I receive many questions privately and I thought I would share some of them that seem to be asked by many. I hope this assists you in your policy decisions, but as always, please check with your legal counsel.
Question: Hi Tammy, What is your rationale for including above par pricing in the Points & Fees test? This would be secondary income and, to my knowledge, is not included in the calculation. Appreciate your insights!
Like all regulation, they seem to morph into one another so this is how I am approaching it. As always, I recommend legal counsel.
1. Par pricing is Rare in the secondary pricing arena.
2. This means that the company will experience variation in debits and credits.
3. Variations in Debits and Credits mess with your ability to prove a consistent secondary marketing methodology.
4. The big issue is Time-Price differential and how this affects your process.
5. The CFPB is doing price traces back to adjusted starting rate/price.
6. Several high profile attorneys on webinars have eluded to the fact that the lender will be required to price trace back to rate/price (rate/price to LO, not secondary…..at least not yet!). This will include demonstration of LLPAs and how they were handled along with how debit and credits are handled. This is then compared to the secondary marketing methodology. As you can guess it you keep the overage you will fail the methodology test because mathematically it will not hold true for each client due to variation. Variation in our new world is the enemy! So basically the math will not work to your advantage for pricing disparity.
Let’s assume my secondary marketing methodology is that for every 50bps in in price I reduce or increase the rate by .125%
I tell the examiner that this is my methodology and now I have to demonstrate how that is done.
On one client the company receives an overage of .375%, on another client the company receives an overage of .25% and on yet another .125%. This shows inconsistency in my pricing methodology because on some clients I am making more than other clients. Not only that, but notice that this “example” has not been given bright lines in the regulation. Therefore, we only have our conservative approach to consider, or risk all of our loans with overage, failing the QM through points and fees.
So now the question becomes how do I make this work without bringing scrutiny to my methodology?
This can begin with Pricing Policy that can be demonstrated as verifiable and consistent.
Perhaps I decide that if a client is within .125% over or under Par then the rate becomes Par. On some loans I make more and on others I lose more but it should even out in the long run. The point is that my methodology is consistent and can be proven.
Since I know that my methodology is 50bps for each .125% that still leaves me with the decision as to what to do if the price is .25% or .375% above or below. This can either be handled as the example using the .125%, or I can make the decision that overages are borrower credits and debits are borrower charges. Whatever is decided must be demonstrated and consistent.
Okay, now let’s take it one step further and read into the guidelines to interpret why we have these changes:
1. CFPB is trying to make pricing transparent to the consumer and to the examiner.
2. Pricing methodology should not deviate from your policy OR contain variables that would cause deviation; so that they can examine us easier.
This is why many companies are going with the following policy just to keep it simple until we see how they are handling this. If it is over par it is a credit, or goes into the points and fees. If it is under par it is a charge to the client. If you choose to issue a credit as part of your policy, make sure you set up your technology to show exactly which closing costs (dollar for dollar trace) the credit was applied to.
Join the discussion 2 Comments
First, thank you for your valuable feedback and insight.
To make sure I understand how rebates can or cannot be used, I’d like to put out an example:
If a consumer was quoted a rate and fees, which at the time, would have met the points-and-fees test for ATR/QM of <3%, making the loan eligible to sale to the GSEs, but, through the underwriting process, we find that the rate and fees will change (primarily through LLPAs) and exceed the 3% threshold, but we still want to honor what was quoted and make the loan still eligible for sale to secondary, cannot we not apply rebates to bring the points-and-fees down to still make the loan eligible for sale, now brining the points and fees <3%?
Yes, the regulation is based on the final lock. However, if this results in a pricing exception make sure you document the exception and monitor this for fair lending purposes. You may also want to consider adding this to your compliance policy as this will demonstrate that the adjustment to QM is applied equally to all clients. I hope this helps!