The bureau decided not to count compensation a lender pays its loan officer employees toward the 3% points and fees cap in the QM rule.
“The fact that they are not including compensation paid to a LO is huge,” said Larry Platt, a partner at K&L Gates. “I think they listened to the industry,” he said, and realized that adding LO compensation to the points and fees would have an adverse impact on the availability of credit.
Exceeding the 3% cap means the loan is no longer considered a QM loan and no longer benefits from a safe harbor that shields lenders from litigation when a borrower defaults.
The CFPB decision will also help mortgage brokers. A brokerage firm doesn’t have to include LO compensation in the 3% cap.
However, a mortgage brokerage firm does have to count the compensation a wholesale lender pays the brokerage firm towards points and fees.
And it is going to put the wholesale channel at a distinct competitive disadvantage to the retail channel, according to the Mortgage Bankers Association.
“Why should two loans that are identical in terms of interest rate and monthly payments be treated differently under the rule,” MBA senior vice president Pete Mills said.
In the final rule, the CFPB discusses ways the broker or wholesaler can avoid counting the lender-paid compensation toward the cap. In one case the borrower can pay the broker directly. But that would require the borrower to come to the closing table with a check to pay the origination fee, which is not typical in today’s market.
Or the wholesaler can raise the interest rate to keep the fees under 3%. But that means the loan is no longer rate competitive with a retail loan.
“It is not a fair result for the wholesale market,” said MBA general counsel Ken Markison. He noted that loan officer compensation rules and other rules are already in place to prevent steering and other lending abuses.
“You are harming this part of the market even though abuses have been addressed through regulation,” the general counsel said.
Mortgage brokers are also troubled by the CFPB rule that is due to go into effect on Jan. 10, 2014.
Marc Savitt, president of the National Association of Mortgage Professionals, noted that the inclusion of lender-paid compensation in the points and fees will make it difficult to operate and be competitive with retail lenders.
The CFPB also includes upfront fees that lenders charge to recover the cost of loan level price adjustment fees on Fannie Mae and Freddie Mac loans in points and fees. In addition, fees paid to lender-affiliated title companies and appraisal firms are included in points and fees.
If they want a cap at 3%, Savitt said, CFPB should only include fees the broker retains and fees paid by the wholesaler and borrower.
But the CFPB notes in the final rule and the 3% cap is only for QM loans. “The general 3% points and fees limit applies only to qualified mortgages and would not restrict the loan originator compensation paid to mortgage brokers in mortgage transactions that are not qualified mortgages.”
Meanwhile, the American Bankers Association and the Independent Community Bankers of America are generally pleased the QM rule includes special provisions for small banks and credit unions, which hold loans in portfolio.
These small entities with up to $2 billion in assets who originate no more than 500 first mortgage loans per year will be able to make QM loans with debt-to-income ratio greater than 43%. Other lenders that exceed the 43% DTI ratio will not receive QM status for their loans.
In addition, small banks and credit unions will be able to originate mortgages with an interest rate 3.5 percentage points above the average prime offer rate and still have QM safe harbor status. Other lenders must stay within 1.5 percentage points to achieve QM status.
While the Dodd-Frank Act generally bans balloon mortgages, the CFPB will allow small depositories to continue to originate balloons over the next two years.
The CFPB is providing this temporary two-year exemption to “preserve access to responsible, affordable mortgage for some consumers,” according to the final QM rule.