Clearing up confusion on lender paid vs. borrower paid comp & bona fide discount points; Home Purchase Assistance Program primer

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

Meg Ryan once asked me out. I was in her room.

Life has a lot of confusion, and there still seems to be some about lender (creditor) paid compensation versus borrower (consumer) paid compensation. In fact, just yesterday I received this note: “I currently work for a wholesale lender that offers the full spectrum of loans.  The new (interpretation of the) rule that borrower paid compensation must equal lender paid compensation is causing my brokers to lose out on jumbo loans since they cannot be competitive.  Most of my brokers have chosen a lender paid compensation level of one amount which is fine for an average loan size in my area but is not on the occasional jumbo.  To be competitive they want to charge less by doing the loan as a borrower paid transaction and either charging the lower amount or giving some of their fee back as a broker credit so they net the lower amount. The lender I work for will not allow that although there seem to be a number of different interpretations of this in the market. If borrower paid comp must equal the broker’s chosen lender paid comp, can they still give a broker credit (when going borrower paid) so they can net the lower fee and be competitive?”

 

To be blunt, the basic premise of your question is incorrect. After a discussion that I had with two CFPB officials yesterday, my view is that it appears that nowhere is it written that consumer/borrower paid compensation may not be different than lender/creditor paid compensation. Removing the double negative leads to borrower paid compensation may be different than lender paid compensation. They are not required by current regulations to be the same. Lenders may place creditor paid compensation in one “bucket”, and consumer paid in a different bucket – that is at their discretion, but comparing “buckets” is not required. There is no rule that says all transactions must pay the LO the same amount/way. So yes, lenders may opt to pay the same scale on every transaction, but it is not mandated by the regulations. And thus the market may see different wholesalers paying different amounts (wholesalers have the option to impose their own compensation rules, if the prefer, as long as they don’t go against the industry-wide rules).

 

In any discussion of this it is important for everyone to remember that there are three things that are NOT mandated by the rules put forth by the CFPB. The first is that creditor and consumer paid compensation be the same. The second is that, between two transactions, the LO must make the same amount of money. (The rule does not prohibit it, but this turns on facts based on the terms of the loan, or any proxy for the terms of the loan. The interpretations, of course, go to differences between programs – these impact the terms of the loan. So we find that the rule does not dictate that a lender can’t pay different amounts on different programs. But the reality of the situation is that programs contain distinct requirements, and thus will probably have different loan terms.) The third is that two originators be paid the same. (The CFPB’s rule making does not specify that two LOs in the same office be paid the same, but that all applicable provisions, such as the LO comp rule, or Fair Lending, must be adhered to.)

 

If you’d like to do your own research on issues related to LO compensation, it is certainly encouraged. A good place to start is the final LO comp rule which has some information on the subject: http://www.gpo.gov/fdsys/pkg/FR-2013-02-15/pdf/2013-01503.pdf on page 11419, bottom of the left hand column.

 

Here is the link to the CFPB website that contains the resource materials for LO compensation under Reg. Z: http://www.consumerfinance.gov/regulations/loan-originator-compensation-requirements-under-the-truth-in-lending-act-regulation-z/. The Small Entity Compliance Guide link, also important, is: http://files.consumerfinance.gov/f/201401_cfpb_complaince-guide_loan-originator.pdf. And as a reminder the CFPB also published amendments in the Federal Register on Oct. 1st that included some amendments to the LO comp rule, but not affecting any language relating to the question on consumer-paid compensation: http://www.gpo.gov/fdsys/pkg/FR-2013-10-01/pdf/2013-22752.pdf.

 

On the subject of APR and bona fide discount points, VP Tracy Sanderson with Washington’s Banner Bank writes, “I had a breakthrough this week.  For some reason, I had the APR /APOR comparison tied to QM. It’s not. Here’s a real example. John Homeowner wants to refinance a rental property. He wants to combine the 1st mortgage and a HELOC (so it’s considered “Cash Out”). He wants the lowest rate possible and is willing to pay extra points and he wants to waive reserves. So – we have Fannie/Freddie pricing of 4.00% on the rate sheet with points of 3.75%.  With all of the other add-ons, the net price is 5.75%. Now it’s non-QM because it exceeds the threshold for points & fees. The Undiscounted Rate was 4.875 on the day it was locked and Starting Adjusted Rate was 4.75% – so 2.00% is considered “bona fide” discount points [see explanation a few paragraphs down] but that still leaves 3.75% plus the other fees that have to be included in the calculation. Going forward, it won’t be an option for the customer to buy the rate down this deeply. There is no APR/APOR comparison for Non-Owner or Second Homes… so if there are a lot of add-ons, the only option will be to go with a higher rate.  The APR/APOR comparison applies only to Owner-Occupied Loans (HPML and HOEPA).  N/A for Investment Properties and Second Homes.”

 

In addition, there still seems to be confusion about what the heck a bona fide discount point is. Here is the link to the MBA piece that discusses bona fide discount points:

http://mba-pac.informz.net/mba-pac/data/images/takeaways_from_cfpb_discount_point_meeting.pdf.

 

Here is information on the passage cited: http://www.bankersonline.com/regs/12-1026/12-1026-032.html#b3. “(3) Bona fide discount point. (i) Closed-end credit. The term bona fide discount point means an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer. (ii) Open-end credit. The term bona fide discount point means an amount equal to 1 percent of the credit limit for the plan when the account is opened, paid by the consumer, and that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer. See comment 32(b)(3)(i)-1 for additional guidance in determining whether a discount point is bona fide.”

