Last week, the Consumer Financial Protection Bureau, CFPB, announced the exclusion of three compensation scenarios from the calculation of points and fees. The final rule prevents the potential disqualification of most mortgages due to double counting issues stemming from the points and fees definition. Mortgage industry regulators always call for commentary before they change or issue rules, and I believe the exacerbated cap resulting from the points and fees calculation as per the original rule was not a real risk to LOs' compensation. However, this is a touchy subject for most of us, and I think a quick overview is timely.
The 3% cap “points and fees” limitation, percent based on the loan amount, was established through the Truth and Lending Act, TILA, section 129c. The CFPB defined “points and fees” as “All compensation paid directly or indirectly by a consumer or creditor to a loan originator that can be attributed to that transaction at the time the interest rate is set.” The problem with this definition is that every time a lender or broker compensated an officer for a loan (think compensation paid indirectly), the points and fees percentage kept adding, this created an additive effect.
To prevent the double counting or additive effect, the CFPB excluded three scenarios from this “points and fees” definition 1 (a net branch is also covered by the loan originator definition put forward by the CFPB)
- No Double Counting of Payments by a Mortgage Brokerage to its Employees
- In this scenario, a mortgage brokerage and an employee work on a transaction; both are considered “loan originators.” The borrower pays the broker for the transaction (direct payment to loan originator), and then the broker pays the employee (indirect payment to a loan originator)
- No Double Counting of Consumer Payments to Mortgage Brokers which have already been included in the points and fees described in the finance charge
- In this scenario, the borrower’s payment to a mortgage broker fell into two charge categories that were to be added, a non-interest finance charge, and a compensation paid directly to a loan originator
- Consumer Payment to Creditors
- In this scenario, the points and fees paid to the lender would increase when it paid an employee, defined as the loan originator. The calculation of points and fees first being the points and fees that were paid by the borrower to the lender, and the additive effect from the “indirect payment” of the borrower to a loan originator
- Mortgage brokers are likely to fall under scenario; however, the CFPB chose not to exclude transactions between the lender and the mortgage broker (i.e. the borrower pays the lender finance charges, and then the lender pays the mortgage broker), to prevent mortgage brokers from steering consumers to expensive loans
Although industry leaders pushed to exclude “real-estate related charges paid to the creditor’s affiliates” from the calculation of the “points and fees” cap as per the definition, the CFPB rejected this exclusion. Note that this rule applies to mortgages of $100,000 or more, and mortgages of lesser amounts can exceed this 3% cap.2 Do you see yourself trying to originate smaller mortgages now?
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