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Passing the Points & Fees Test for QM!

What is included in the Points & Fees?  How do we know if we have a QM Loan?  Much discussion has occurred around this issue with differing opinions from industry consultants.  I spent an exhaustive amount of time getting everyone on the same page because as a pricing engine it is necessary for us to offer a platform that does these calculations correctly prior to January 2014.  Yes, I said calculations (plural) because it is not just “what goes into the 3%” that must be considered.

QM loans must meet ATR and Points and Fees calculation to be Purchased by the GSE’s.  Today I will focus on just the points and fees calculation as it relates to pricing your loans in the new world.

So Where Did I Come Up With This Information?

•I read the guidelines over and over.  Please send money to my eye fund!

•I confirmed the calculations with several industry consultants, the general counsel of the CFPB, the counsel for a very large bank and an attorney with FNMA.  It was tough to get everyone on the same page, and to be honest no one will put it in writing beyond what they said.  Yet, I heard it along with several other hundred people and when compared to their exam guides, guidance, seminars and regulations it makes sense.  However, these are my opinions and in no way reflect the opinion of my employer, Optimal Blue.  Lawyers make us all say these things!

First, the Overview and then the Nitty Gritty for The Creditor and then The Broker.

Overview

Common Misinterpretations:

First, let’s clear up what I believe are common misinterpretations.  Then I will show you what I believe (through countless industry confirmations) is a thoughtful approach to each business line.

  1. For a QM you must pass the 3% test, the APOR to Interest rate test and the APR to APOR test.  While everyone was talking about what is in the points and fees, little conversation was centered on the other two tests.  You’ll see why as I take you through the calculation.
  2. LLPA’s ARE included in the points and fees calculations IF, you as the creditor, present your pricing with LLPA’s.  LLPA’s that are “baked” into the rate at the creditor level and displayed to the loan originator with them baked in without additional risk adjustments, are not part of the points and fees calculation because they exist in the rate.  Don’t get too excited!  Remember the other two tests I talked about?  Too high of a rate with LLPA’s or lender contributions = higher rate.  Higher rate=potential to flunk the other two tests!
  3. I point blank asked an attorney for FNMA if they were planning on baking in their pass-through LLPA’s into the rate and the answer is NO.  So, that means you will either need to do that before you present pricing, or they will be included in the points and fees calculations.
  4. The examiner will look at what the originator was offered and do the calculations from there.  Your ability to profit too much is why they have the APR and APOR test!
  5. The amount included in Points and Fees is NOT equal to the Finance Charges for APR; although there are some similarities.
  6. If the creditor or the originator has affiliated arrangements, the entire amount of the charge will be included in the points and fees calculations.  For instance, if your company has an affiliated title company, whether or not you use them the entire amount of the title charges will be in your points and fees calculations.  This doesn’t mean the difference between what you charge and what the market charges.  I believe the CFPB would like to see ALL affiliate arrangements gone.
  7. MI is tricky.  PMI that is paid upfront AND is refundable on a pro-rated basis AND it is automatic, you only need to use the difference between that amount and the amount of an FHA upfront premium.  Caution!  Most PMI is not set up that way so let us hope they change, or that monthly premiums become your norm.
  8. Any Seller points are excluded from the points and fees calculation, to the extent that they are presently excluded under Finance Charges.

Points & Fee Calculations:

There are a couple of things to remember.  First, points and fees calculation are those fees known at or before loan consummation.  Second, unless specified, closing costs that a creditor pays and recoups from the consumer over time and THROUGH the interest rate are NOT counted in points and fees.  This means that creditors can bake that into the rate too.  Yet that doesn’t mean that you will pass the APOR and APR test if you do that (more on that in your business line analysis).

There are 6 Categories to explore, and depending on how your company is structured and priced, fees may or may not apply:

  1. Finance Charges:  Not all finance charges are included.  See Charts below.
  2. LO Compensation
  3. Real Estate Related Fees (See the Reasonable test)
  4. Premiums for credit insurance, et al where the creditor is the beneficiary or debt is cancelled or there is suspension of coverage payments.  This does NOT include Hazard/Homeowner’s insurance.
  5. Maximum Prepayment Penalty
  6. Prepayment Penalty paid in a refinance

 

Assumptions:  100,000 loan amount or higher, ATR Qualified, QM Product Type, 1st lien, residential mortgage.

