Explaining Interest Rates to Borrowers

QUESTION 

I am a new loan officer working for a mortgage broker. I graduated from college two years ago, and I still live with my parents because I can't find a decent job. A friend became a loan officer and said I should do it too. So, I got involved as a side hustle. I've been doing this for nine months. 

At this point, I have made loans for a few family members and a good friend, and I have 6 loans in the pipeline from real estate offices. My borrowers always talk about the rates. It's probably their number one question. They then ask me to explain how rates are determined. No matter how I explain it to them, they get confused, and I don't blame them. The rate is always changing and seems unpredictable. 

How should I explain interest rates to my borrowers?

Thank you! 

A Newbie Loan Officer 

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OUR ANSWER 

For my response, I am going to assume that your loan applicant is not particularly interested in the secondary and capital markets, the factors that determine mortgage rates, or the securitization factors that affect them. 

That said, I am going to assume that you want a straightforward explanation that you can provide to your loan applicants. I hope to offer a non-technical view that they will understand while you are sitting with them to take the loan application. 

As a new loan officer, please note that when the applicant is sitting down to take the application (or interacting with you online), the point of sale is often a make-or-break moment. 

The point of sale is the most important part of loan sales because it is the primary point where trust is established between the loan officer and the applicants. If you can't explain how mortgage rates are determined, you can lose their trust in your expertise, a factor that could determine if they go with you or somebody else. 

Components that Determine Mortgage Interest Rates

There are essentially two significant components that determine mortgage interest rates: market and economic conditions, and what I'll call personal and lender-specific influences. 

Let's consider each of them. 

Market and Economic Conditions 

Several market and economic factors affect the baseline for all mortgage rates and are largely outside a borrower's control. 

Let's discuss! 

Bond Market & Treasury Yields 

Mortgage rates are directly tied to the yields on U.S. Treasury notes, particularly the 10-year Treasury yield, and mortgage-backed securities (MBS). These are considered "safe havens" for preserving financial assets. When investor demand for these safe-haven assets increases – most often during times of economic uncertainty – yields, and thus mortgage rates, tend to fall. Conversely, low demand pushes rates up. 

Now, this may confuse your borrowers. So, you should tell them that these financial instruments work inversely to interest rates because their "fixed coupon" payment becomes more or less valuable as new such financial instruments offer different rates. So, when market rates rise, existing bonds with lower fixed payments become less attractive, and their prices fall to a competitive yield; and when rates fall, existing bonds become more valuable, and their prices rise. This inverse relationship means if you sell an old bond when rates are up, you'll get less; if you sell when rates are down, you'll get more. 

Inflation 

High inflation leads lenders and investors to demand higher interest rates to offset the erosion of the purchasing power of future payments. When inflation is low, rates tend to be lower. 

An example would be when high inflation prompts the Federal Reserve to raise interest rates, making mortgages more expensive (for instance, from 3% to 6%). Hence, a buyer of a $300,000 home pays more monthly, and when investors demand higher yields on bonds to compensate for their future earnings, they buy less. At the same time, low inflation allows for lower borrowing costs, stimulating spending and investment.

Fannie's Mandate for Servicing Quality Control

QUESTION 

We are a mortgage servicer. We subservice about $8 billion. I am on the staff of the compliance department. Our servicing quality control audits have been picking up compliance issues, particularly overcharging late fees and charging consumers fees that should have been waived per the CARES Act. 

The CFPB's recent Supervisory Highlights specifically mention these two issues in their examination audits. We have no wish to have CFPB examiners identify such findings in their audits. 

We have been through three audit firms for servicing quality control. But only the current one picked up on these issues. Little good it does us since we've been making these mistakes for years! And our clients are going through MORA reviews. Some did not do servicing quality control, so they did not pick up on the problem. Others have, and now they are threatening to leave us. 

We know you offer servicing quality control, so you have expertise in this area. We read your article on servicing QC and found it very helpful. Our concern now is to get a description of the implications of these process issues. 

What are the compliance implications of overcharging late fees in loan servicing? 

What regulatory issues arise when we charge consumers fees that should have been waived per the CARES Act? 

