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Establishing a “Bona Fide” Discount Methodology!

As part of the new QM regulations, you will be required to demonstrate how a discount point is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer.  What??

Okay, let me translate……

This is what you are going to need to do to prove out your methodology:

1.  Show that the way you apply discount is reasonable and consistent with industry norms.  How?  Research the methodology from your investors and apply their patterns to your pattern.

2.  Next, if you are selling to Fannie and Freddie, demonstrate that your bona fide discount is just like theirs.

3.  Use a “to be announced” market for Mortgage-Backed Securities to establish that the interest rate reduction is consistent with the compensation that the creditor could reasonably expect to receive in the Secondary market.

4.  By all means, apply them consistently to all clients.  Deviations either through discretion or any other methods will cause you Fair Lending headaches.  If different investors apply different methodologies, then record those deviations.  If one lender is less favorable than another lender and you close similarly situated clients with each lender; be prepared to justify why one client received dissimilar discounting versus another client who had a comparable financial profile.

5.  Discuss how you will demonstrate to the examiner your methodology AND prove that it is applied consistently.

Okay, I didn’t say it would be easy.  This is tough stuff.  So in my humble opinion, pay attention to the overall methodology and let your technology prove it for you.

Or, just become an Optimal Blue client and we will work that out for you!  For those of you that fuss about pricing…..Remember, Mama always said you get what you pay for!  If you’re south of the Mason Dixon then you already know “if Mama ain’t happy, ain’t nobody happy” translates to “if the CFPB ain’t happy, ain’t no one gonna to be happy”!

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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