Note:  Loan amounts 60k-100K have a $3000 (points & fees) limit.  20k-60K have a 5% (points & fees) limit.  12,500k-20k $1000 dollar (points & fees) limit.

 

Finance Charges (P.S., this part should already be figured out within your company.  If not, let me know and I will write an in-depth overview of Finance Charges as well).

Always Included:

•Interest

•Transaction Fees

•Loan Origination Fees

•Consumer Points

•Credit Guarantee Insurance Premium (FHA, VA Funding Fee, USDA)

•Charges imposed on the creditor for purchasing the loan which is passed onto the consumer.

•Discount Points for inducing payment by means other than credit

•Mortgage broker fees

•Fees for preparing TILA disclosures, real estate construction loan inspection fees, fees for post-consummation tax or flood service policy, required credit life insurance charges.

Maybe Included:

•Credit Life or Debt Cancellation:

Excluded IF the insurance is not required, disclosures are made and the consumer authorizes it.  Otherwise it is included.

•Premiums for property or liability insurance Excluded IF the consumer selects the insurance company and disclosures are made.  Otherwise it is Included.

•Premiums for vendor’s single interest (VSI) insurance.

•Security Interest charges (filing fees), insurance in lieu of filing fees and certain notary fees Excluded IF the fee is for lien purposes prescribed by law, payable to a third public official and is itemized and disclosed.

•Charges imposed by third parties are Excluded IF the use of the third party is not required to obtain loan and creditor does not retain the charge.

•Charges imposed by third-party closing agents Excluded IF creditor does not require and does not retain the fee for the particular service.

•Appraisal and credit report fees Excluded IF application fees, if charged to all applicants, and are not finance charges.  Application fees may include appraisal or credit report fees.

Not Included:

•Fees for title insurance, title examination, property survey.

•Fees for preparing loan documents, mortgages and other settlement documents.  NOTE:  Fees for preparing TILA disclosures ARE part of the Finance Charge.

•Amount required to be paid into escrow, if not otherwise included in the finance charge.

•Notary Fees

•Pre-consummation flood and pest inspection fees

•Seller’s Points

 

Creditor (Wholesaler, Correspondent who funds the loan)

RETAIL OPERATION-Your Own Originators

Overview:

►Review the Maybe’s in the chart for conditions as outlined in the Overview.

►Prior to baking any charges like LLPAs or Borrower Closing Costs, into the rate check it against the APOR and APR Test

►Market Volatility can be to your disadvantage because the APOR is only posted weekly.  In a rising interest rate environment the APOR that is used to test may be much lower than the rates/price at the time of lock in.

Fee Points & Fees? Finance Charge?
Interest & Time Price Differential NO YES
MIP-Federal, State, Guarantee Fees, VA, FHA, USDA NO YES
PMI-Upfront Maybe-Conditional YES
3rd Party Settlement Charge, i.e.   Attorney NO-Unless Affiliated NO-Unless creditor required
Compensation to LO NO LO Origination & Consumer Points
Title Exam, Abstract, Title Insurance, Property   & Survey NO-Unless AffiliatedOR-Deemed Unreasonable* NO
Fees to Prepare Settlement Docs NO-Unless Deemed Unreasonable* NO
Notary & Credit Report NO-Unless Deemed Unreasonable* NO
Appraisal Fees NO-Unless Deemed Unreasonable* NO
Inspection Fees-Construction NO-Unless Deemed Unreasonable* YES
Pest & Flood Inspection NO Unless Deemed Unreasonable* NO
Credit Insurance, Credit Property Insurance other   life, accident, health or loss of income insurance where creditor is   beneficiary or debt cancellation or suspension coverage payments NO-If Monthly PremiumsYES-If paid at or before loan consummation Maybe-Conditional
Maximum Prepayment Penalty Yes Maybe-Conditional
Junk Fees YES YES
 

*The Reasonable Test!

