CFPB's Supervisory Highlights: Where Do Mortgage Lenders Fall Short in Compliance?

Recently the CFPB issued its 2015 Summer Supervisory Highlights to highlight the areas of compliance concerns revealed through its examination of supervised entities.

With respect to mortgage loan origination, the CFPB highlighted following compliance failures it noticed during its supervisory examination of mortgage lenders:

1.  Loan Originator Compensation Rule

In complying with the Truth-in-Lending Act and Regulation Z, mortgage lenders are required to establish and maintain written policies and procedures designed to ensure and monitor employees' compliance with TILA and Reg. Z.  The key component of the Loan Originator Compensation Rule under Reg Z is the prohibition against varying loan originator compensation based on loan terms.  Varying loan originator compensation based on loan terms may cause loan originators to steer consumer to costlier mortgage loans.

The CFPB noted that mortgage lenders written policies and procedures, if any, do not specifically instruct employees on how to comply with such policies and procedures.  In other words, the policies and procedures are defective, incomplete, incomprehensive, or impractical.

In my experience, I have seen lengthy written policies and procedures that either summarize or regurgitate laws or regulations.  Such policies and procedures do not meet lenders' needs because they have little practical value.  If written policies and procedures were purchased "off the shelf" without regard to the the lender's unique size and operational characteristics, they are hardly effective in accomplishing the ultimate goal of establishing and maintaining written policies and procedures -- to ensure and monitor compliance by each and every loan originator and officer of the entity.  Therefore, written policies and procedures must be tailor made, and they must address not only what the law is but also how to spot and avoid a violation.    

2.  Common RESPA Violations

A.  Untimely GFE

RESPA mandates that a lender must provide a good faith estimate of the fees and charges associated with a mortgage loan within three business days after the lender's receipt of a loan application.  Unfortunately, due to technical glitches or inadequate training of loan originators, many lenders fail to comply with this strict timeline consistently.

Lenders should be mindful that the same three-day requirement will apply to mortgage loan applications received by lenders on or after October 3, 2015, and they must deliver a Loan Estimate instead of the GFE in connection with covered loan transactions.

B.  Untimely Revised GFE

With respect to fees subject to the 0% or 10% tolerance, lenders may issue a change of circumstance disclosure and revised GFE within three business days of receiving the information constituting a change of circumstance.  This time restriction is critical to reset the applicable tolerance baseline.  Once the TRID Rule becomes effective, the same time restriction will apply to properly document a legitimate change of circumstance.

C.  Failure to Include All Fees on the GFE

The CFPB also noticed that lenders often fail to include all fees on a GFE.  This failure may cause an inaccurate estimate of fees to be paid by consumers at closing.

Under the TRID Rule, the disclosure of all fees and charges on the Loan Estimate is subject to the good faith standard.  Good faith requires a lender to accurately estimate and disclose loan-related fees and charges based on the best information available to the lender at the time of disclosure.  Good faith may require a lender to exercise due diligence to obtain information in order estimate certain fees and charges, including fees related to optional services, such as home warranty or inspection.

3.  Failure to Provide the Homeownership Counseling Disclosure

Effective since January 10, 2014, lenders are required to provide a list of homeownership counseling agencies within three business days of receiving a loan application for a RESPA-covered mortgage loan.  The disclosure must contain a list of at least 10 counseling agencies located nearest to the borrower's location (current residence zip code).  The list of counseling agencies must be accompanied by the following pieces of information related to each agency: name, phone number, street address, city, state, zip code, website URL, email address, services provided, and languages spoken.

These supervisory highlights offer lenders an opportunity to review  their own policies and procedures, and initial disclosures with respect to the above areas to determine whether they are in compliance with the applicable regulations.

Texas Home Equity Loans: How Not to Apply Equity Loan Proceeds?

It's not an exaggeration to state that originating a home equity loan in Texas can be perilous to any mortgage lender or financial institution.  The perils lie in the numerous restrictions, limitations, and requirements provided in the Texas Constitution and the Texas Administrative Code.

One of the restrictions relates to how to apply the proceeds from a Texas home equity loan.

Article 16, Section 50 (a)(6)(Q) of the Texas Constitution requires that a home equity loan is made on the condition that:

(i) the owner of the homestead is not required to apply the proceeds of the extension of credit to repay another debt except debt secured by the homestead or debt to another lender;

In addition, Section 50(a)(6)(g) requires the lender to provide each owner of the collateral property a disclosure at least 12 calendar days before closing a home equity loan.  The disclosure, commonly loan as the "12-Day Notice", must notify the recipient that the lender does

NOT REQUIRE YOU TO APPLY THE PROCEEDS TO ANOTHER DEBT EXCEPT A DEBT THAT IS SECURED BY YOUR HOME OR OWED TO ANOTHER LENDER

Texas Administrative Code (TAC), Title 7, Part 8, Article 153 was promulgated by the Texas Finance Commission to provide additional regulatory guidance regarding home equity lending in Texas. Section 153.18 provides:

An equity loan must be made on the condition that the owner of the homestead is not required to apply the proceeds of the extension of credit to repay another debt except debt secured by the homestead or debt to another lender.   (1) The lender may not require an owner to repay a debt owed to the lender, unless it is a debt secured by the homestead. The lender may require debt secured by the homestead or debt to another lender or creditor be paid out of the proceeds of an equity loan.  (2) An owner may apply for an equity loan for any purpose. An owner is not precluded from voluntarily using the proceeds of an equity loan to pay on a debt owed to the lender making the equity loan.

