Of all of the new rules that the CFPB implemented in January, perhaps the one with the most negative impact on the majority lenders is the 3% restriction that is part of the regulator’s Ability-to-Repay/Qualified Mortgage rule. With a stroke of its pen, the industry’s new regulator limited the amount of money a lender can make on a mortgage loan. Well, at least that’s what a lot of lenders seem to think.
In truth, understanding this important rule is key to setting a pricing strategy that will work for your company.
Specifically, the rule requires points and fees to be included in a qualified mortgage total less than or equal to 3% of the loan amount for all loans with principal balances over $100,000. For smaller loans, the CFPB has a graduated scale that allows lenders to charge more, but since fewer of those loans are written by readers of this blog, I want to focus here on the larger loans.
In its efforts to protect consumers, the CFPB is requiring lenders to include a number of items in the points and fees calculation for the 3% cap. This includes all of the finance fees the lender charges as well as broker compensation. It may also include certain third-party fees, even if the lender doesn’t take a portion, for example, certain PMI premiums, certain real estate-related charges, and premiums for certain credit insurance and debt cancellation or suspension coverage. The CFPB specifically points out in its ‘Ability to Repay/Qualified Mortgage Small Entity’ Compliance Guide that “up-front fees you charge consumers to recover the costs of loan-level price adjustments imposed by secondary market purchasers of loans, including the GSEs, are not considered bona fide third-party charges and must be included in points and fees.” And there are other fees that must be included, but not all of the typical fees will apply to every deal, so it’s important that your technology knows what must be included at the time you price the loan.
What can you do if you are continually failing the 3% rule?
One thing you can easily do is switch your strategy to include some or all of the closing costs in your interest rate. Just be careful that the final APR you arrive at remains in tolerance.
If that doesn’t work, or it takes you out of tolerance for the APR to APOR, you can charge origination fees to get within tolerance and still remain at a reasonable profit level.
Lenders are still figuring out what will make them the most money in this market and they should continue that work. It’s the only way to remain in business for the long haul and help more borrowers.