ANSWER 

The article you refer to is Servicing Quality Control: Why's and Wherefore's. That article dealt with a mortgage lender that did not conduct servicing quality control of the subservicer. Interestingly, like some of your clients, that lender seemed to indulge in the philosophy of "unknown knowns;" that is, because it did not do the audits, it was unaware of the risks. Being unaware of known risks – certainly when the risk are knowable – is a recipe for failure. 

Your clients should be conducting servicing quality control of their portfolio being serviced by you.[i] This is an oversight function. They cannot evade liability by pushing it to the servicer. If you are a Fannie Seller/Servicer, it is a relationship mandate that the Fannie's MORA team will check. The MORA team evaluates how well a mortgage company meets Fannie Mae's guidelines and gauges operational risks.

Lenders who use subservicers retain my firm to conduct Servicing Quality Control. A high level of expertise is needed; not just any quality control auditor can do these reviews, and most do not. Interested lenders and servicers can download our Servicing QC presentation HERE. Or contact me HERE, and we'll arrange a call. 

I think you will have a hard time holding onto clients, not only the clients who did the servicing QC audits but also those who did not do them. Especially those clients that did not conduct servicing quality control audits and are involved in Fannie Mae MORA audits,[ii] as they now face a double-barreled issue: (1) they did not do the oversight requirement of servicing quality control, so MORA will write them up for not doing so, and (2) as their subservicer, you are going to give them servicing QC reports that show ostensible compliance issues that the CFPB has identified to be regulatory violations.

The compliance issues that the CPFB has found pervasive come under the regulatory categories of violations of UDAAP and Regulation Z, the latter triggering violations related to junk fees. 

Overall, the Bureau's examiners found that servicers overcharged junk fees that were unlawful, repeatedly charged for unnecessary property inspection visits, misrepresented that consumers owed PMI premiums, charged consumers fees that should have been waived, charged consumers for PMI after it should have been removed, and charged late fees after sending periodic statements listing a $0 late fee. 

I will address the two you mention, referencing the Supervisory Highlights[iii] you've noted. The CFPB's examiners found multiple servicing compliance failures relating to UDAAP and Regulation Z violations. 

What are the compliance implications of overcharging late fees in loan servicing? 

Overcharging late fees is assessing late fees in excess of the amounts allowed by their loan agreements. It is an unfair acts or practices violation. Specifically, where loan agreements included a maximum permitted late fee amount, the servicers failed to input these late fee caps into their systems. 

The servicers charged the maximum allowable late fees under the relevant state laws, which frequently exceeded the specific caps in the loan agreements. This happened because the systems did not reflect the maximum late fee amounts permitted by their loan agreements. Servicers cause substantial injury to consumers when they impose these excessive late fees. 

Consumers can not reasonably avoid injury because they do not control how servicers calculate late fees; indeed, they have no reason to anticipate that servicers would impose excessive late fees. The CFPB's position is that charging exorbitant late fees does not benefit consumers or the competition. Consequently, examiners concluded that servicers also violated Regulation Z by issuing periodic statements that included inaccurate late payment fees, since they exceeded the amounts allowed by the loan agreements.[iv] In general, if this is your situation, you can expect the CFPB to require you to waive or refund late fee overcharges to consumers and correct the periodic statements. 

What regulatory issues arise when we charge consumers fees that should have been waived per the CARES Act? 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) directs servicers of federally backed mortgages to grant consumers a forbearance from monthly mortgage payments if the consumer is experiencing financial hardship resulting from the COVID-19 emergency. 

During the time a consumer is in forbearance, no fees, penalties, or additional interest beyond scheduled amounts are to be assessed. While the CARES Act prohibits fees, penalties, or additional interest beyond scheduled amounts during a forbearance period, consumers sometimes accrue these amounts during periods when they are not in forbearance. 

For instance, a servicer is permitted to charge a late fee if a consumer was delinquent in May 2020 and then entered a forbearance in June 2020. 

In the case of FHA loans, when consumers exit CARES Act forbearance and enter certain permanent loss mitigation options, the HUD (Department of Housing and Urban Development) requires servicers in certain circumstances to waive late charges, fees, and penalties accrued outside of forbearance periods. 

The CFPB's examiners found that servicers engage in unfair acts or practices when they fail to waive certain late charges, fees, and penalties accrued outside forbearance periods, where required by HUD, upon a consumer entering a permanent COVID-19 loss mitigation option. 