In other words, in originating a Texas home equity loan, the lender should not require the borrower to use the loan  proceeds to repay another debt owed to the lender unless the previous debt was secured by a lien against the homestead (e.g., purchase money lien, deed of trust lien, or a home equity lien). However, the lender may require the loan proceeds to be applied toward other debts owed to other creditors (e.g., tax lien, credit card debt, etc.)

According to the TAC, a borrower may voluntarily apply the loan proceeds from a home equity loan toward another debt owed to the same lender.  Lenders should, however, be cautious in doing so because it may have to prove to a court that the use of the loan proceeds was indeed voluntary in the event of a future default.  One can easily anticipate a defaulting borrower arguing otherwise when facing foreclosure. 

Loan Originator Compensation - What to Avoid?

Prohibited Loan Originator Compensation Practices

-- Illegally Funded Employee Expense Accounts

            The CFPB’s Loan Originator Compensation Rule (“Rule”) prohibits compensation to loan originators based on the term of a loan transaction or terms of multiple transactions, but it permits compensation based on a fixed percentage of loan amount.  A compensation plan based on a fixed percentage (or basis points) of a certain loan amount may also be subject to a fixed floor or ceiling.  To attract talented loan originators or to increase production of existing originators, some mortgage lenders may attempt to introduce additional compensation mechanisms into their compensation scheme.  While some mechanisms designed to incentivize loan originators are legal, others, such as bonuses paid from individual employee expense accounts that are funded through loan-related profits resulting from origination charges or retained interest rebates, are illegal according to the CFPB.  Although the Rule does not expressly prohibit individual employee expense accounts, the CFPB has clearly shown that it believes some compensation or bonus mechanisms tied to individual employee expense accounts violate the Rule, and that they can create significant legal liability for mortgage lenders and their executives. 

1.         The CFPB’s Allegations  

In two recent enforcement actions against Franklin Loan Corporation (“Franklin”) and RPM Mortgage, Inc. (“RPM”), respectively, the CFPB targeted the lenders’ compensation plans, which allegedly contained the following features: (1) upfront commission based on a fixed percentage of the loan amount; and (2) additional compensation paid from individual employee expense accounts.  With respect to the employee expense accounts, the CFPB alleged that both Franklin and RPM: (1) established employee expense accounts for each loan originator; (2) deposited funds into the expense accounts only for closed loan with a profit; (3) the profit per loan is calculated by deducting the expenses from the revenue related to each loan; (4) the expenses related to each loan may include the loan originator’s upfront commission for the loan and/or other operating expenses allocated to the branch level; and (5) the revenue on each loan may include origination fees, net interest rebate, and other income tied to the interest rate.  The CFPB further alleged that Franklin paid quarterly bonuses to its loan originators that had positive balances in their individual employee expense accounts.  Regarding RPM, the CFPB claimed that RPM’s loan originators had open access to their individual expense accounts, and that they could use the funds to: (1) offset tolerance cures or other fee concessions to borrowers on future loans, and (2) provide periodic raises to themselves on future loans.          

2.         Civil Liability

            In the action against Franklin, the CFPB ordered Franklin to pay $730,000.00 in redress to borrowers for its alleged violation of the Rule.  Due to Franklin’s financial condition, the CFPB did not seek civil penalties against it. 

            With respect to RPM, the CFPB ordered RPM and its CEO to pay, jointly and severally, $18 million in civil damages; it also ordered RPM and its CEO to pay $1 million in civil penalties, respectively.

                                   

3.         Analysis

In both enforcement actions, the CFPB filed civil lawsuits against the defendants in federal courts in California.  The defendants in both cases chose to enter into a settlement agreement (Stipulated Final Judgment and Order) with the CFPB instead of trying the cases before the judge or a jury.  Therefore, concerned stakeholders in the mortgage industry will probably not know whether the CFPB’s allegations are facts or merely allegations.  While the results accomplished by the CFPB in these actions may demonstrate to the mortgage industry the enforcement power the CFPB wields, these cases lack the clarity and guidance that judicial decisions may otherwise provide.  Nonetheless, unless defendants in future enforcement actions are able to “fight” back, entering into settlement agreements and consent orders with the CFPB in enforcement actions will probably become the norm.   

     

            Assuming the CFPB’s allegations against Franklin and RPM were true, the “fatal” flaw in Franklin and RPM’s compensation plan was funding the employee expense accounts with revenue tied to the terms of loan transactions.  Terms under the Rule include fees, charges, interest rate, APR, collateral type, etc., related to covered mortgage loans.  By tying the employee expense accounts (e.g. source of additional compensation) to the revenue generated from each loan, Franklin and RPM’s compensation plans, arguably, incentivized loan originators to offer loan terms detrimental to consumers (higher rates and/or fees) in order to maximize the revenue on each loan so as to gain additional deposits into their expense accounts.  To be compliant, any compensation plan should not contain provisions that, directly or indirectly, purposefully or accidentally, link compensation to the terms of loan transactions.

            In zealously enforcing consumer finance protection laws, the CFPB has repeatedly demonstrated its willingness to hold mortgage company executives personally liable for civil penalties and damages.  Under the Consumer Financial Protection Act of 2010, a “related person” may be held jointly liable for a mortgage company’s violations, and the CFPB has actively relied on this legal tool to impose personal liability on executives for alleged violations that occurred on their watch.  Therefore, prudence dictates that mortgage company executives exercise due care and diligence in establishing and practicing a compliant lending culture that permeates all facets of a mortgage lender’s operations.    

