 in fees counted toward the cap. Another assumes the $2,000 covers both, thus avoiding “double counting” as it has been referred to. NAR has proposed that loan officer compensation should not be counted in fees and points at all, but if the Bureau does this, it should at least not adopt a double-counting model.

NAR also opposes counting the LLPAs toward fees and points. These LLPAs are simply risk-based charges imposed by the secondary market. They are not compensation going to a lender or originator. It could be devastating to some borrowers, as these charges could exceed the 3 percent cap in and of themselves.

We do not expect many changes on the Bureau’s end of this regulation, so NAR and its industry partners are pursuing legislation once again to fix this discrimination against affiliates and those measures that would further reduce access to affordable credit for otherwise qualified borrowers. If you care about these issues, and you should, tell your Representatives and Senators to cosponsor and support “The Consumer Mortgage Choice Act.”

This column is brought to you by the NAR Real Estate Services group.

Ken Trepeta is the director of Real Estate Services for the National Association of REALTORS®.

For more information, visit www.realtor.org.

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