All of the new mortgage rules can be confusing, but the definition of points and fees deserves particularly high marks for obfuscation. Once you think you have it figured out, another gremlin rears its ugly head. Despite this, most credit unions narrowed the list of charges included in the points and fees cap to a handful of charges – origination fees, underwriting fees, upfront credit insurance, third party loan originator compensation, a portion of upfront PMI, a portion of discount points, and Fannie or Freddie loan level price adjustments (LLPAs) charged as a point or fee. For many credit unions, LLPAs are the biggest chunk.
The CFPB was very clear in the preamble that LLPAs are included in points and fees and not excludable under the bona fide third-party charges exception. That brings us to the title of this post – can LLPAs be excluded under the bona fide discount points exception? The answer is yes, but not an unequivocal yes. Here is the money quote from the Preamble – “To the extent that creditors offer consumers the opportunity to pay points to lower the interest rate that the creditor would otherwise charge to recover the lost revenue from the LLPAs, such points may, if they satisfy the requirements of § 1026.32(b)(1)(i)(E) or (F), be excluded from points and fees as bona fide discount points.” Thus, depending on the APR, you could exclude up to two points charged as a result of LLPAs. BUT, you can only exclude LLPAs “to the extent [you] offer consumers the opportunity pay points to lower the interest rate . . . .” That may mean that you have to give the consumer the option of taking a higher rate and an option to pay points for a lower rate. If you do that, and the consumer chooses to pay the points, they will be bona fide discount points. If, on the other hand, you simply offer the consumer the loan with the lower rate and the points, it may not be an offer to lower the rate.
This ability to exclude LLPAs gives credit unions another tool to stay below the qualified mortgage and high cost points and fees thresholds. [Jeff stands on soapbox] The CFPB did not do you any favors in finding the answer to this post, however. There is no mention in the rule, commentary, or small business guide. The line quoted above was on page 80 of the 638 page preamble. Important questions like this should really be reflected in the official commentary so financial institutions don’t have to play a guessing game. [Jeff steps down from soapbox]
On a related note, if you haven’t already, please click here to download a white paper written by myself and Mr. Jason Skemp entitled ‘What’s Next for Credit Union Mortgage Rule Implementation?’