4.         Conclusion

Creating a competitive and compliant loan origination compensation plan can be a challenging task.  On the one hand, the compensation plan must contain favorable terms to attract and maintain gifted loan originators in a highly competitive market place.  After all, the financial success of any mortgage lender largely depends on productive loan originators capable of originating high quality loans.  On the other hand, the Franklin and RPM enforcement actions serve as a stark reminder that a compensation plan incentivizing loan originators must comply with the Rule.  To accomplish these twin purposes in any compensation plan, mortgage lenders and their executives should carefully review their compensation plans for compliance with the Rule.  When necessary, they should engage legal counsel to see if their compensation plans contain any prohibited provisions.         

Right to Rescind: What Mortgage Lenders Should Know

In its recent and relatively short opinion in Jesinoski v. Countrywide Home Loans, Inc., the U.S. Supreme Court confirmed that a homeowner has the right to cancel a covered residential loan transaction for up to three years after the transaction is consummated.  But, the Court overturned the lower courts' (both the district court and the 8th Circuit) ruling that the homeowner must file a lawsuit within three years after the loan closes in order to cancel or rescind the loan.  To exercise that right, the Court held that the homeowner needs only send the lender a written notice of its intent to cancel within the three-year period.

Most lenders are familiar with a three-business-day rescission period on covered loan transaction, but this case involved a three-year rescission period.  Generally, to trigger the three-year rescission period, a lender must have failed to provide a federally-mandated Notice of Right to Cancel at the time of closing.

Although it would be interesting to discuss the complications of a rescission almost 3 years after closing (finance charges, closing costs, the prior lien released, etc.), let's instead focus on how to avoid triggering the three-year rescission.

Most importantly, a lender should provide, at closing, two copies of the Notice of Right to Cancel to each homeowner in connection with a covered loan transaction.  What's a covered transaction?

Covered Transaction:  A covered transaction must have the following elements -

1.  Consumer Purpose.  The Truth-in-Lending Act and the Regulation Z govern consumer purpose loans; hence, loans for commercial/business purposes are not covered, even if the collateral securing the loan is the borrower's principal dwelling.  So, the first step is to clearly identify the borrower's intention regarding the loan proceeds.  Business or otherwise?

2.  Principal Dwelling.  The collateral property securing the consumer loan must be the borrower's principal dwelling, which a borrower can have only one at any given time.  Therefore, a consumer transaction secured by the borrower's second home and non owner-occupied investment property is not subject to rescission.

3. Security Interest.  The borrower's right to rescind applies only if the lender takes a security interest in the borrower's principal dwelling.  So, an unsecured loan is not subject to rescission.

Exempt Transactions: As applicable to most mortgage lenders, even if a loan is a covered transaction per the above, the borrower may not have the right to cancel where the loan is a -

1. Residential Mortgage Transaction.

(a) The purpose of the loan is to help the borrower acquire or purchase a principal dwelling.  (Purchase transactions)
(b) The loan proceeds will be used to finance the borrower's initial construction of a principal dwelling. (Interim construction loans for a new primary residence)

2. Refinancing by the Same Lender.  This type of refinancing loans, done by the existing lender, are generally to help reduce a borrower's interest and/or payment.  No new money is advanced in connection with the loan.  

Tricky Situations:  In some consumer loans, it may be tricky to determine whether the loan is a covered or exempt transaction.  For example, the following types of loans in the state of Texas should generally be subject to a federal right of rescission:

• Home Improvement Loans - a lender provides financing for homeowners to repair or renovate their principal dwelling.  Usually, the lender refinances the underlying mechanic's and materialmen's lien that's created in favor of the general contractor, which lien is assigned to the lender as consideration for funding the construction draws.

• Owelty Transactions - a lender provides the financing for a borrower who will use the loan proceeds to pay off co-tenants of a principal dwelling.  Generally, an owelty lien is created in favor of the departing co-tenant, which lien is then assigned at closing to the lender.  The owelty lien underlies the lender's deed of trust lien.

• Home Equity Loans - Loans made by eligible lenders to take equity out of a borrower's principal dwelling.  Numerous requirements apply to home equity loans, and one of which is a state and federal right to cancel the loan.

• Other Refinancing Transactions - Such loans are secured by a lien against a principal dwelling, including, for  example, a rate and term refinance and a tax lien refinance.  (Refinancing by the same lender is an exception.)

Watch Out: North Carolina Fee Limitations on Home Loans

Like many states, North Carolina sets limits on closing fees and charges that a mortgage lender can impose on a borrower in connection with residential mortgage loans.  But North Carolina's fee restrictions are special in a number of ways.

First, on a "home loan" a lender's origination charges are limited to the following:

• loan application, origination, commitment, and interest rate lock fees (HUD-1 801; GFE Box 1);
• bona fide discount points (HUD-1 802; GFE Box 2); and
• additional origination charges (in whatever name) in the aggregate not to exceed the greater of (i) 1/4 of 1% of the note amount, or (ii) $150.  (HUD-1 801; GFE Box 1)  See N.C. Gen. Stat. 24-1.1A(c)(1).

 The net result of the above limitation on a lender's origination charges is simple: other than application fee, origination, commitment fee, rate lock fee, and discount points, a lender can only charge an additional maximum of $150  to cover all other origination fees.  (It's worth noting that the statute does not limit the origination fee (point) to 1% or any particular amount.)  Anything beyond the limit will cause the loan to be out of tolerance.

Second, a "home loan" is defined to mean one where the loan:

• has a principal amount (note amount) that is less than $300,000;
• is a closed-ended transaction; and
• is secured by a first lien against real property with, or to be built upon it, one or more single-family dwellings or dwelling units, or a manufactured home. 

Therefore, the definition is broad enough to cover purchase and refinance transactions to be secured by a principal residence, a second home, or investment property.  But, loans in a subordinate lien position is excluded.

