How are you handling QM Points & Fees?
Today we'd like to look into the QM points & fees issue. We've been hearing from some organizations that this is not an important issue--we would agree with you, but then we'd all be wrong.
In 1965, numerous federal agencies were consolidated into HUD--a cabinet- level department that proceeded to release an avalanche of regulation that changed the mortgage industry forever. Sound familiar? While not quite cabinet level, the CFPB has an independent director, independent rule-writing authority (plus authority to examine and enforce consumer protection laws), and a budget independent of Congress's appropriations process, making the CFPB very powerful. With a $500 million+ budget, no doubt some Capitol Hill folks would like to see some ROI.
Turning now to QM points & fees--
Overview: Points & Fees v. APOR limit
As you know, there is a points & fees cap of 3% (different for lower amounts) for all "versions" of QM--regular, temporary GSE-eligible, and for small creditors. So everyone should be worried about this!
Of course, "points & fees" is not what was considered points and fees before the new regulations--there are exceptions and nuances to the definition that are still being disputed. Expect the CFPB to respond soon!
A basic problem arising is that, by solving one problem (staying within 3% by baking costs into the rate), organizations are creating another problem (exceeding the APOR by enough to make the loan a "higher priced" transaction, therefore losing the QM safe harbor). So be aware of both the rock and the hard place! In some cases--with small amounts of fees--the best idea may simply be to drop a fee to protect yourself on both ends.
But remember--some points & fees problems are easy to fix ... don't risk originating a bunch of non-QMs that could easily have been QM.
Lower loan amounts
While the MBA is lobbying to increase the threshold of 3% to $150,000, we are currently stuck with the $100,000 cap. When testing for points & fees problems, pay special attention to lower loan amounts, where 3% may not be enough to cover the points and fees. The turning point appears to be $225,000 ... watch out for loans between $100k and there.
Tracking/proving
We hear many organizations are confident they will fit comfortably within 3% in most transactions. Great for you! But remember--you still need to prove that! Please make sure that you're documenting this and that everyone knows who is in charge of making this calculation--technology will help, but this does not reduce the need for someone to make the initial determination of what to put in ... 'garbage in, garbage out.'
LLPAs
Unfortunately, loan level pricing adjustments are included in points & fees if charged up front. What if you have 2% LLPA? Then you only have 1% left to work with for all the other charges! Of course, LLPAs are not included in points & fees if they are baked into the rate ... but watch your APR and APOR.
Policies + Procedures
What will you do in close cases? Will you provide a discount? Make sure your people know when and how to do this, and who is responsible. If the difference is 20 BP, the value in having a QM versus non-QM on the books may well be worth that.
Discount points
Bona fide discount points is a huge issue--if it isn't a big issue with your organization now, it will be. The rules permit a maximum of 2 discount points to reduce the points & fees. What makes a discount point bona fide? That is a great question--look into this--some of our clients have spent weeks working on this, and the procedures necessary to ensure it is done properly.
Don't think you need to worry about taking advantage of discount points? Remember--LLPAs can be excluded as bona fide discount points. Still don't care? Well, it may not be necessary for you now, but what about as rates rise--will you see more customers who want to buy lower rates? Probably. Do you want all of those transactions to fail the points & fees test? If not, you'll need to make sure your team is in control of the bona fide discount points question so that you can continue to operate as you have in the past--don't let compliance concerns dictate whether you will allow consumers to buy down rates, don't lose a marketing advantage over something you could prepare for now.
"I'm sleeping like a baby, too. Every two hours, I wake up, screaming." Colin Powell, upon hearing that President Bush was "sleeping like a baby" on the eve of war with Iraq, as quoted in The Tragedy of Colin Powell (February 19, 2004).
We're hearing a lot about how the entire culture of the mortgage industry needs to change, and that compliance must now permeate every level--top to bottom. We just hope that the regulators rise to the occasion and are deserving of this level of attention--that they write intelligent laws, provide sufficient guidance on real-world and practical issues, and that they enforce these laws evenly and justly. Particularly, we hope they provide additional guidance on the points & fees questions (specific unresolved issues with which we did not discuss today).
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**These are our opinions. We're not authorized, or willing, to express those of others.**