 

And for more guidance on the subject, and others, from the CFPB, go to http://www.consumerfinance.gov/guidance/.

 

This week I discussed how the CFPB was interested in the loan closing process, and from Nevada received, “If the CFPB wants to know the pain points of closing, they don’t have to look further than big banks and their escrow/title affiliates: they have a much higher cost than local T & E. Docs are sent to borrowers at their home with a notary – an additional cost. There is NO ONE there to assist the borrower with signing or explanation of documents. This is good for the consumer?”

 

And this note from Idaho on QM versus non-QM loans (which are not against the law): “Non-QM loans are not all bad. The regulators that wrote the regs made sure many very well qualified borrowers will be forced to non-QM. Since those same regulators now have a business that provides non -QM loans, it worked out very well for them. The well qualified consumer gets to pay higher interest rate and cost. Again, the consumer is screwed.  I hope eventually those pushed into higher cost for no good reason will finally start to complain. Those people vote.”

 

And the commentary discussed how state home loan programs are exempt from QM restrictions. A while back I received a letter from John Coester, Principal with CLA Title & Escrow (MD, DC & VA). “I get asked a lot about how to does HPAP work and how does someone apply for this? Well here it is, at least in my area! The Home Purchase Assistance program provides interest-free loans and closing cost assistance to qualified applicants, which provides the applicant with the opportunity to purchase houses, condominiums, or cooperative units. The loan amount is based on a combination of factors, including income, household size, and the amount of assets that each applicant must commit towards a property’s purchase. Loans provided are subordinate to private first trust mortgages. Eligible applicants can receive a maximum of $40,000 in gap financing assistance and an additional $4,000 in closing costs assistance. The HPAP 0% interest loan is deferred for the first five-years, and amortized over 40 years.

 

“The Home Purchase Assistance program provides interest-free loans to qualified applicants, which provides them the opportunity to purchase houses, condominiums, or cooperative units. Applicants who are accepted into the program are eligible for financial assistance to (1) bridge the gap between the 1st trust loan and the purchase price and (2) closing cost needs. The loan amounts are based on a combination of factors, including income, household size, and the amount of assets that each applicant must contribute towards the property’s purchase price. Loans provided are subordinate to a private first trust mortgages. The maximum first trust loan amount cannot exceed $417,000, the conventional conforming loan limit.

 

“To be eligible for HPAP assistance, you must meet the following criteria: 1. Be the head of the household and a first-time homebuyer. 2. Be a low-to-moderate income resident, based on the Department’s standards. 3. Cannot have had ownership interest in any residential real estate within the three years prior to application. 4. The purchased home must be the borrower’s primary residence and must be located within the District of Columbia. 5. Possess a good credit rating. 6. Applications are prioritized based on the following: a. low-income, elderly, handicapped, disabled or displaced District residents, b. other District residents, c. non-residents who have been employed in the District for one year prior to application, d. non-residents who have lived in the District for three years as an adult. Please note: District residents will always be the priority for HPAP assistance. Non-resident applications will be accepted, but only processed for eligibility at times when there are no pending applications from District residents.

 

“The total amount of financial assistance for down payment provided to very low-, low-, and moderate-income eligible households shall not exceed $40,000 based upon household size, household income, need, and the availability of funds. Closing cost assistance is provided separately and will be no more than $4,000. HPAP recipients contribute $500 or 50% of liquid assets greater than $3,000, whichever is greater. For very low- and low-income applicants, the contribution in excess of five hundred dollars ($500) may be waived by the Director where there is demonstrated need and the applicant is elderly, handicapped, disabled, or displaced.

 

“Payments on loans made to any income-eligible household under this program are deferred for the first five years. Monthly principal-only payments begin at the start of the sixth year of the loan and will be amortized for 40 years. The entire amount of the loan is immediately due and payable if the borrower transfers the property, the property is refinanced (unless the refinance meets certain conditions), or the property ceases to be the borrower’s primary place of residence.” Once again, this information is for the DC, Maryland, and Virginia areas, but similar programs exist nationwide. Thank you John!

 

 

Father Norton woke up Sunday morning and realizing, after a long period of terrible weather, it was an exceptionally beautiful and sunny early spring day. He decided he just had to play golf.

So he told the Associate Pastor that he was feeling sick and persuaded him to say Mass for him that day.

As soon as the Associate Pastor left the room, Father Norton headed out of town to a golf course about forty miles away. This way he knew he wouldn’t accidentally meet anyone he knew from his parish.

Setting up on the first tee, he was alone. After all, it was Sunday morning and everyone else was in church! At about this time, Saint Peter leaned over to the Lord, while looking down from the heavens and exclaimed, “You’re not going to let him get away with this, are you?”

The Lord sighed, and said, “No, I guess not.”

Just then Father Norton hit the ball and it shot straight towards the pin, dropping just short of it, rolled up and fell into the hole. IT WAS A 420 YARD HOLE IN ONE!

St. Peter was astonished. He looked at the Lord and asked, “Why did you let him do that?”

The Lord smiled and replied, “Who’s he going to tell?”

 

 

Rob

(Copyright 2014 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)