The federal government wants to make the mortgage industry safer. In this context, “safer” means it should be less likely to wreck the economy and drive hordes of homeowners into foreclosure. That kind of safe.
One of the steps to achieving this goal is to limit the amount of points and fees mortgage lenders may charge. Specifically, the new rule would limit certain points and fees to 3% of the total amount being borrowed.
Background: How We Reached This Point
In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act — or “Dodd-Frank” for short. This law represents the most sweeping set of financial reforms since the Great Depression. Among other things, it required the creation of a so-called Qualified Mortgage. These are mortgages that comply with a pre-defined set of standards and rules, which are designed to reduce risk.
For instance, the Qualified Mortgage (QM) rule prohibits interest-only payments on home loans. It also limits the amount of points and fees the lender can pass along to the borrower. Lenders have a strong incentive to generate qualified mortgages. In exchange for generating “QM compliant” loans, they will receive one of two forms of legal protection from consumer lawsuits — either a safe harbor or a rebuttable presumption.
To learn more about these parameters and protections, visit QualifiedMortgage.org.
The new rules were announced in January 2013, but they don’t take effect until January 2014. In many ways, they will define the “gold standard” for mortgage loans originated in the U.S.
Certain Mortgage Fees Limited to 3%, According to QM Rule
The Consumer Financial Protection Bureau (CFPB), that federal watchdog agency that defined the Qualified Mortgage, recently published a “small entity compliance guide” for lenders. This guide offered some clarification on the 3% rule for points and fees.
“For QMs, points and fees generally may not exceed 3% of the total loan amount, but higher thresholds are provided for loans below $100,000.”
The 3% limit is for loans greater than or equal to $100,000, and it only applies to certain types of mortgage points and fees – specifically, those charged by the lender. As a result, most of the loan-origination and finance charges will be subject to the 3% cap.
An important distinction: This rule does not apply to legitimate and “reasonable” fees charged by third parties (non lenders) associated with the transaction. Fees excluded from the 3% rule include those associated with title examinations, property surveys, document preparation, credit reports, notary services, and property appraisals.
The 3% cap on mortgage points and fees is only one small aspect of the broader QM rule. It also prohibits certain lending products that have been labeled as “high risk.” According to the aforementioned CFPB compliance guide, “the QM requirements generally focus on prohibiting certain risky features and practices, such as negative amortization and interest only periods.”
As mentioned earlier, the Qualified Mortgage rule and the closely associated Ability-to-Repay (ATR) rule do not take effect until January 2014. But they are already starting to have an impact on lending standards in the U.S. We expect to hear a lot more about these new standards as the January 2014 implementation date draws near.