Third, the applicable statute and regulations are silent on the penalties if a lender exceeds the limitation on origination charges.  Usually, it is acceptable under federal law, i.e., RESPA and TILA, to issue a lender credit at the time of closing, or a refund check post closing, to cure any tolerance violations.  When asked whether there is a cure mechanism applicable to a N.C. Gen. Stat. 24-1.1A(c)(1) violation, an employee at the mortgage compliance division of the North Carolina Commissioner of Banks indicated, via informal telephone guidance, that a refund check to the borrower along with a letter of explanation is an acceptable way to cure the violation.  Good record-keeping by a lender is advised in connection with discovering and curing a tolerance violation.   

What Every Mortgage Lender Should Know about Copyright Infringement?

If you are a mortgage lender, you probably have generated many pieces of advertising for the loan products offered by your company.  Before releasing those ads, you probably spent countless hours on the content, aesthetics, and compliance aspects of the ads.  Everything seemed perfect.  

But, in many cases, your ads probably contain some kind of picture, graphic, or image.  Where did that picture or image come from?  Did you have permission from its owner to use it for commercial purpose?  If not, you may have infringed someone's copyright in and to that picture.  

Mortgage lenders of all sizes are subject to strict federal and state regulations with respect to advertising mortgage loan products.  On the federal side, lenders must comply with the MAP Act, Regulation N, the Truth in Lending Act, Regulation Z, the Fair Credit Report Act, and Regulation V.  At the same time, each state has its own mortgage advertising rules.  Given the severe consequences of a violation of the numerous federal and state rules, and in light of the CFPB's particularized attention on false and misleading mortgage advertising, mortgage lenders tend to spend much time and resources on advertising compliance.
         
The following may generally describe how a lender finalizes a piece of mortgage loan-related adverting.  First, a loan officer or production manager comes up with the desired texts for the ad; second, the compliance officer scrutinizes over the texts for federal and state compliance issues; third, someone with some computer skills "googles" for a visually appealing image and inserts it onto the texts; and finally, the ad gets distributed electronically or in print to the target audience.  Unfortunately, some lenders often neglect another important aspect of their advertising materials - copyright.

Copyright is the exclusive right of the owner of a copyrighted materials (music, literary work, pictures, among others) to produce, distribute, perform, or otherwise use such materials.  Copyright does not protect ideas, concepts, objects, or things; rather, it protects the original or creative expression of the underlying ideas, concepts, objects, or things.  Unlike for patents, the "original" or "creative" threshold required for copyright is low.  This renders most photographs, paintings, images, drawings, and musical notes copyrightable under federal law in the United States.  

Copyright infringement occurs when someone reproduces, displays, performs, or otherwise uses a copyrighted work during the copyright protection period without the permission, authorization, or license of or from the owner.  Unless you display or re-distribute a copyrighted work under some kind of fair use exception, i.e., commentary, criticism, parody, news reporting, or scholarly research, your unauthorized use of a protected work for commercial purposes is likely to constitute copyright infringement, which may be extensive civil damages.

Having reviewed copyright and the infringement thereof, let's think about how a mortgage lender can avoid committing, unwittingly, copyright infringement in making ads.

First, if you need a picture or image to make your ad "pop", conduct some internet searches to get the right look or "feel" for a picture.  But, don't just copy and paste a picture you find out there.  In most case, if not all, the picture you find and like on the internet is copyrighted.  Once you know the right look, you may want to use your own picture with a similar look.  If you don't have it, ask other employees in your company.  If they have a picture you like, obtain permission to use it.

Second,  if you or no one you know has a picture to your liking for a particular ad, think about creating one on your own.  Does your company have an artsy employee who can draw, make, or photograph?  Ask around and you may be surprised.

Third, if none of the above two options works for you and you really would like to use a photo you find on the internet, you may have to find its owner and ask for permission to use.  It may, however, be difficult to find the owner of a picture or image.  If you found the image via a google search, you may first use some technical means to identify the owner.  When that fails, you may want to go to flickr or similar websites to search for particular photos from the registered members of those websites.  It should be fairly easy to get in touch with the owner of one of the photos/images you like on those websites.  Contact the owner for permission to use.      

Fourth, when all of the above fails, you can always commission a graphic artist (a talented kid, an art teacher, etc.) to produce a custom-made image for you.  This may cost a small amount of money, but you know for sure that the image belongs to you because the artist created it for you under the "work for hire" doctrine.  You can re-use it as many times as you would like, without worrying about receiving a cease and desist letter from someone.         

Smaller Community Banks and Credit Unions: Have the Cake and Eat It Too

Smaller community banks and credit unions play a unique role in many Americans' financial lives by providing various financial products with great customer service.  However, these community banks and credit unions often cannot keep a large number of mortgage loans on their books due to a host of reasons, including, without limitation, high compliance costs, overhead costs associated with retaining mortgage loan professionals, risks associated with borrower default, etc.  As such, they often just refer their customers and members to other financial institutions in order to avoid the "headaches" associated with originating mortgage loans.  

However, I believe smaller community banks and credit unions can capitalize on existing customer relationships, originate loans to their customers, yet at the same time manage their costs and risks.  With the right setup and relationships, they can do so by selling their mortgage loans to the secondary market mortgage investors.  To that end, I often advise them of four options with varying degrees of risks, rewards, and costs associated therewith.  Below is a slightly modified email I recently sent to a community bank:

Option 1 – Marketing Services Agreement
With this option, the Bank can refer its customers desiring a mortgage loan to another mortgage company.  To move forward, you will need to select a target mortgage company(ies), enter into a formal marketing services agreement, and implement procedures required under the agreement.   

