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Terri Buckman
Terri Buckmanspace
Terri Buckman
VP, Sales Manager

Pinnacle Capital
Mortgage Corporation
1390 Willow Pass Road
Suite 560
Concord, CA 94520
email Terri
Shelley Thurlow
Shelley Thurlow
RVP, Branch Manager
email Shelley
Bona fide Discount: What's the point?
Bona fide Discount vs. Required Point
So, here it is January 21st and we are now living in the world of ATR and QM. In my December blog post, Terms of Careerment, we discussed new industry jargon associated with ATR and QM. Terms like, General QM vs. Temporary QM, the APR to APOR test and the Points and Fees Test. What we did not discuss however, was "bona fide" discount points. Turns out this is the area our industry is having the most difficulty in agreeing on. Consequently, I am devoting this entire post to the topic of bona fide points as they relate to the QM points and fees test.

Let’s start by saying bona fide is just a ten dollar word for genuine or authentic, but genuine or authentic as defined by what standard? Unfortunately, when the CFPB gave us their ruling on QM they did not include a concrete definition of bona fide discount. Many of us following this since the initial proposal have been asking this question to anyone who would listen. What is a bona fide discount point?

The ruling gave no explicit guidance on how we distinguish a bona fide discount point from any other point. The name itself implies there is non bona fide discount. And it is imperative that we understand this because as you all know by now, we can exclude a certain amount of bona fide discount point(s) (up to 1% or 2% depending) from the points and fees test. This can mean the difference between a pass or fail for QM status which can ultimately impact your loan approval.

Enter the Mortgage Bankers Association (MBA) who on September 4, 2013 asked the CFPB staff this exact question. The MBA posted a document noted as takeaways from CFPB discount point meeting and titled it, Guidance from CFPB on Appropriate Rate for Excluding Discount Points under Final ATR Rule. Let me see if I can synopsize this for you.

The CFPB staffer responding to the MBA was Paul Mondor. Mr. Mondor, when asked what a discount point was answered by saying the CFPB interprets the statute to require a discount point to be the amount but for the payment of which the consumer would have paid the starting adjusted rate.

This begs the question, what is a starting adjusted rate? It is yet another new "term of careerment" and it is the rate available to your borrower at zero points or as close to zero points as you can get. It is sometimes also referred to as the undiscounted rate and also the rate without any discount. All LLPAs (loan level price adjusters) and lender paid compensation should be factored in when determining the starting adjusted rate. Now, understanding this, you may be better able to follow Mr. Mondor's explanation of bona fide discount points.

Essentially, he is saying that any points the borrower pays to lower the rate from the starting adjusted rate will be considered bona fide discount and thus eligible for exclusion from the points and fees test up to the applicable maximum of 1% or 2% caps.

Note: The starting adjusted rate is the rate compared to APOR when determining maximum discount eligible for exclusion from points and fees test. If the starting adjusted rate does not exceed APOR by more than one percent up to two bona fide discount points may be excluded. If the starting adjusted rate does not exceed APOR by more than two percent up to one bona fide discount point may be excluded.

What if there is no zero point option available when determining your starting adjusted rate?
Since the inception of LO Compensation rules it is rare that we have a rate available for our client
with a corresponding price of exactly par or zero. We can get close to par as Mr. Mondor suggests, but we will generally end up with a price slightly in premium pricing (rebate) or slightly in cost.

What if corresponding price to our starting adjusted rate is in premium/rebate pricing?
Understand that the discount points that are excluded from points and fees may not exceed the actual discount point paid by the consumer. So, if the starting adjusted rate offers a rebate and the borrower pays discount points, only the amount of points actually paid are the maximum that can be excluded from the points and fees test.
Here is an example from the Mondor to MBA guidance:
Starting adjusted rate of 4.25% with a .375 point rebate. Borrower agrees to pay 1.5 discount points to lower the rate to 3.75%. The maximum discount points that could be eligible for exclusion from points and fees test is 1.5 points.