This is not the first time the CFPB has cited UDAAP violations relating to charging fees to consumers during a CARES Act forbearance.[v] The CFPB's position is that the failure to waive the late charges, fees, and penalties constitutes a substantial injury to consumers. This injury is not reasonably avoidable by consumers because they have no reason to anticipate that their servicer would fail to follow HUD requirements, and consumers lacked reasonable means to avoid the charges. This harm outweighed any benefit to consumers or competition. You can expect the CFPB to require proof that you have improved your system controls. In addition, you'll need to waive all improper charges and provide refunds to consumers.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] Fannie Mae’s Quality Control Review, Chapter A2-4 Fannie Mae, Single Family, Servicing Guide, March 8, 2023

[ii] The Fannie Mae Mortgage Origination Risk Assessment (MORA) team conducts a comprehensive review, which includes an assessment of the operational capabilities, governance and compliance with Fannie Mae's Selling Guide requirements.

[iii] Supervisory Highlights – Junk Fees Special Edition, Consumer Financial Protection Bureau, March 2023, Issue 29, Winter 2023, pp 9-12; FR, Vol. 88, No. 54, March 21, 2023, Notices, pp 16945-16951

[iv] 12 CFR. § 1026.41(d)(1)(ii)

[v] See Supervisory Highlights, Issue 25, Fall 2021, available at:
https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-25_2021-12.pdf.

What’s in a word? “Lender” Defined

QUESTION
Last week, we watched a presentation from a top business management company. The theme was about the challenges that mortgage lenders face these days.

As a large mortgage lender, we found the presentation interesting. However, it occurred to us that they gave this big presentation and did not define the word “lender” in their slides.

So, we looked at the mortgage regulations and found that the definition varied, depending on the regulation. After talking about it, we decided to ask you for a general, working definition that we could use.

What is a generic definition of a “lender?”

ANSWER
This is a good question. You did not mention if the regulations you looked at were state or federal. And that is important. In any event, I think the essence of your question is meant to pertain to both state and federal banking laws. Our firm is always using definitions as they are defined in a specific statute. We deal with consumer credit compliance all the time and know the importance of statutory and regulatory definitions.

My guess is that you had the federal mortgage regulations in mind. So, I will give you a bird’s eye view based on the federal regulations and how they may extend to state law. Sometimes we can determine what a mortgage lender is by describing what it is not. That may seem counterintuitive, but it really isn’t. You’d be surprised how much litigation pivots on a judicial interpretation of what is or is not meant by a single word!

A recent case shows the importance of the term “lender” as it is used in state and federal law. The case is Kemp v. Nationstar Mortgage Association, which was litigated in Maryland’s Court of Special Appeals.[i] First, I will provide a brief outline of the case. Then, I’ll offer a few observations.

Kemp obtained a mortgage loan from Countrywide, which assigned the loan to Fannie Mae. Unfortunately, in 2017 Kemp fell behind on her payments, and her loan servicer, Seterus, declared the loan in default. Kemp had learned that Seterus charged her $180 for twelve property inspections it ordered after she defaulted. In November 2017, Seterus offered, and Kemp accepted, a loan modification, which rolled several of the property inspection fees into the loan balance.

In December 2017, Kemp sued Seterus and Fannie Mae on behalf of herself and a class, alleging that Seterus had violated § 12-121 of Maryland’s Commercial Law, which prohibits a “lender” from imposing a property inspection fee “in connection with a loan secured by residential property.”

The trial court dismissed the complaint, holding that Seterus and Fannie Mae were not “lenders” and that § 12-121 did not prohibit them from charging inspection fees.

The Court of Special Appeals reversed. The view here was that the trial court’s interpretive construction would defeat the broader statutory purpose and lead to absurd results. This is because § 12-121 applied to assignees. Maryland’s General Assembly, the court held, did not intend for the section’s broad prohibition against property inspection fees to apply only to the originator of the loan and, even more to the point, to allow assignees of the loan or their agents to charge the very fees the originators could not.

Now for some observations.

Both lenders and borrowers should be careful when considering the reach of a decision, such as in the case I’ve cited above. As I inferred, the meaning of a term such as “lender” may change from one statutory provision or framework to another. For instance, in the case of Bishop v. Carrington Mortgage Services, LLC,[ii] a federal district court considered a claim by borrowers that their mortgage loan servicer, which handled servicing for an assignee of the borrowers’ loan, had improperly charged them a $5 fee to make their payments online, in violation of several state statutes and the Federal Debt Collection Practices Act (FDCPA). In Bishop, the federal court apparently chose to discount Kemp, which was a state court decision.