The benefits of this option include, without limitation: (1) no origination activity is required of the Bank; (2) the Bank receives a certain fixed amount for its bona fide marketing services provided to the mortgage company; and (3) the Bank will not have the compliance duties related to originating mortgage loans. 

The disadvantages associated with this option include, without limitation: (1) the Bank has little to no control over the borrower/customer’s mortgage loan experience with the mortgage company; (2) the Bank may lose the customer(s) due to a perceived lack of financial products, i.e., mortgage loans; and (3) the Bank misses the opportunity to make income from those mortgage loans on a per loan basis. 

Option 2 – Brokering
Under this option, the Bank can process mortgage loan applications made by its customers and make limited income on those loans by brokering such loans to a secondary market wholesale lender.  A brokering relationship typically necessitates a loan brokering agreement, and the Bank will need to hire loan originators and processors. 

The benefits of this option include, without limitation: (1) the Bank can conduct certain origination activities, therefore, will have control over the customer service experience in the loan origination process; (2) the Bank can help its customers with their mortgage loan needs; (3) the Bank can make some income on each loan, i.e., broker compensation and broker fees; (4) the wholesale  lender of the loans will underwrite, close, and fund these loans, and absent fraud or misrepresentation, the wholesale lender should shoulder most of the liability in connection with the loans. 

The disadvantages include, without limitation: (1) because of the QM points and fees limitations, loans with lower principal amounts may fail the QM points and fees test (3%), which may impact the salability of such loans; (2) the Bank will not be able to leverage its own strengths – available funds to close and fund the loans for greater compensation; and (3) originating loans will require the Bank to hire a loan originator and contract/employee processor.  

Option 3 – Mini Correspondent
Under this option, the Bank can close and fund mortgage loans to its customers and earn greater income on such loans.  Becoming a mini correspondent will require the Bank to establish some mortgage lending infrastructure, such as formulating contractual relationships with investors, hiring loan originators and processors, and finding third party vendors (credit reporting, flood cert., loan documents, MERS, etc.) 

The benefits of this option include, without limitation: (1) meeting existing customers’ mortgage needs; (2) closing and funding the loans in the Bank’s name will help the Bank earn greater income (in comparison with brokering) when the loan is sold; (3) the loans will be underwritten by the investors not the Bank, which effectively reduces the Bank’s liability; and (4) the Bank can outsource the closing, funding, and post closing associated with such loans to a third-party provider . 

The disadvantages include, without limitation: (1) the cost associated with hiring loan originators and processors (employee or contract); and (2) the Bank will need to have compliance expertise. 

Option 4 – Full Correspondent
This option will require the Bank to have a complete mortgage team (in house or contract) in order to originate loans, including loan originators, processors, underwriters, closers, and post closers.  The income on each loan is greater than what the Bank could get under the other three options, so will be the cost.  This is probably is not a viable option for the Bank at this time.

For most smaller community banks and credit unions, going the mini correspondent route may be the best choice.

Why the New Appraisal Disclosure (Reg B) is Tricky?

Effective on 1/18/2014, creditors must comply with new rules under Reg B governing appraisals ("Appraisal Rule") in connection with first lien loans secured by a dwelling with an application date of 1/18/2014 or later.

In a nutshell, a creditor must provide the borrowers a disclosure, within three business days after the receipt of a loan application, advising them of their right to receive a copy of all appraisals and other written valuations developed in connection with the loan.  Appendix C, Form 9 provides the following recommended language for the disclosure:

We may order an appraisal to determine the property's value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. 

 You can pay for an additional appraisal for your own use at your own cost.

In addition, the creditor must provide a copy of the appraisal/valuation reports to the borrowers promptly upon completion or three business days before closing.

These requirements seem simple and straightforward enough.  What is so tricky about the new Reg B?

1.  Scope of Application
Unlike other federal regulations, for example, Reg Z (TILA), Reg X (RESPA), Reg V (Fair Credit Reporting Act), or the new fearsome QM Rules, the new Appraisal Rule applies broadly to both consumer credit transaction and business-purpose credit transactions.

Notably, the Official Staff Interpretations provides:

14(a)(1) In general.
1. Coverage. Section 1002.14 covers applications for credit to be secured by a first lien on a dwelling, as that term is defined in § 1002.14(b)(2), whether the credit is for a business purpose (for example, a loan to start a business) or a consumer purpose (for example, a loan to purchase a home). [Emphasis added]

In other words, if the borrowers apply for a first-lien loan secured by a dwelling (i.e., 1-4 family residence, including, mobile home, condo, and coop), the requirements under the new Appraisal Rule will be triggered.  Therefore, even if the loan is for a business purpose, for example, to acquire a non-owner occupied, 1-4 family rental/investment property, the Appraisal Rule applies.  Similarly, it applies to a business purpose loan even if the borrower is a business entity, such as a limited liability company.

In terms of scope and applicability, the Appraisal Rule departs from other federal regulations.  Creditors, who lend to business entities or rental property investors, must comply with the Appraisal Rule by providing the early disclosure. (I do note that the broad application of this disclosure requirement is an existing requirement under Reg B.)  

2. Written Valuations
While the industry is familiar with appraisal reports developed by appraisers, less is known, however, about "written valuations".  In Reg B, "valuations" is defined as follows:

any estimate of the value of a dwelling developed in connection with an application for credit.

According to this definition, valuations should cover (refer to this):

• An appraisal report (by an appraisal whether or not licensed or certified) including the appraiser's estimate or opinion of the property’s value;
• A document prepared by the creditor or its agent/contractor that assigns a specific monetary value to the property;
•  A report approved by a GSE for describing  the estimate of the property’s value developed pursuant to the proprietary methodology or mechanism of the GSE;
•  A report generated through an automated valuation model (AVM) to estimate the property’s value;
• A broker price opinion (BPO) prepared by a real estate broker, agent, or sales person to estimate the property’s value.

