Monday, January 27, 2014

Qualified Mortgages: Are Seller-Paid Items Included in Points and Fees?

It's well established in the industry that seller's points are excluded from the APR calculation.  Likewise, a seller's credit/contribution to pay certain pre-paid finance charges, such as mortgage insurance premiums, may convert such fees into non-APR fees.  Lenders should feel fairly comfortable in such a practice with respect to a seller's credit/contributions because of the following Official Staff Interpretations:
Paragraph [1026.]4(c)(5)
1. Seller's points. The seller's points mentioned in §1026.4(c)(5) include any charges imposed by the creditor upon the noncreditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller's points are frequently involved in real estate transactions guaranteed or insured by governmental agencies. A commitment fee paid by a noncreditor seller (such as a real estate developer) to the creditor should be treated as seller's points. Buyer's points (that is, points charged to the buyer by the creditor), however, are finance charges.
 2. Other seller-paid amounts. Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower's behalf by a noncreditor seller. The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available. [Emphasis added]
The question is whether a lender/creditor may approach seller credits in the same way when calculating the QM points and fees.  More specifically, if the seller pays a particular charge or fee included in QM points and fees, will this payment by the seller cause the fee to be excluded from QM points and fees?  A convoluted answer lies in the CFPB's Official Staff Interpretations:
2. Charges paid by parties other than the consumer. Under § 1026.32(b)(1), points and fees may include charges paid by third parties in addition to charges paid by the consumer. Specifically, charges paid by third parties that fall within the definition of points and fees set forth in § 1026.32(b)(1)(i) through (vi) are included in points and fees. In calculating points and fees in connection with a transaction, creditors may rely on written statements from the consumer or third party paying for a charge, including the seller, to determine the source and purpose of any third-party payment for a charge.
According to the above, the general rule is that even if a third party (including the seller) pays items included QM points and points, such items will still be counted in QM points and fees.  The CFPB gives the following examples:
i. Examples—included in points and fees. A creditor's origination charge paid by a consumer's employer on the consumer's behalf that is included in the finance charge as defined in § 1026.4(a) or (b), must be included in points and fees under § 1026.32(b)(1)(i), unless other exclusions under § 1026.4 or § 1026.32(b)(1)(i)(A) through (F) apply. [Comment: no exclusion applies to a lender's origination charge; therefore, this charge should still be included in QM points and fees no matter who pays it.]  In addition, consistent with comment 32(b)(1)(i)-1, a third-party payment of an item excluded from the finance charge under a provision of § 1026.4, while not included in the total points and fees under § 1026.32(b)(1)(i), may be included under § 1026.32(b)(1)(ii) through (vi). For example, a payment by a third party of a creditor-imposed fee for an appraisal performed by an employee of the creditor is included in points and fees under § 1026.32(b)(1)(iii). See comment 32(b)(1)(i)-1. 
However, some exceptions, as shown in the example below, apply.  
ii. Examples—not included in points and fees. A charge paid by a third party is not included in points and fees under § 1026.32(b)(1)(i) if the exclusions to points and fees in § 1026.32(b)(1)(i)(A) through (F) apply. For example, certain bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either are excluded from points and fees under § 1026.32(b)(1)(i)(D), regardless of whether those charges are paid by a third party or the consumer.
In other words, in order to utilize seller's credits to offset QM points and fees, such points and fees must fall into one of the following categories: 
  • interest (1026.32(b)(1)(i)(A)) ;
  • insurance premiums in Federal or State agency loan programs (1026.32(b)(1)(i)(B)) ;
  • upfront and annual mortgage insurance premiums, guaranty fees, funding fees, etc. in government-insured loans (VA, FHA, USDA, etc.) (1026.32(b)(1)(i)(C));
  • bona fide third-party charges in connection with the loan, not retained by the creditor/broker, or an affiliate of either (1026.32(b)(1)(i)(D)) ; and
  • bona fide discount points  (1026.32(b)(1)(i)(E) - (F))
But, practically speaking, because the above items would have already been statutorily excluded from the QM points and fees, it would not make logical sense for a creditor to apply seller credits to offset them in the event that the lender has exceeded the 3% limit.  It appears that the Rule was designed to prevent the circumvention of QM points and fees by artful application of seller credits to pay charges.  

According to the CFBP's official comments, seller's points are, apparently, treated differently than seller's credits:
iii. Seller's points. Seller's points, as described in § 1026.4(c)(5) and commentary, are excluded from the finance charge and thus are not included in points and fees under § 1026.32(b)(1)(i). However, charges paid by the seller for items listed in § 1026.32(b)(1)(ii) through (vi) are included in points and fees. 
Therefore, unless seller's credits can be treated as sellers' points, the seller's credits will, in effect, not be permitted to offset QM points and fees.        

For the purpose of calculating QM points and fees, can a lender/creditor LEGALLY treat seller credits (toward paying finance charges) as seller's points?

To date, there seems to be two schools of thought and interpretation.

On the one hand, some believe the answer is "Yes" because of the Official Staff Interpretations on §1026.4(c)(5), which section is part of the general provisions (Subpart A) in Regulation Z and the definitions therein should apply to the rest of the regulatory provisions, including QM.  According to the CFPB,
[...] The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. [...]  
It seems plausible to argue that CFPB would want "seller's points" to have a consistent meaning in the context of both APR fees and QM points and fees; therefore, a seller's payment of finance charges at or before closing should be treated as seller's points so long as the consumer is no longer legally responsible for paying such charges.

On the other hand, some approach this more conservatively, believing that seller's credits are treated differently than seller's points, and that seller's credits can be applied toward pre-paid finance charges only if exclusions to points and fees in § 1026.32(b)(1)(i)(A) through (F) apply.

Absent further clarification from the CFPB, lenders/creditors should follow their investor's particular guidelines on these complex issues so as to originate salable loans on the secondary market.  If a lender does not sell its loans on the secondary market, it is probably more prudent to refrain from applying seller's credits toward pre-paid finance charges with the intent to reduce the amount of QM points and fees.  

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