What if corresponding price to ur starting adjusted rate is a cost and no higher rates are available?
This will happen. After all, those LLPAs can really add up. Just take a gander at any wholesale rate sheet and check out the LLPAs for lower credit scores, subordinate financing, condos and non-owners. Then you add lender paid compensation on top of that, and sometimes there just isn't enough YSP (yield spread premium) to cover it all. Indeed some product types don't start out with a lot of YSP to begin with. Look at the max YSP available on ARMs for example. I guarantee there will be times you won't be able to get a zero point or premium/rebate option for your starting adjusted rate.

In these circumstances when you have a cost associated with your starting adjusted rate, this amount must go into the points and fees test as required points. That is if your lender is taking Mr. Mondor's advice to the MBA and many lenders are.
Here is an example from the Mondor to MBA guidance:
Starting adjusted rate of 4.125% with 0.125 discount points. The borrower agrees to pay 1.625 in discount points to lower the rate to 3.75%. Only 1.50 additional discount points paid by the borrower to lower the rate is eligible for exclusion from the points and fees test since the .125 points paid are required to get the starting adjusted rate.

Some lenders, however, are going with their own interpretation of the ruling with some not excluding any points as bona fide and some excluding all points as bona fide and other calculations in between. It'll be interesting to see where this ends up.

Calyx Point absolutely took Mr. Mondor's advice when creating their QM tool, LoanScoreCard which is conveniently included in Point. In fact, you can see the terminology they adopted for LoanScoreCard is directly from the MBA guidance mentioned here.

Seems to me a safe approach for roll out as this guidance is the most explicit direction given to date.

It should be noted that this interpretation means there will be some loans that simply won't be able to pass the points and fees test no matter how low the broker sets their compensation and no matter if the lender converts their admin fee to an LLPA. This is particularly true on wholesale loans where the broker compensation has to go into the points and fees test (again). If the LLPAs chew up all the YSP available and your starting adjusted rate has a cost of 2.5 for example, that does not leave much room for the brokers compensation. Fortunately, these will be few and far between.

The bigger point here, sorry for the pun, is to note the difference between bona fide discount points which are eligible from exclusion and required points which are not eligible for exclusion and thus must go into the points and fees test. Knowing the difference may enable you to direct a customer to another product that offers more YSP or restructure to reduce LLPAs and could save their loan.

I highly recommend reading the MBA guidance on bona fide discount and I also recommend utilizing LoanScoreCard if you are a Point user.

Hey, on a positive note, Dodd-Frank is about 90% implemented and I don't know of any other dynamic shifts heading our way until the new disclosures roll in late 2015. Looks like we're getting a much needed reprieve.
Post Date: January 21, 2014
New Terms of Careerment
Lingo YOU need to know by January 10th
Don't know your APOR from your APR? Or general QM from temporary QM? The industry is preparing for the next round of changes this January 10th and in so doing a new parlance is emerging.

As part of QM/ATR which affects all loans originated January 10th or later, you'll be running your pricing scenarios through some type QM calculator before you disclose or lock your loan. All lenders are required to make a reasonable determination that the borrower has the ability to repay the loan. Lenders seeking a safe harbor that ensures they've met this test will only make loans that meet the QM or (qualified mortgage) standards. There are two standards of QM, general QM standards and Temporary QM standards.