In some instances, a creditor may compile valuation data, post closing, regarding a property solely for quality control purposes.  Will those valuation data be subject to this rule?  Given the overarching goal of Reg B for preventing discrimination by promoting transparency during the loan origination process, written documentation developed by a creditor after closing for quality control purposes should fall outside the scope of the Appraisal Rule.

Texas Supreme Court Further Clarifies Home Equity Lending

Summary:

In a Supplemental Opinion On Motion for Rehearing dated January 24, 2014, the Supreme Court of Texas ruled that: (1) per diem interest and legitimate discount points are not included in the constitutional 3% fee cap in connection with Texas home equity loans secured by homestead; and (2) a power of attorney can only be used in closing a home equity loan if that power of attorney was properly executed in the office of a title company, an attorney, or of the lender.

Impact:

With this additional ruling from the high court, lenders can now exclude prepaid per diem interest from the 3% fee cap.  "Legitimate" discount points can also be excluded, but the Court did not define what constitutes "legitimate".  The intent of the Court was, probably, to state "bona fide" discount point, which is a concept familiar to the mortgage lending industry.  Like with the exclusion of bona fide discount points in calculating the QM 3%, lenders will likely be required to demonstrate the discounts were in fact bona fide.  It's possible the Court may issue additional clarification on "legitimate discount points", and I will continue to monitor for developments on this.  For lenders that only originate QM loans, they will need to comply with both the Texas 3% fee cap and QM 3% when the Texas home equity loan amount is equal to or greater than $100K. 

In addition, borrowers, who must sign closing documents with the help of a power of attorney, will have to execute a Power of Attorney in the office of an attorney, the lender, or title company.  As a practical matter, title companies that close Texas home equity loans may require evidence, proof, or certification that a Power of Attorney was indeed executed in one of the permitted locations.  To be safe, a lender should not allow an agent/attorney-in-fact to execute Texas home equity loan closing documents unless it is certain that the power of attorney giving authority to the agent was properly executed in the office of a title company, an attorney, or of the lender.      

Homeownership Counseling Disclosure

Lenders of federally-related mortgage loans are now required to provide the Homeownership Counseling Disclosure.  This disclosure is in addition to the GFE required under RESPA.

Here are the basics:

1.  Effective Date:  for loans with an application date of 01/10/2014 or later.

2. Scope:  This new requirement covers all federally-related mortgage loans.  Essentially, if the GFE is required for a loan, you must also provide this Homeownership Counseling Disclosure.

3. When: within three business days after the receipt of an application, or information sufficient to constitute an application.  The timing is identical with that of the GFE.

4. What: this disclosure must contain a list of at least ten HUD-approved housing counseling agencies located closest to the borrower's current address (zip code).  At this moment, the easiest way to generate this list of counseling agencies is to go here, plug in the zip code of the borrower's current address, hit "Find A Counselor", and print or save search results.  Before you send the list to the borrower, be sure to include the following language on your disclosure document:

The counseling agencies on this list are approved by the U.S. Department of Housing and Urban Development (HUD), and they can offer independent advice about whether a particular set of mortgage loan terms is a good fit based on your objectives and circumstances, often at little or no cost to you. This list shows you several approved agencies in your area. You can find other approved counseling agencies at the Consumer Financial Protection Bureau’s (CFPB) website: consumerfinance.gov/mortgagehelp or by calling 1-855-411-CFPB (2372).  You can also access a list of nationwide HUD-approved counseling intermediaries at http://portal.hud.gov/hudportal/HUD?src=/ohc_nint.

Lenders should pay special attention to this requirement for a number of reasons.  First, many loan originators may be aware that housing counseling is required for reverse mortgages and Section 32 high cost mortgage loans; therefore, they may mistakenly ignore this disclosure when sending out the early disclosures on federally-related loans.  Second, most, if not all, secondary market investors will be looking for this disclosure when auditing loans.  A few have expressly stated in their bulletins that they would not purchase a loan absent this disclosure.

  

QM Points and Fees: What to Do about Bona Fide Discount Points?

Lenders and clients of our firm continue to ask for clarifications regarding bona fide discount points in calculating QM points and fees.  Many articles have been written, many webinars have been had, and many clarifications have been given, yet folks are still not sure about what to do about bona fide discount points.  So, it is, I think, not redundant to go over the basics one more time.

Discount points are finance charges, and are therefore included in the QM points and fees.  However, the QM Rule dos allow the following exclusions:

• up to two bona discount points paid by the consumer in connection with the loan if the loan's interest rate, without any discount, does not exceed the APOR by more than 1%;
• Upon to one bona fide discount if the loan's interest, without any discount, does not exceed  the APOR by more than 2%.

The math above seems easy enough, but the real problem lies in the definition of "bona fide" in the QM Rule. According to Section 1026.32(b)(3)(i), 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.  [emphasis added]

 In simpler terms, a discount is considered "bona fide" if the discount fee paid by the borrower corresponds to a reduction in interest rate, but the ratio (rate reduction vs. discount fee) must conform to "well established industry practices".

