You are not alone! Many are scrambling and trying to figure out the best solutions from multiple angles to be compliant. CFPB Peeps, I know you are reading this so please take it easy on us if you see we are truly trying!
To help clear the murky waters, I thought it would be a good idea to go over some basic scenarios as laid out by the MBA and Paul Mondor, Managing Counsel of the CFPB from September, 2013. Tomorrow I will lay out the bottom line as I see it so stay tuned!
“Principle #1: CFPB defines the base rate as the starting rate to be adjusted for the particular consumer before discount points are applied – The starting adjusted rate should be the rate available to the consumer based on the particular consumer’s profile and loan characteristics. It must include the LLPAs and other specific adjustments applicable to that consumer.
Principle #2: Discount points excluded from points and fees may not exceed the discount points actually paid by the consumer – The discount points that are excluded from points and fees may not exceed the actual discount point amount paid by the consumer. So, if the starting adjusted rate offers a rebate and the consumer chooses to pay discount points, the amount of the points actually paid are the maximum that can be excluded up to the two points allowed in the rule.
The following example was provided in the meeting: Starting adjusted rate of 4.250% with a 0.375 point rebate. Consumer agrees to pay an additional 1.50 discount points to lower the rate to 3.750%. The maximum discount points that could be eligible for exclusion from points and fees is 1.50 points
Principle #3(a): No requirement for a zero point loan to be available – The starting adjusted rate does not have to be a rate with zero points. Mr. Mondor noted the language in the regulation (“the interest rate without any discount”) is an inexact translation of the statutory language in section 1412 of the Dodd-Frank Act (“the interest rate from which the mortgage’s interest rate will be discounted”).
Principle #3(b): Starting adjusted rate actually must be available -The starting adjusted rate used must actually be available to the consumer. This eliminates linear interpolation as an acceptable means of determining the starting adjusted rate as well as using a hypothetical rate as a starting adjusted rate. Neither are rates available to the consumer.
Principle #4: Discount Points that may be excluded from points and fees are those applied to the starting adjusted rate for the consumer to reduce the interest rate – If the starting adjusted rate for the consumer includes a required point or portion thereof, when calculating the discount points to be excluded, such required points are included in the QM’s points and fees.
The following example was provided in the meeting: Starting adjusted rate of 4.125% with 0.125 discount points. The consumer agrees to pay 1.625 in discount points to lower the rate to 3.750%. Only 1.50 additional discount points paid by the consumer to lower the rate is eligible for exclusion from points and fees since the .125 points paid are required to get the starting adjusted rate.”
Finally, Mr. Mondor recommended you keep your rate sheets just in case you are challenged. Rate Sheets? That is so old school! Make life easier and run the scenario through your historical database and be done in less than a minute.
My take in our industry language in tomorrow’s posting! Stay Tuned!
Join the discussion 4 Comments
What about LLPA’s?
Stay Tuned. More on that tomorrow.
Hello Tammy, we find Principal #1 as stated by Mr. Mondor confusing with respect to the “starting adjusted rate” being inclusive of LLPAs. LLPAs are adjustments to the discount points, as opposed to loan level rate adjustments (LLRAs). The definition of bona fide discount point in §1026.32(b)(1)(i)(E) makes no reference to LLPAs nor does the preamble or Official Staff Commentary that I am able to find.
I’d appreciate your feedback on this!
Darcie L. Cancino, CUCE
Manager, Lending Compliance
SchoolsFirst Federal Credit Union
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I absolutely agree! Stay tuned for my take tomorrow on each of these points. However, in the meantime let me address this one area.
Examiners are trained not on the rate/price combo that we are used to, as much as they are trained on the rate to the client. Traditional fair lending analysis is flawed this way. So, in order to have a starting rate AND exclude the LLPA from points and fees, the lender must consider all risk adjustments when presenting rate. This in conjunction with your secondary marketing methodology allows the examiner to test your secondary methodology against the rate presented to see if it makes sense. Make sure you read tomorrow’s blog.