General QM:
• Total DTI is less than or equal to 43%
• Points & Fees do not exceed 3% of total loan amount
• No negative amortization, IO, balloon payments or terms longer than 30 years

Temporary QM:
• Mortgage must be eligible for purchase, insurance or guarantee by a GSE or government agency vs. a total DTI of 43% and thus ratios can exceed 43% for these transactions
• This is the only difference from General QM
• Temporary patch expires on January 10, 2021 or in the event government conservatorship ends
APOR Test:
Lenders seeking safe harbor in meeting the ability to repay standard will also want to ensure loans meet the APOR Test. To meet the APOR test, the APR of the loan must not exceed the APOR by 1.5 or more percentage points. I'll assume anyone reading this knows what an APR is, but what is the APOR? This is the Average Prime Offer Rate. It is published by the FFEIC weekly and you can find it posted here.
The QM calculator used by your targeted lender will run this APOR test. Should your loan fail this test, your lender will likely contact you to give you the option to reduce the rate, if possible. If the rate cannot be lowered enough to allow for a pass on this test, your lender may elect to decline the loan.

The QM 3% Points and Fees Test:
Lenders seeking safe harbor in meeting the ability to repay standard will want to ensure loans meet the 3% Points and Fees test. Again, the QM calculator used by your targeted lender will run this test. Generally, speaking all broker compensation, will be included in this test, most items in the finance charge will be included in this test unless they are provided by a bona fide third party. All lender fees, such as admin fees, doc prep, etc. will be included in the test. Fees charged by affiliated vendors of the creditor will be included in the test.

Note: Many lenders have affiliated AMCs for appraisals. The CFPB recently clarified that only the portion of the AMC fee retained by the creditor will be included in the 3% points and fees test. Should your loan fail this test, your lender will likely contact you to give you the option of reducing the fees, if possible. If the fees cannot be lowered enough to allow for a pass on this test, your lender may elect to decline the loan.

Loans below $100k will have higher thresholds for the points and fees test.

Naturally, you'll want to vet the policies of your wholesale sources and/or employer for in house fundings where applicable. Like the many changes we've navigated over the last 5 years, we'll see disparate approaches to these new regulations at the onset. Once the industry has had time to digest and absorb these new regs and processes we may see more standardization.

It should be noted that most leaders of our industry feel the industry can work within the parameters of these new regulations successfully in all our current channels of business.

Keep calm, carry on and contact your reps before disclosing or locking new loans come January 10th.

More resources from the MBA located here.

Post Date: December 23, 2013
TIL death do they part? GFE & TIL tie the knot...
How HUD & the Federal Reserve finally got on the same page!

For years, we've given the consumer two disclosures at application designed to explain the cost of the loan, namely the GFE and the TIL. These two disclosures were created by separate federal agencies under separate acts. The GFE was under RESPA and administered by HUD and the TIL was under TILA and administered by the Federal Reserve.


It's been cumbersome explaining the two disclosures over the years and there's been wide consensus the two forms confuse the consumer. Mortgage industry trade groups have lobbied for reform to no avail. It was simply not possible to get two federal agencies on the same page-pun intended.  We adapted and accepted and learned creative ways to explain what the government was attempting to explain.


This situation was exacerbated after the meltdown when after over 35 years of no change to these disclosures we had changes to them both. First we had the MDIA (Mortgage Disclosure Improvement Act) which affected the TIL then we had the new GFE roll out from HUD. Consequently, each new disclosure now has their own mandatory delivery date requirements and incidentally each uses their own calendar. To compound matters, the massive overhaul to the GFE added a new major flaw. It no longer calculated cash to close nor did it reflect credits toward closing costs. This necessitated the use of yet a third disclosure sometimes created and designed by the originator.


Enter the CFPB and their Know Before You Owe public initiative. The CFPB has oversight over HUD and the Federal Reserve and, in fact, they were mandated by Dodd-Frank to create a new disclosure that essentially marries the GFE and the TIL. They did exhaustive research to create the new disclosure,

reaching out to the mortgage industry for feedback as well as conducting consumer testing. In my opinion, they did a good job on this one.  One less disclosure is a plus right out the gate.

One calendar for counting time frames is a welcome change and the new Loan Estimate clearly identifies the cash needed to close and reflects credits toward closing costs.