You will notice that some of the fees excluded for Points & Fees are conditional upon “unless deemed unreasonable”.  The CFPB says that these charges are excluded from points and fees ONLY IF:

1. The charge is Reasonable

2. The creditor receives no direct or indirect compensation with the charge; and

3.  The charge is not paid to an affiliate of the creditor.

Certainly you will know if you have an affiliate arrangement or you receive direct or indirect compensation.  The tough part is the “reasonable” word since that can be based on opinion.  The way to defend that is by documenting average area costs for those fees.  If found to be unreasonable, then you have documentation to show why you consider them reasonable!

The Points and Fees Test for QM-Creditor-Retail

Determine the appropriate charges per product line or product type.  If your fees are correct in your pricing engine, this should convert the points & fees into basis points.

Next, bake your pass-through LLPA’s, or any closing costs that you are paying on behalf of the consumer AND/ONLY recouping overtime through the interest rate, into the pricing.  If you have LLPAs imposed by your company you can bake them in as well, or show them as an LLPA.  If you show them as an LLPA they become part of the points and fees calculation.  If you put them into the rate they do not….however, it may inflate the rate to a point that it fails the APR or APOR test.

Subtract the BPS Points and Fees for each product line from 300BPS & the remainder is the allowable profit to stay within the 3% points and fees.

300BPS- Points & Fees BPS= Remainder

Example:  Points and Fees = .875%.  This leaves 2.125%

Important Note:  All tests are performed at time of final lock-in.  Compliance and secondary should check this at lock, at any subsequent re-lock and 3 days prior to closing to ensure a QM compliant loan.  Additionally, this should all be documented, notated and archived!

Test The Rate:

The next step is to test the rate against the weekly APOR.  Take the interest rate then add to the price anything you want to bake in, so that it does not become part of the points and fees costs, and compare the new interest rate (with LLPA baked into price) to the APOR.

Rate = X% (all in)

APOR= x% (posted that week)

IF the Rate = or less than 1% over APOR you can then assist the client in reducing the rate.  IF the rate passes this test, the client can receive a rate equivalent to 200bps lower in price, which can be applied to receive a lower interest rate.

Example:  Rate at 4% (LLPAs baked in) passes Rate Test.  Client wants to reduce the rate.  You can reduce that by 200bps in price to give them a lower rate.  The key is that your discounts are applied consistently.  So, for example, let’s say that for every 100bps, the borrower can reduce their interest rate by .125% rate.

This borrower would be able to get an interest rate of 3.75% (200bps price = .25%) without having to pay any points.  In this scenario you would meet the points and fees test of 3% and because the “baked in” rate was = to or less than 1% over APOR the client can use 2% or 200bps to reduce the rate they pay.

IF the Rate is more than 1% over APOR, then the client can only pay or finance up to 1% in discount points.  So to stick with the same example above, their rate would be

 3.875% (100bps price = .125% rate.)

Bottom Line:  Rate with LLPAs or other costs baked in that is = or less than APOR + 1%=Borrower can use 200bps to reduce rate.  YOUR COMPANY cannot keep this as profit as it must be applied to bona fide discount to be used.  If it exceeds the APOR by more than 1% the borrower only gets 100bps!

VERY IMPORTANT:  Price Tracing, Memorializing what the LO saw as Price/Rate and documenting that the discount points are applied consistently on that business line or program is a must for the examination!  Your pricing engine should do all of this for you by January!

Final Test-the APR:

You have one final test to be QM acceptable!

APR = X%

APOR + 1.5% = Maximum APR for QM!  If it is higher…..sorry no QM.

After you think about this for a while, you will see why too high of an interest rate (even at par pricing) fails one of the tests and as such gives you a non-QM loan.