Let’s drill down a bit.

In November 2005, Alexander took out a residential mortgage loan from America’s Wholesale Lender to buy a home. She entered into a deed of trust that included this language:

“In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or Applicable Law.”

Alexander’s Note required her “to make all payments under this Note in the form of cash, check or money order” and to make those payments at a specified post office box or “at a different place if required by the Note Holder.”

Seven years later, in 2012, Alexander’s Note was assigned to The Bank of New York Mellon, as trustee for the certificate holders of the CWABS, Inc., Asset-Backed Certificates, Series 2005-13, which I’ll call “CWABS.” In August 2013, CWABS retained Carrington Mortgage Services to service Alexander’s loan.

When Alexander made her monthly payments, Carrington Mortgage offered her options with respect to the payment method. She chose to make her payments online to Carrington Mortgage, each time incurring a $5 processing fee, rather than to send a check or money order and not incur a processing fee. Alexander sued Carrington Mortgage on behalf of herself and a purported class, alleging that the practice of charging a $5 “convenience fee” violated various Maryland statutes, most notably for our purposes Maryland Commercial Law § 12-105(d).

According to the court, § 12-105 limits the fees a “lender” may charge. Under Maryland law, a “lender” means “a licensee or person who makes a loan subject to this subtitle.” A “lender” does not include a subsequent assignee of the loan or the loan servicer. The court cited Flournoy v. Rushmore Loan Management Services, LLC,[iii] a federal court decision that Kemp had disavowed.

In Bishop, the court mentioned Kemp this way:

“While Plaintiffs argue that the recent Maryland Court of Special Appeals’ decision in Kemp v. Nationstar Mortgage Association supports finding that Carrington was a lender, that decision specifically applied to Section 12-121 of Maryland's Commercial Law Code, finding that ‘§ 12-121 is not limited to the originators of loans.’…. This holding does not extend to Section 12-105(d), which still requires that the lender be the originator of the loan.”

I know it seems convoluted, but, according to the court, this left no question that Carrington was not the originator of the loan, so Alexander’s claim under § 12-105(d) failed. The court discounted Kemp simply because Kemp dealt with a different provision, to wit, § 12-121, without addressing the “broader statutory purpose” cited by Kemp.

How another court will consider the question is anyone’s guess. A decision might depend on whether the action is filed in a state court or a federal district court. But, I hope you can see how the word “lender” is determined as defined by a statute.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

______________________________________  
[i] 248 Md. 1, 239 A.3d 798, Md. App. (Ct. Spec. App. 2020)
[ii] Bishop v. Carrington Mortgage Services, LLC, 2020 U.S. Dist. (D. Md. Dec. 11, 2020)
[iii] Flournoy v. Rushmore Loan Management Services, LLC, 2020 U.S. Dist. (D. Md. Mar. 17, 2020)

FHA and VA Loans – Charging Notary Fees

QUESTION

We need some assistance regarding our ability as a lender to charge the borrower notary fees on FHA and VA loans when it is an employee of the lender who is acting as the notary. Can you please provide some guidance?

ANSWER

With respect to a VA loan, the lender may not charge the borrower a separate itemized notary fee, regardless if the notary is an employee or not. All such fees are intended to be covered by the 1% flat fee charge. 

[VA Lender’s Handbook Ch. 8.2-d]

With respect to an FHA loan, the current handbook provides that the lender may charge the borrower “reasonable and customary fees that do not exceed the actual cost of the service provided”. 

[HUD Handbook 4000.1.II.A.6.a.x(A)] 

The italicized section of the previous sentence implies that a lender may not charge for services provided by its employees as the lender did not incur any costs, as the employee’s salary is part of the lender’s overhead.

A prior version of the HUD handbook specifically delineated allowable fees which included a notary fee if notarization is required by the state and the notarization is performed by a notary who is not employed by the lender.  

[HUD 4000.2 Rev-3 Ch. 5-2(O)]  

HUD Handbook 4000.2 Rev-3 was superseded by Handbook 4155.2 which did away with the specific categories but stated that the cost for any item charged must not exceed the cost paid by the lender or charged to the lender by the service provider, thus making it impermissible to charge for services provided by the lender’s employees. Handbook 4155.2 has been superseded by Handbook 4000.1 discussed above.

