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Thursday, December 8, 2016

Limits on Points and Fees

QUESTION
We are a mortgage banker. Our policy is to place limits on points and fees in our residential mortgage loan transactions. But an applicant complained to the CFPB that we denied the application because of our limits on points and fees. Our regulator has told us that a lender does have limits on points and fees based on certain guidelines. What are those guidelines?

ANSWER
At a rudimentary level, the CFPB expects lenders to (1) document the loan transaction, and (2) determine the consumer’s ability to repay the loan. Depending on the loan transaction, the ability-to-repay feature – which offers certain standards for demonstrating a good faith effort to determine that the consumer is likely to be able to pay back the loan – may have some bearing on the points and fees concern.

If a consumer does not have the ability to repay the loan, the lender may not offer the credit extension. In fact, some lenders may choose to comply with the ability-to-repay rule by making only “Qualified Mortgages,” which do have caps on upfront points and fees.

Certain loan features are not permitted in Qualified Mortgages, such as an “interest-only” period, negative amortization, balloon payments, loan terms that are longer than 30 years, a limit on how much of the consumer’s income can go towards debt, and no excess upfront points and fees. If the consumer applies for a Qualified Mortgage, there are limits on the amount of certain upfront points and fees the lender can charge. These limits will depend on the size of the loan. Not all charges, like the cost of a credit report, for example, are included in this limit. If the points and fees exceed the threshold, then the loan can’t be a Qualified Mortgage.

The reason for the CFPB’s position is clear: the consumer needs protection from paying very high fees; therefore, a lender making a Qualified Mortgage can only charge up to the following upfront points and fees:

  • For a loan of $100,000 or more: 3% of the total loan amount or less.
  • For a loan of $60,000 to $100,000: $3,000 or less.
  • For a loan of $20,000 to $60,000: 5% of the total loan amount or less.
  • For a loan of $12,500 to $20,000: $1,000 or less.
  • For a loan of $12,500 or less: 8% of the total loan amount or less.
The foregoing loan amounts reflect the initial statutory base. There have been annual adjustments to these tiers. Under the CFPB’s rules, only Qualified Mortgages have a limit on points and fees. But, lenders are not required to make Qualified Mortgages, so they can charge higher points and fees if they so choose.

Jonathan Foxx 
Managing Director 
Lenders Compliance Group