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Opinion

Simplifying the 3% Points and Fees Rule

Many lenders are struggling with determining what is included in the 3% cap on points and fees as it pertains to the definition of a qualified mortgage. For those who want to avoid the 900-plus page rule, an oversimplified but generally useful way of understanding what is included in the 3% cap, is that it is the same as the old definition of “finance charge,” with a few important additions:

(1) To the extent settlement related fees or charges are required by the lender, amounts retained by a creditor, originator, or affiliate of either, are now included in the finance charge. In short, this means fees escrowed or incurred in connection with a real estate settlement, such as for appraisals, homeowners insurance, etc, are typically going to be added to the 3% if and to the extent that the creditor/originator/affiliate retains monies associated with such costs.

(2) With respect to mortgage insurance, the only addition to points and fees is the amount charged up front, and only to the extent it is private mortgage insurance charging in excess of government-backed mortgage insurance. 

(3) Compensation to third party originators will have to be included in calculating the 3% cap on points and fees.

(4) Loan level price adjustments charged as bona fide discount points (up to 2%) and/or included in the rate will not count toward the 3% cap, but other LLPAs charged upfront will count toward the 3% cap.

What this all means (again, speaking very generally), is that these changes will most affect lenders with affiliates and/or lenders that engage in third-party origination. Loans impacted most are those involving up-front loan level price adjustments but not as bona fide discount points; and/or loans with private mortgage insurance exceeding the cost of government backed mortgages.

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