H.R. 1153 excludes insurance held in escrow and, under certain circumstances, fees paid to companies affiliated with the creditor from the costs that would be considered in calculating the three percent “points and fees” limitation for purposes of determine whether a mortgage can be considered a “Qualified Mortgage”. The legislation directs the Consumer Financial Protection Bureau (CFPB) to amend its regulations to reflect the new exclusions.
Mortgage points, also known as discount points, are fees directly paid to the lender at closing in exchange for a reduced interest rate. Essentially, some interest is paid up front in exchange for a lower interest over the life of the loan. One point costs 1 percent of your mortgage, or $1,000 for every $100,000.
Under the CFPB’s “Ability-to-Repay and Qualified Mortgage” rule, creditors are required to make a “reasonable, good faith determination of a consumer’s ability to repay” dwelling mortgage. A legal safe harbor from liability was established for certain “Qualified Mortgage” (QM) and are not “higher-priced.”. A QM loan has less risky features and meets strict Federal requirements.
A key requirement for a mortgage to be considered QM is if total “points and fees” do not exceed 3 percent of the total loan amount. Points and fees include finance charges, loan originator compensation, real-estate related fees, insurance premiums, and loan-level price adjustment fees. The CFPB’s mortgage rules allow for the exclusion of certain real estate-related fees, including fees for title insurance and appraisals, if the third party is affiliated with the lender, but not if the third party is unaffiliated. As a result, many loans involving affiliated companies would exceed the 3 percent cap, and not qualify as QMs.
However, under current law and regulations, what constitutes a “fee” or a “point” varies depending on who is making the loan and what the consumer does to obtain the title insurance. If the consumer chooses a title insurance provider that is affiliated with the lender, the title insurance charges count, but if the insurance is purchased from an unaffiliated title agency, the title charges do not count. In addition, escrowed homeowners insurance premiums may count as “points and fees” due to ambiguous drafting in Dodd-Frank. As a result many loans, especially those for low- and moderate-income consumers, fail the qualified mortgage test.