What is "well established industry practices"?  CFPB explains as follows:

To satisfy this standard, a creditor may show that the reduction is reasonably consistent with established industry norms and practices for secondary mortgage market transactions. For example, a creditor may rely on pricing in the to-be-announced (TBA) market for mortgage-backed securities (MBS) to establish that the interest rate reduction is consistent with the compensation that the creditor could reasonably expect to receive in the secondary market. The creditor may also establish that its interest rate reduction is consistent with established industry practices by showing that its calculation complies with requirements prescribed in Fannie Mae or Freddie Mac guidelines for interest rate reductions from bona fide discount points. For example, assume that the Fannie Mae Single-Family Selling Guide or the Freddie Mac Single Family Seller/Servicer Guide imposes a cap on points and fees but excludes from the cap discount points that result in a bona fide reduction in the interest rate. Assume the guidelines require that, for a discount point to be bona fide so that it would not count against the cap, a discount point must result in at least a 25 basis point reduction in the interest rate. Accordingly, if the creditor offers a 25 basis point interest rate reduction for a discount point and the requirements of § 1026.32(b)(1)(i)(E) or (F) are satisfied, the discount point is bona fide and is excluded from the calculation of points and fees. [Emphasis added]

CFPB's staff commentary specifically refers to FNMA's definition or method of determining whether discount points are bona fide.  However, FNMA has since removed its definition from its guidelines.

Without the benefit of the only readily available and familiar standard, the mortgage lending industry is in dire need of clarity.  Secondary market investors have varying ways of determining "bona fide"; however, I do see a common requirement for documentation showing the connection between points paid and a corresponding rate reduction, which documents may include, without limitation:

• Rate sheet;
• Screen print from LOS and/or Pricing Engine;
• Rate lock agreement/confirmation with the borrower; and
• Final HUD-1.  

 In order to successfully exclude certain number of discount points from QM points and fees, a lender will have to present sufficient documentation to establish that the discounts paid by the borrower were indeed bona fide.

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.  

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

With the exception of LO/broker compensation, lender-paid items are excluded from QM points and fees.

As supported by the official guidance below, if a loan exceeds the QM 3% in points and fees, the lender can always issue a lender credit to bring the loan into compliance before closing:

iv. Creditor-paid charges. Charges that are paid by the creditor, other than loan originator compensation paid by the creditor that is required to be included in points and fees under § 1026.32(b)(1)(ii), are excluded from points and fees. [Official Interpretations] 

Investment Property: Does the Qualified Mortgage Rule Apply?

To continue yesterday's discussion on my first impressions of the QM Rule, let's focus on the applicability of the QM Rule.  In particular, does it apply to investment properties?

Section 1026.43(a) details the scope of the QM Rule, and it identifies a list of transactions exempt from this Section, which is the crux of the QM Rule.  However, Section 1026.3(a)(1), which formulates "Subpart A" of Regulation Z that encompasses the QM Rule, provides specifically that an extension of credit primarily for commercial or business purposes is exempt from Regulation Z.  The Official Staff Interpretations regarding Section 1026.3(a)(1) clarify that credit extended to purchase, improve, or maintain non-owner occupied rental property is "deemed" to be for business purpose.  This means that residential mortgage loans to be secured by non-owner occupied investment property are exempt from Regulation Z, and thus Section 43 of Regulation Z.  However, if a borrower were to occupy the property for at least 14 days in one year (second home), a loan to be secured by such a property would not be deemed to be for business purpose, and thus, rendering it subject to the QM Rule.

Despite the express, statutory exemption for business-purpose loan transactions secured by investment properties, some investors have decided that such loans must comply with the QM Rule in order for them to be eligible for purchase.  For example,  Stonegate Mortgage Company, Cole Taylor Mortgage, and Freedom Mortgage all wrote in their QM bulletins or guidelines that they want, for the time being, the QM Rule to apply to investment properties.

These investors' interpretations are not necessarily wrong.  The investors just chose to approach the QM Rule more conservatively for legitimate business reasons, which is perfectly justifiable in the post-QM business environment.  They may, for good business reasons, change their interpretations a few months later when the jitters and uncertainties about these complex new rules settle down. For lenders and loan originators, in order to originate loans salable to investors that may appear to be a little conservative at this stage of the QM Rule, it is absolutely essential to know how the investors interpret the QM Rule.

In sum, knowing the QM Rule is important; knowing your investors' interpretations of the QM Rule is probably more important.  

Qualified Mortgage Rules: Will the Sky Fall?

The CFPB's regulations on qualified mortgages ("QM") have been in effective since 1/10/2014, but most covered transactions have yet to make through the origination/underwriting process.  In the next few weeks, more loans will proceed to closing in the post-QM, mortgage lending environment.  Before lenders and loan originators begin the last minute preparation to close their loans, I would like to share some of my first impressions on QM.

First, secondary market investors have very different interpretations on QM.  Based on my perusal of a large number of bulletins, guidelines, and updates issued by a handful of investors, it appears that investors interpret many aspects of QM very differently.  For example, while Regulation Z clearly states that non-owner occupied investment property is exempt from the QM requirements, some investors still require loans secured by investment properties to comply with QM rules.  Although most investors are poised to purchase QMs, some may only purchase certain loan products that fall under the safe harbor QMs.

Second, confusion seems abundant in a number of areas.  Some folks may still find it difficult to grasp the nuanced distinction between pre-paid finance charges (APR fees) and QM points and fees.  What is typically an APR fee, for example, contract processing fee, may not necessarily be included in the QM points and fees if the contract processor receiving the fee is not an affiliate of the lender/broker.  On the other hand, what is counted in the QM points and fees, for example, certain real estate-related charges (appraisal fee, credit report fee, title policy premiums) paid to an affiliate of the lender, are generally not APR fees.  It's essential for lenders and originators to identify the differences and connection between APR fees and QM points and fees.  In addition, the 3% threshold applies when the loan amount (note amount) equals to or is greater than $100,000.  In such cases, the total points and fees cannot exceed 3% of the total loan amount.  For the purpose of calculating the QM points and fees limit, the total loan amount, in most cases, is the amount financed as shown on the final TIL disclosure, not the note amount.