 

 

 

 

Creditor (Wholesaler, Correspondent who funds the loan)

Pricing to the TPO

Fee Points & Fees? Finance Charge?
Interest & Time Price Differential NO YES
MIP-Federal, State, Guarantee Fees, VA, FHA, USDA NO YES
PMI-Upfront Maybe-Conditional YES
3rd Party Settlement Charge, i.e.   Attorney NO-Unless Affiliated NO-Unless creditor required
Compensation to LOCompensation Paid to Broker NOYES LO Origination & Consumer Points
Title Exam, Abstract, Title Insurance, Property   & Survey NO-Unless AffiliatedOR-Deemed Unreasonable* NO
Fees to Prepare Settlement Docs NO-Unless Deemed Unreasonable* NO
Notary & Credit Report NO-Unless Deemed Unreasonable* NO
Appraisal Fees NO- Unless Deemed Unreasonable* NO
Inspection Fees-Construction NO- Unless Deemed Unreasonable* YES
Pest & Flood Inspection NO- Unless Deemed Unreasonable* NO
Credit Insurance, Credit Property Insurance other   life, accident, health or loss of income insurance where creditor is   beneficiary or debt cancellation or suspension coverage payments NO-If Monthly PremiumsYES-If paid at or before loan consummation Maybe-Conditional
Maximum Prepayment Penalty Yes Maybe-Conditional
Junk Fees (Both the Creditor & TPO) YES YES
 

 

TPO QM Test:

For the TPO it is good practice to test the Rate and APOR Before you present pricing to them!

Rate to APOR Test for TPO

Points & fees (converted into BPS) + Broker Fee – 300bps = Remainder for additional profit.

Use the same examples as the retail with the difference of the fee paid to the broker is now included in the points and fees.  In the retail scenario the LO commission or company profit is not.

Rate to test APR

APOR + 1.5% = Maximum APR for QM!

If you pass this test, the broker can apply up to 2% additional cost for BONA FIDE discount points only.  As with the creditor, they cannot keep this. You must show the examiner how this lowered the rate and this must be applied consistently between broker clients to avoid Fair Lending issues.

If you exceed the APOR + 1.5% then the broker can only apply 1% for BONA FIDE discount points.

 

What The Examiner Will Look For!

The examiner is concerned with what the loan originator was offered as options, what options and pricing they presented to the client, and whether the client received the best price/rate/cost for their personal financial situation when compared to similarly situated borrowers.

They will also check what you did and did not include in the points & fees calculation, much like they still do for the Finance Charge check.  My advice!  They use checklists….so should you!

The examiner will perform the tests mentioned above based on what was available on the day of lock.  I’m pretty sure that an automated historical pricing tool is a lot more efficient then scouring through rate sheets from that day for 1000 files.  Just my opinion.

Here are Some Tips to Help You Re-Engineer Your Process:

  1. Memorialize what the LO saw in Rate & Price.
  2. Force a compliance checklist notation at the time of lock-in from the loan originator as to whether the client was offered the lowest rate presented (price being equal).  If the answer is no, force the originator to document a reason.  This way when an examiner asks you a year later and the LO doesn’t remember or isn’t there, you have a good reason.
  3. Require a notation on any re-lock from the LO.  Rates are rising and if a client starts at one rate and ends up at a higher rate you want to document why.  This includes a history of field value changes, dates and pricing traces on each of those days.

Next, work with your pricing engine to ensure that all of this, PLUS the calculations to test for QM will be complete by January.  I cannot imagine doing this without technology unless you are just doing a few mortgage loans a month!

Proper Prior Planning Prevents Poor Performance

And Preventing Poor Performance saves you millions of dollars in fines and litigation!

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

More posts by Tammy Butler, Master CMB

Join the discussion 2 Comments

  • Jim says:

    As a broker, I don’t see where lender/investor underwriting fees are accounted for. Are they included in in points and fees?

  • Hi Jim, the lender/investor should be building that into the rate versus charging that seperately come January. If not, they will be included in the points and fees, and if you include the mortgage broker fee, it will exceed the 3% cap. So, I suspect the lenders will begin to incorporate those into their rate quote versus presenting both to you!

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