The Future Of Mortgage Lending

Consumer Choice (concerns under current Qualified Mortgage (QM) 3% cap)

CFPB Final Rule: Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)- including non-borrower paid origination fee paid by the wholesale creditor to originating company.

Understanding how the final definition for lender/creditor-paid fees on a wholesale transaction (non-borrower paid fees) included in the 3% cap on points and fees calculation negatively impacts consumers and unfairly targets MLOs that choose to broker loans rather than use a warehouse line(s) of credit/temporary bank funds (which are excluded from the 3% cap). 

* For simplicity in these examples I have used a margin of 1.75% (company origination fee including and unrelated to the Mortgage Loan Originator compensation) without thought to correspondent, bank, or wholesale base pricing, etc. to show that even at the same cost/revenue the wholesale transaction is penalized under the current QM definition (even if examples of lower cost wholesale transactions were used, the same would hold true with penalty under the Qualified Mortgage). 

Scenario:  $300k purchase price, 20% down, $240k loan amount. FNMA Conventional 30 year fixed.

Sample rate sheet – (consumer’s choice on pricing for cost/credit based off % of loan amount)


Sample 1 GFE (See below): “ORIGINATOR BROKERING”  – using sample note rate of 4.125% above with 1.75% lender-paid mortgage broker compensation (already built into the rate sheet) and $875 underwriting fee.

Sample 2 GFE (See below): “ORIGINATOR USING EMPLOYERS LINE OF CREDIT OR TEMPORARY FUNDS”  – using the above noted rate of 4.125% with an assumed 1.75% margin built into rate sheet (creditor origination fee not disclosed) and $875 underwriting fee. 

Side note:  The creditor-employed originator compensation portion within any margin is as easy to determine and know just as the mortgage brokerage firm compensation since compensation reform.  Neither should apply if the consumer is not paying up-front, but the claim that creditor-employed originator compensation cannot be determined at loan execution is inaccurate. 

BROKERED LOAN:

Broker-_GFE.pdf
40.1 KB

  • Company origination fee (paid by lender/creditor) is 1.75% or $4,200 based off $240,000 loan amount. 
  • Amount calculated toward 3% points and fees under QM = $4,200 (broker company) and $875 (underwriting fee to wholesale lender) for a total of $5,075.00 or 2.11% (which can easily hit threshold with other items added pending clarity on how credits also applied)
  • Consumer adjusted origination fees actually paid (Box A GFE):  -$778.60 (no borrower origination fees paid)

“BANKER”/LINE OF CREDIT LOAN:

Banker__credit_line_GFE.pdf
39.7 KB

  • Company origination fee (built in rate sheet) is 1.75% or $4,200 based off $240,000 loan amount.
  • Amount calculated toward 3% points and fees under QM = $875 (underwriting fee).  Same $4,200 company origination fee NOT included for a total of $875.00 or app. 0.36%
  • Consumer adjusted origination fees paid (Box A GFE):  -$778.60 (no borrower origination fees paid)

RESULTS (while using only origination/lender fee items in the 3% cap for this example):

  • The cost in the above noted scenario is the exact same, for same FNMA loan type and interest rate.  The “wholesale channel” is hit $5,075.00 toward 3% calculation.  The loan using a line of credit with same revenues was only hit $875 toward the 3% calculation.  This is a 1.75% difference in what is applied toward the 3% cap on points and fees, for the same program at same cost and NO borrower-paid points or fees.  This is assuming lender credits also do not off-set the stated lender underwriting fee noted which needs clarity as a pre-paid finance charge (PFC).

Additional Scenario (text only):  Assuming higher cost loan on creditor-employed originator vs. non-creditor employed.  Using 4.125% vs. 4% for an example, let's assume the creditor has a margin of 2.875% and broker of 2.25%.  Let's also assume that this results in 0.125% higher rate to borrower on the creditor transaction.  

$130,000 purchase price, 20% down, $104,000 loan amount, and let's assume just a 0 PAR price on each (meaning that the comp/revenue is included in rate sheet and $0 or 100.00 pricing reflected).

