Earlier, I gave you some points to ponder as to the new way we will consider our profit in the QM “points and fees” calculation along with other tests we will need to perform to have a QM loan.
Today, I would like to take that information and break it down into for the “creditor/lender” channel and your retail loan originators. This means you fund the loan and these calculations are based on the rate/price you offer to the loan originator. The broker calculation will come later. I am also choosing to keep this very basic so that the concept is learned. You mathematicians can spin off all sorts of scenarios from this!
I believe I have gotten to the bottom of the LLPA issue and points and fees calculations. Having just returned from the ABA Regulatory conference and MBA Legal issues conference, there seems to be a strong consensus as to how this will work. So, I’m going to go with this until the CFPB tells us otherwise.
The greatest quandary is handling the client with LLPA adjustments; which is many of your clients. To illustrate how this will work, I’m going to keep it really basic to grasp the concept and then build upon it in future articles.
Let’s assume the following:
•LLPA Adjustments 200BPS
•Points and Fees = 1%
•Rate at 100 is 4.00% APR 4.375%
•Rate at 102 is 4.25% APR 4.625%
•Rate at 104 is 4.50% APR 4.875%
•Rate at 105 is 4.625% APR 5.125%
•Loan Amount =100,000+ (Loans below 100,000 have other thresholds)
Step One: Compute your points and fees for each product line and convert the dollar amount into BPS. (I will be doing an article strictly on this, so stay tuned)
Step Two: Subtract the points and fees BPS for each product line from 3% or 300bps and the remainder will be your market profit for a QM loan.
Step Three: I’m going to assume 1% points and fees or 100bps.
Step Four: This means that my company can earn 2% or 200bps in market profit. (2+1=3%)
Step Five: Each time you price a loan, your company will need to determine how many discount points can be used to reduce the interest rate for the client. If the interest rate before the discount (with your profit and with LLPAs) is less than the APOR + 1% for that day, you can use 2 discount points. If the interest rate before the discount is more than the APOR + 1 you will be limited to 1 discount points. In our example, our rate is 4.5% before the discount. The APOR is 3.61%. If I add 1% to 3.61% I get 4.61% and 4.5% is less than this, so I can assist the consumer with 2 discount points, which will give them a rate of 4.25% while still keeping in line with the 2% that my company needs to earn.
What I am really doing, is (adding together my points and fees 1%) + (my company profit 2%) + (my LLPA on this loan 2%) and my total is 5%. I am then subtracting 2% to be applied to the price, to reduce the rate for the consumer. So, my fees + profit are at 3% which meets the QM test for points and fees.
This means that although I included my LLPAs in my points and fees calculations (as per the regulation); I was able to assist (without profit to my company) the consumer by using the 2% to reduce their rate. Any overages will need to be applied as a credit to the consumer. Any underages will need to be paid by the consumer or taken out of your profit.
Last Step: Now you will need to calculate your APR and apply the APOR test. To do this I take my APR from this example 4.625% and make sure I do not exceed the APOR + 1.5% (3.61 + 1.5 = 5.11%). Since 4.625% is lower than 5.11% I have passed that test too!
Anyone care to do this loan with a 300bps adjustment to see how things turn out? If so, please post!
P.S. You will need to document this entire process to defend any potential issue with the QM.
P.S.S. Seller credits and clients who pay points is another calculation so stay tuned!
Make Sense? Comments? Questions?