How Much Would YOU Pay for Consumer Protection?

How Much Would YOU Pay for Consumer Protection?

As we all know, this Friday, January 10, 2014, saw the implementation of many of the Dodd-Frank provisions that directly impact the mortgage industry.  As lenders, we are now held to making sure our originated loans meet the criteria in Dodd-Frank or we risk running afoul of the Consumer Financial Protection Bureau and their ability to audit and remedy with virtually unchecked power.  Loans that do not adhere to the Qualified Mortgage, or "QM" model could be unsaleable and put any lender in a really tight spot.

Today, however, I want to talk about a single provision of this bill that, like many others, strikes me as "anti" consumer protection.  In other words, this is a requirement that makes it HARDER for me to look out for the best interests of my client.

Specifically, all lenders are now keenly aware that loans to be considered either QM or non-QM must pass additional tests that seek to determine if they are HPML, or higher priced mortgage loans.  They must also NOT exceed a 3% cap on points and fees.  It is this second item I would like to examine, and I wish to do so in light of a method by which Fannie Mae and Freddie Mac loans are priced when an originator negotiates his/her client's rate.  This has NOTHING to do with overcharging a borrower needless fees, a practice I have never employed in my 15-year career.

For quite some time, Fannie and Freddie have included loan level price adjustments, or LLPA's, into their overall price.  So, for example, a higher loan-to-value (LTV) might incur a .500% hit to the borrower's price.  The lender, in turn, must factor this into the rate he/she can quote.  A smart lender can use this to his client's advantage and I'll give you a case study, below, on how.

I recently structured and first/second mortgage combination where I needed to maximize the jumbo-conforming loan limit on the first mortgage ($625,500).  Upon running a price check, I noticed that an LLPA of 1.75% was incurred because my first mortgage had an LTV a hair in excess of 75%.  So by lowering the first mortgage just $1000, and increasing the second mortgage by that same amount, I was able to reduce the borrower's rate by .25%!  This will save them $97 per month for the life of the loan!

Now, let's get back to our points and fees calculation.  The CFPB says that if the bank by which I'm employed shows the LLPA's to its loan officers when we negotiate price, the LLPA's must be included in the points and fees calculation.  What???  A fee for which Fannie hits the lender is included in the borrower's points and fees?  Yes --- this is their view.  However, if the lender DOES NOT disclose the LLPA's to the loan officer, but instead bakes them into the base price he/she sees on the rate sheet, then they are NOT included in the points and fees calculation.  Knowledge of this, according to their logic, may entice us to steer our borrowers into higher priced loans.  Never mind that even if we did so, the loan officer compensation regulations, also in Dodd-Frank, would prevent us from profiting from such an action.

So, in my example above and if I did not know better, and I hadn't been disclosed the Fannie attributes that resulted in the buyer's end rate, the CFPB would have "protected" these borrowers by helping them obtain a higher rate than they otherwise could have.

So I'll ask, "How much would YOU pay for this type of consumer protection?"