BROKERED LOAN:

  • Company origination fee (paid by lender/creditor) is 2.25% or $2,340 based off $104,000 loan amount. 
  • Amount calculated toward 3% points and fees under QM = $2,340 (broker company) and $875 (underwriting fee to wholesale lender) for a total of $3,215.00 or 3.09%
  • Consumer adjusted origination fees actually paid (Box A GFE):  $875.00 (actual paid origination fees meant to be included)
  • This is above 3% threshold and a non-qualified mortgage, financing cannot be offered

“BANKER”/LINE OF CREDIT LOAN:

  • Company origination fee (built in rate sheet) is 2.875% or $2,990 based off $104,000 loan amount.
  • Amount calculated toward 3% points and fees under QM = $875 (underwriting fee).  $2,990 company origination fee NOT included for a total of $875.00 or app. 0.84%
  • Consumer adjusted origination fees paid (Box A GFE):  $875.00
  • Financing CAN be offered
  • This is a qualified mortgage, although costs borrower 0.125% more in rate for same FNMA 30 year fixed term

RESULTS (while using only origination/lender fee items in the 3% cap for this example):

  • This is clearly a consumer issue.  This poses problems with disparate impact and treatment under fair lending in the primary mortgage market.  This is a conservative example for any other items that may be included in this cap.  The rules were not originally meant to restrict credit or calculate costs in which consumers do not pay.  Creditor-employed originator higher cost loans (for creditor to retain more fees in rate from borrower) are supported by regulators when lower cost loans are not, all negatively impacting the consumer.

We all know where this is headed on rate and fee increases to the consumer if nothing is done to change it and create equal competition and accountability through all origination channels.  Not holding every origination channel equal on regulatory changes and disclosure will lead to the loopholes that can cause steering and higher costs to consumers by creditors. 

The consumer is penalized by these regulations which will reduce and limit their choices and competition in the primary mortgage market.   The mortgage brokerage (or employee working for creditor brokering a loan) and the consumers they serve are penalized for simply choosing to not use a warehouse line of credit for the benefit to their clients on margins, lender overlays, etc. on agency-backed and other residential mortgage loans.  The choice should be the consumers, not rule makers.

These rules under Dodd-Frank were not created to limit competition and choice for consumers to access credit.  The rules were created to make sure there were not excessive points and fees charged that negatively impact consumers.  In the following example, you can clearly see that including lender-paid brokerage origination fees in the points and fees calculation does not help, but harms consumer choice and access to credit.  The 3% cap can easily be hit on lower loan amounts and other items included, even when they are not paying any lender/broker origination fees in many examples.

In addition, a Mortgage Broker originator/owner that operates their small business has a lot more risk and “skin in the game” than a Loan Officer working for a creditor or net branch.  Mortgage Brokerage firms should not be penalized by offering their clients alternatives, nor should steering toward warehouse lines or one origination channel be supported or tolerated by rule makers such as proposed in these final rules.  This choice should be made only by the consumer.

SUGGESTIONS/SOLUTION (please also see HR 1077 and S.949, but the items noted below must change by January 2014): 

Revise final rule making as it pertains to 3% points and fees cap under QM and make sure that all channels are treated equally for the benefit of consumers, competition, and small businesses that serve consumers across the United States.

  • Remove creditor-paid compensation/origination in the 3% cap on points and fees to loans being brokered on the wholesale channel when included in the rate sheet (treat channels fairly and supports competition and choice for consumers as well as correcting many other issues that can arise as proven by this example)
  • Make sure YSP and SRP are always treated identically on future RESPA/TILA disclosures and regulations facing the industry.  To make disclosures easy to understand, only show the rebates or costs consumers actually receive or actually pay, to remove YSP on creditor-paid wholesale transactions in line with all channels.  The note rate, APR, and adjusted origination fees MUST be clear for consumers to compare and understand that are disclosed identically.  **See 11/20/2013 updates on ACTION page