Third, lenders and investors alike seem to still struggle with how to apply seller credits.  Before QM, the same issue surfaced when lenders tried to comply with Fannie Mae's 5% points and fees limit.  Fannie Mae did clarify in its Announcement 09-24 that "points or fees are counted against the limitation regardless of the party paying the fee".  With respect to QM points and fees limit, the CFPB's guidance document and staff interpretation seem to indicate that seller credits/contributions can be used to offset pre-paid finance charges in 1026.32(b)(1) that are included in the QM points and fees.  However, if charges paid by the seller were for broker compensation, real estate-related fees (payable to the lender's affiliate), or credit insurance premiums, such charges should still be included in QM points and fees.

In the next few days, I will provide addition details on each of the above three topics.  Please check back for more.                             

BSA/AML Compliance

By now, every residential mortgage lender in this country should know that it must comply with the BSA/AML requirements.  According to the Final Rule issued by FinCEN, effective as of August 13, 2012, all non-bank residential mortgage lenders and originators ("RMLOs") must establish and maintain a comprehensive BSA/AML program and file suspicious activities reports. Non-compliance may result in substantial legal and monetary consequences.

Let's first sample the recent FinCEN enforcement actions against two banks.  Though these enforcement actions are not against RMLOs, the message from the FinCEN is loud and clear.  On September 24, 2013, FinCEN announced a consent order against the defunct Saddle River Valley Bank in Saddle River, New Jersey.  According to the consent order, FinCEN assessed a $4.1 million civil money penalty against Saddle River Valley Bank because FinCEN has determined that the bank failed to: (1) implement an effective BSA/AML program designed to manage its risks; (2) conduct due diligence in its foreign correspondent accounts; and (3) file suspicious activity reports ("SARs").  FinCEN levied a civil penalty of $37.5 million, on September 23, 2013, against TD Bank, N.A. for failing to file SARs related to a Ponzi scheme perpetrated by a Florida lawyer who was a customer of the bank.  Occurring almost concurrently, these two enforcement actions remind financial institutions, lenders, and RMLOs that BSA/AML compliance should be an integral part of each institution's compliance program, just like RESPA, TILA, and ECOA.  

Having seen the consequences of non-compliance with BSA/AML requirements, let's turn to the basics on how to be compliant. A RMLO must develop and implement a written BSA/AML program tailored to prevent itself from facilitating money laundering or from financing terrorist activities.  The BSA/AML program should be approved by the lending institution's senior management, and a copy of it must be made available to FinCEN or its designee, upon request.  The BSA/AML program should, at a minimum include these features: (1) policies, procedures, and internal controls designed in accordance with the risk factors associated with the RMLO’s products and services; (2) a designated compliance personnel to ensure the BSA/AML program’s effective implementation by relevant persons, agents, and brokers; (3) continuous training of appropriate persons regarding their responsibilities under the BSA/AML program; and (4) independent tests and audits by the RMLO or third parties to monitor and maintain the adequacy of the BSA/AML program.

It has been a little over one year since the BSA/AML requirements became mandatory for RMLOs.  With multiple final rules affecting mortgage lending being issued and amended by the CFPB in the past few months, compliance with the BSA/AML is hopefully not on the back burner of any RMLO since FinCEN has demonstrated that it is ready and willing to impose huge civil penalties where non-compliance is found.

Fannie Mae 5% Fee Limits and Real Estate Agent’s Commission

On rare occasions, borrowers might want to pay their real estate agent’s commission in connection with the closing of a mortgage loan. Hence, the question arises—does the fee paid to the real estate agent count against the 5% fee limitation as set forth by Fannie Mae?

First of all, let’s review what the Fannie Mae 5% fee limit is about. In Fannie Mae’s 2012 Selling Guide, B2-1.4-02, it is stated that:

Fannie Mae will not purchase or securitize mortgages if the total points and fees charged to the borrower exceeds [sic] the greater of 5% of the mortgage amount or $1,000 regardless of the party paying the fee.

Points and fees counted against this limitation include:

· Origination fees,

· Underwriting fees,

· Broker fees,

· Finder’s fees,

· Charges imposed by lenders as a condition of making the loan whether they are paid to the lender or a third party [emphasis added]

Points and fees that do not have to be counted against this limitation include:

· Fees paid for actual services rendered in connection with the origination of the mortgage, such as attorneys’ fees, notary’s fees, and fees paid for property appraisals, credit reports, surveys, title examinations and extracts, flood and tax certifications, and home inspections [emphasis added];

· The cost of mortgage insurance;

· The costs of title, hazard, and flood insurance policies;

· State and local transfer taxes or fees;

· Escrow deposits for the future payment of taxes and insurance premiums.

Bona fide discount points […]

In effect, the Selling Guide has specifically stated the fees included and those excluded in determining the 5% limitation. Therefore, whether a particular fee should count against the 5% limitation depends on whether it is included in the definition of “points and fees” as defined in the Selling Guide.

With respect to real estate agent’s commission, this fee is not identified in B2-1.4-02 of the Selling Guide, nor in Fannie Mae’s subsequent clarifications. However, the language in the Selling Guide is instructive in deciding whether restate estate agent’s commission should count against the 5% limitation. As highlighted above, points and fees to count towards the 5% include “charges imposed by lenders as a condition of making the loan […]”. Generally speaking, paying a real estate a commission regarding the real property in question is not a condition of making a mortgage loan; rather, it is a fee that a property buyer would have to pay even in a cash transaction. Therefore, this fee should not count against the 5% limitation, regardless of who pays it.