Pertinent sections of the Handbooks cited above are set forth below.  

HUD Handbook 4000.1.II.A.6.a.x(A)

x. Closing Costs and Fees

The Mortgagee must ensure that all fees charged to the Borrower comply with all applicable federal, state and local laws and disclosure requirements.

The Mortgagee is not permitted to use closing costs to help the Borrower meet the Minimum Required Investment (MRI).

(A) Collecting Customary and Reasonable Fees. The Mortgagee may charge the Borrower reasonable and customary fees that do not exceed the actual cost of the service provided. The Mortgagee must ensure that the aggregate charges do not violate FHA’s Tiered Pricing rules.

HUD Handbook 4155.2 6.A.3.a Collecting Customary and Reasonable Fees

The lender may only collect fair, reasonable, and customary fees and charges from the borrower for all origination services. FHA will monitor to ensure that borrowers are not overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on the amount of any fees that a lender may charge a borrower(s) for obtaining an FHA loan.

Aggregate charges may not violate FHA’s tiered pricing rules, per ML 94-16.

Additionally, FHA does not allow “mark-ups.” The cost for any item charged to the borrower must not exceed the cost paid by the lender, or charged to the lender by the service provider.

Only the actual cost for the service may be charged to the borrower.

HUD Handbook 4000.2 Rev-3 Ch. 5-2(O)

CLOSING COSTS AND OTHER FEES (05/04)

Listed below are the customary and reasonable fees and charges that may be collected from the borrower by the lender and used to meet the minimum investment requirement for purchases and added to the existing indebtedness for refinances. The cost for any item charged to the borrower must not exceed the cost paid by the lender or charged to the lender by the service provider.

* * *

O. Courier/Wire/Notary Fees. Courier fees and wire fees may be charged only on refinances and only for delivery of the mortgage payoff statement to the lien holder and for closing documents to the settlement agent. The borrower must agree in writing to pay for the courier and wire fees, prior to loan closing. Notary fees may be charged if notarization is required by state law and is performed by a notary who is not employed by the lender.

VA Lender’s Handbook Ch. 8, 2-d: Lender's One Percent Flat Charge (11/08/12)

In addition to the “itemized fees and charges,” the lender may charge the veteran a flat charge not to exceed one percent of the loan amount.

Calculate the one percent on the principal amount after adding the funding fee to the loan, if the funding fee is paid from loan proceeds (except Interest Rate Reduction Refinancing Loans (IRRRLs).

Note: For IRRRLs, use VA Form 26-8923, IRRRL Worksheet, for the calculation.

The lender’s flat charge is intended to cover all of the lender’s costs and services which are not reimbursable as “itemized fees and charges.”

The following list provides examples of items that cannot be charged to the veteran as “itemized fees and charges.” Instead, the lender must cover any cost of these items out of its flat fee:

• notary fees

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Recording Fees under Know Before You Owe

QUESTION

We had a loan where the borrower shopped for the title company and did not use the company we had listed on the service provider list. Our provider does not charge us a separate recording fee, it is included in the “settlement fee” they charge. 

In this instance, however, the title company selected by the borrower separately added to their charges the “recording fee” from the county recorder’s office. We were not notified of this within 3 days of receiving their contract and did not redisclose. We now have a tolerance cure that we are having to pay at closing.

Do you have any suggestions about how to avoid this in the future? 

ANSWER

There are several parts of your question and part of the problem arises from the fact that your usual settlement service provider does not separately break out the fees paid to the county recorder’s office – fees that are assessed by and paid to a government authority to record and index the mortgage or deed of trust (rather than a fee payable to the title company for facilitating the recordation of documents).

The Integrated RESPA/TILA Disclosure Rule (“Know Before You Owe”) requires that these fees be broken out and separately disclosed. The pertinent part of Reg. Z (12 CFR 1026.37) provides:

“For each transaction subject to §1026.19(e), the creditor shall disclose the information in this section…” (Emphasis added.)  12 CFR 1026.19(e) provides in pertinent part: “In a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to §1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in §1026.37.” (Emphasis added.) 

