Earlier this week, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule (the “Final Rule”) that attempts to fix the double-counting problem when including loan originator compensation in the points and fees calculation for Qualified Mortgages (“QMs”) and high-cost loans under Section 1026.32 (“HOEPA Loans”).
When the CFPB issued its final Ability to Repay and Qualified Mortgage Rule (“ATR/QM Rule”) on January 10, 2013, it raised several concerns in a concurrent proposal regarding the statutory requirement to include loan originator compensation in the points and fees calculation. A loan’s points and fees are limited to 3% when making QMs (which will be deemed or presumed to comply with the complex ability-to-repay requirement) and 5% when trying to avoid HOEPA. The CFPB warned that a strict interpretation of that points and fees limit would mean that all loan originator compensation, including compensation that subsequently flows from one party to another, must be counted in the points and fees calculation. Such double-counting of compensation would mean that even fewer loans would be eligible for QM treatment, and even more loans would trigger HOEPA’s additional protections.
We can thank the CFPB for attempting to fix this problem in its Final Rule, which wholly adopts the recommendations of the Office of the Comptroller of the Currency and many other commenters. The Final Rule excludes from points and fees loan originator compensation that is:
- Paid by a consumer directly to a mortgage broker where that compensation is already captured as part of the finance charge;
- Paid by a mortgage broker to its employee(s); or
- Paid by a creditor to its employee(s). (The CFPB recognized that accurately calculating individual employee compensation early in the loan origination process is impracticable, creates market distortions and anomalies for consumers, and poses a limited risk of consumer harm. The CFPB indicated, however, that it will continue to gather data to determine the need for and best method for counting this compensation, and that additional rulemaking might be necessary.)
The CFPB did retain an “additive” approach for compensation paid by a creditor to loan originator other than the creditor’s employee (e.g., a mortgage brokerage company). A creditor must include in the points and fees calculation compensation paid by the creditor to a mortgage broker, in addition to up-front charges paid by the consumer to the creditor that are included in points and fees. The CFPB observed that the compliance burden related to those payments is substantially less than with creditor payments to employees and that including creditor-paid compensation to mortgage brokers will lessen the introduction of business models designed to steer consumers to more costly transactions. The CFPB also noted that creditors and mortgage brokers could eliminate any double-counting concerns by allowing consumers to pay mortgage brokers directly.
These exclusions should benefit consumers and creditors alike. In general, the exclusions result in a more accurate representation of costs to the consumer, and prevent some over inclusiveness that could kick loans out of QM territory (and perhaps into HOEPA territory). Accordingly, the exclusions may preserve the ability of creditors to offer mortgage loans to eligible borrowers. Additionally, these exclusions may lessen certain extraordinary record-keeping and systems burdens. As the CFPB noted, an all-inclusive approach would have required creditors somehow to create and implement systems to capture payments to their loan officers that may otherwise not be easily calculable at the time of consummation (such as when those officers’ compensation on a particular transaction is based on cumulative volume over the course of a month, quarter, or year).
While those exclusions are welcome, the Final Rule summarily dismissed other industry concerns regarding the over inclusiveness of points and fees, leaving unchanged that:
- Real-estate related charges paid to affiliates are still included;
- Up-front charges to recover loan-level price adjustments (“LLPAs”) are still included; and
- No more than two (2) bona fide discount points may be excluded.