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QM Confusion? Part Two: Bottom Line!

On Friday, I presented the Principles from Paul Mondor, Managing Counsel of the CFPB from a meeting in September, 2013 with the MBA.  Today, I am going to attempt to translate those into our language.

“Principle #1: CFPB defines the base rate as the starting rate to be adjusted for the particular consumer before discount points are applied

There is one repeating theme throughout the document that is important to pay attention to; “starting adjusting rate” = “base rate”.  Defined, this is the rate that includes all of the risk adjustments for a particular borrower.  This definition is defined in Principle 1 so if you see both of these words used, they mean the same thing!

Example:  Rate with no pricing adjustments is 3.50%.  Rate with Risk adjustments is 3.75%.  Rate with Risk Adjustments (3.75%) = “Starting Adjusting Rate”.  This means that the lender needs to factor in (bake in) risk based price adjustments prior to presenting the rate to the LO and consumer.  If the LO is left to do this themselves, then all of the risk based pricing adjustments end up in the points and fees bucket.  I believe that one of the goals of this regulation is to take the negotiating tool away from the loan originator who is incented by commission and place it with the lender who is incented to provide fair and equal pricing.

This means that lenders cannot just plop rates and LLPA adjustment sheets out to the originator anymore.  Technology can do all of this at the corporate level which allows the lender control and monitoring over pricing.  Flow at the corporate level would look something like this:

Base price + corporate margin + risk adjustments (based on borrower characteristics) = Rate to LO

Any remainder in price is either a lender credit to the client or is included in the points and fees.

Principle #2: Discount points excluded from points and fees may not exceed the discount points actually paid by the consumer.

Tammy’s Translation:  Discount = True Discount, Rebates= Real Rebates, No profit was garnered by the lender as part of the bona fide discount limits.  Keeping it clean!

Principle #3(a): No requirement for a zero point loan to be available.

Tammy’s Translation:  You do not need to offer Par Pricing, but you do need to decide how your technology will handle this.  As an example, if you are over par then your system should be configured to give that as a rebate to the borrower or automatically add it to your points and fees.  As you create your QM/Points and Fees methodology, do not forget Fair Lending issues.  Consistently applied and monitored is the new mantra.

 

Principle #3(b): Starting adjusted rate actually must be available. 

The examiner wants to start where the rate should really be for that particular consumer, versus trying to extrapolate the rate based on pricing adjustments (linear interpolation).

 

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 client wants to execute their “bona fide” discount points, they can as long as no one is profiting from the use of those discount points.  They are supposed to be used as a legitimate rate buydown and you must prove this methodology.

Also be careful as to how you combine lender rebates with discount points.  The example given in my first article under this principle is a great example.

Bottom Line:

•Incorporate risk adjustment scenarios into the calculation of the rate prior to presentation to LO.

•Residual if profit must be given to the borrower as a lender credit.

•Residual if cost may be paid for by the client to “buydown” the rate subject to bona fide discount rules.

•LO’s should no longer negotiate rate/price.  Companies set that and if an exception occurs the documentation is made and monitored.

Done well, all of your pricing should be equal for similarly situated clients with like risk profiles.

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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