Closing disclosures are being changed too. Replacing the final TIL and HUD-1 will be the Closing DisclosureHold on to your hats on this one, the new Closing Disclosure must be delivered 3 days prior to close. In other words, a purchase transaction will have a 3 day waiting period similar to the 3 day rescission period a refinance has today. And it has a tolerance variation threshold that if exceeded will require re-disclosure and another 3 day waiting period. On a happier note, the final rule expanded the tolerance threshold significantly from the proposal. Believe me, had they not done this, escrow closings in California would have looked like table fundings. The expansion of the tolerance should mean much less disruption to the way we close escrows in our state.


Some other interesting tidbits:


It appears the creditor will NOT have to break out compensation to the mortgage broker thereby ending the disparity between broker and banker disclosure methodology. This is still up for interpretation, but NAMB is currently of this opinion. If this interpretation is adopted, it would be a huge win for the mortgage broker and more evidence that our trade groups can make a difference!


Mortgage brokers as well as creditors can deliver the Loan Estimate, which is not the case today with the TIL. 


The creditor is required to deliver the Closing Disclosure but they can use a settlement agent to deliver as is the case today with the HUD-1. A creditor being able to use a settlement agent is a nice change from the proposal and a result of industry feedback.


The final rule is sticking with our current calculations for APR, the CFPB decided to ditch the all-in APR calculation. Be grateful for this as more fees in the APR would have pushed more loans into non QM land. 


Perhaps not on your gratitude list, our industry will soon have to explain what a TIP is in addition to the APR. TIP is the acronym for Total Interest Percentage. This is explained as "The total amount of interest that you will pay over the loan term as a percentage of your loan amount.) In the loan estimate example, the CFPB shows a rate of 69.45%! While we're on the topic, the CFPB also gave us a brief and nifty explanation of the APR. It is simply, "Your costs over the loan term expressed as a rate. This is not your interest rate."  I think someone from our industry must have told them that's how we've explained it for years!


For a synopsis on other items that changed from the proposal to the final rule read this curiously titled post from the CFPB Disclosure Team-The Explainer


If you've been in the business for 19 years and holding like I have (I don't admit to anything over 19 years any more) you don't have enough time left to read the whole final rule. Read this 7 slide summary on the final rule prepared by the CFPB. This is concise and to the point. (Final rule is 1,888 pages long)


The new disclosures don't take effect until August 1, 2015 which gives us plenty of time to prepare and train for implementation.

We can be thankful for that for sure!


Post Date: November 23, 2013
    Read Past Blog Articles    
Vet your 2012 Business Plan! 10/25/11
Score Two for the Brokers! 9/29/11
Dodd-Frankly Speaking... 6/8/11
LO Comp for Affiliates vs. Wholesale Customers 4/20/11
One Extra Step before completing your GFE on LPC... 4/6/11
Prepare for LO Comp Reform... 12/21/10
Comp Reform Dominates CAMP Show Chatter in Long Beach 8/23/10
Will LO Comp Reform fuel the Broker to Banker Trend? 7/27/10
Be an Industry Expert! 7/16/10
LQI new fact of life as of June 1st 6/18/10
LO Compensation 2011-Still a little Merkley... 5/23/10
CAIVRs is NOT a spelunking term! 4/26/10
We're looking for a few good Davids... 3/26/10
Jumping Aboard the Banker Train? 3/15/10
Whose YSP is it anyway? New World Order... 3/5/10
Happy CAMPers hit Capitol Hill 2/26/10
Mini-Eagle going way of Dodo Bird! and expected HUD changes Q1.... 1/12/10
Forget Red Flags, where’s my White Flag?! 12/19/09
Notes from the FHA Lender Training in Atlanta 9/23/09
Sneak Preview new MLs coming on Condos… 9/21/09
My Blog solely represents my own personal opinions and commentary and does not represent the opinions of any corporate entity or other individual. The intent of this blog is to start conversation on topical mortgage issues. This is not advice and should not be acted on accordingly. Further, this information is intended for mortgage professionals only and is not intended for consumers.
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