Section 1026.37(g) provides:

“(g) Closing cost details; other costs. Under the master heading “Closing Cost Details,” in a table under the heading “Other Costs,” all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. The table shall contain the items and amounts listed under six subheadings, described in paragraphs (g) (1) through (6) of this section.

(1) Taxes and other government fees. Under the subheading “Taxes and Other Government Fees, “the amounts to be paid to State and local governments for taxes and other government fees, and the subtotal of all such amounts, as follows:

(i) On the first line, the sum of all recording fees and other government fees and taxes, except for transfer taxes paid by the consumer and disclosed pursuant to paragraph (g)(1)(ii) of this section, labeled “Recording Fees and Other Taxes.” [In the CFPB Guidebook, the illustration used for the type of “government fees” referred to in this section is “recording fees.” (See section E of illustration below)] (Emphasis added.)

Thus, the “recording fee” should not be lumped into the title settlement fee, but rather listed separately in Section E of the Loan Estimate. Recognizing this requirement will alert you to clarify the charges of any settlement service provider when a separate “recording fee” is not identified in their charges.

However, you must still determine whether the “recording fees” being charged are the fees assessed by and paid to a government authority to record and index the mortgage or deed of trust, or a fee payable to the title company for facilitating the recordation of documents. The former are subject to a 10% tolerance, but the latter, if the title company is selected by the borrower, are not: 

Thus, with respect to fees paid to a governmental entity, 12 CFR § 1026.19(e)(3)(i-ii) provides:

(3) Good faith determination for estimates of closing costs—(i) General rule. An estimated closing cost disclosed pursuant to paragraph (e) of this section is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed under paragraph (e)(1)(i) of this section, except as otherwise provided in paragraphs (e)(3)(ii) through (iv) of this section.

(ii) Limited increases permitted for certain charges. An estimate of a charge for a third-party service or a recording fee is in good faith if:

(A) The aggregate amount of charges for third-party services and recording fees paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed under paragraph (e)(1)(i) of this section by more than 10 percent;

(B) The charge for the third-party service is not paid to the creditor or an affiliate of the creditor; and

(C) The creditor permits the consumer to shop for the third-party service, consistent with paragraph (e)(1)(vi) of this section.

                          (Emphasis added.)

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

TRID: Disclosing fees not required by Lender

Question

Do services - and the fees for such services - that are not required by a lender need to be disclosed on the Loan Estimate once the TILA-RESPA Integration Rule becomes effective on August 1, 2015?

Answer

Yes, the CFPB has made it clear that fees paid by the borrower, even if not required by the lender or part of the loan transaction must be disclosed on the Loan Estimate. This would include the commissions of real estate brokers or agents, additional payments to the seller to purchase personal property pursuant to the property contract, homeowner’s association and condominium charges associated with the transfer of ownership, engineer inspection fees and personal attorney fees.

Specifically, a creditor is required to itemize in the column titled “Other” in the Closing Costs Details provided on page 2 of the Loan Estimate “any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing and of which the creditor is aware”. [12 CFR 1026.37(g)(4)] 

The Official Commentary states:

Examples. Examples of other items that are disclosed under § 1026.37(g)(4) if the creditor is aware of those items when it issues the Loan Estimate include commissions of real estate brokers or agents, additional payments to the seller to purchase personal property pursuant to the property contract, homeowner’s association and condominium charges associated with the transfer of ownership, and fees for inspections not required by the creditor but paid by the consumer pursuant to the property contract.

[Official Commentary: 12 CFR 1026.37(g)(4)]

Further, Official Commentary provides additional guidance when discussing the good faith requirement for services chosen by the consumer that are not required by the creditor.

[Official Commentary: 12 CFR 1026.19(e)(3)(iii)-3]

The foregoing comment states, in pertinent part, that:

… if the subject property is located in a jurisdiction where consumers are customarily represented at closing by their own attorney, even though it is not a requirement, and the creditor fails to include a fee for the consumer's attorney, or includes an unreasonably low estimate for such fee, on the original estimates (Loan Estimate) then the creditor's failure to disclose, or under-estimation, does not comply with § 1026.19(e)(3)(iii).

As this is a big change from existing requirements, brokers, lenders and loan originators need to make sure that they have policies and procedures in place to comply with the foregoing requirements.

Michael Barone

Director/Legal & Regulatory Compliance

Lenders Compliance Group