When I first read Dodd Frank and noticed that cryptically, it could be interpreted to prohibit payments to originators of upfront points and fees, I was at first confused, and secondly, disturbed, as to what it would mean for my clients.
With respect to confusion, if the CFPB and regulators want transparency, there is no question that upfront points and fees are about as clear as it gets. Upfront points and fees treat loans like every other consumer good. You get X interest rate for Y upfront points.
Moreover, since originators already have no or little incentive to charge or steer, how are upfront points and fees such a bad thing from a regulatory perspective?
Eliminating compensation on such loans would create a certain amount of havoc and disarray for lenders in ways I can't predict. For borrowers, it would certainly increase the cost of borrowing, and especially punish those persons who would purchase and hold property for the long-term, since they would ultimately pay more over the life of the loan then the cost of up-front points.
Fortuitously, the CFPB seems to have realized this as well. The proposal it has floated to replace the current provision is, from my perspective, fair and reasonable in all but one manner (which I will get to last).
First, the CFPB proposes that discount points must correspond to a rate reduction. Since that is the purpose of a discount fee such a requirement is certainly not earth shattering.
Second, requiring lenders to offer both an up-front and non-upfront fee alternative to borrowers is neither a significant burden, nor a game changer. Most borrowers realize that they always have an option to pay now or pay later. This merely requires to be offered explicitly, what is already available.
The last provision, however, requiring all origination fees to be flat dollar amount (regardless of loan amount) is in my estimation ridiculous. All such a provision does is shift the burden of origination fees onto borrowers less able to afford them.
In other words, a lender that might typically deal with properties between $200,000 and $1 million might set an origination fee right in the middle.
This would force borrowers of lower priced homes to effectively subsidize the origination fees of higher priced home purchasers (an typically that means lower income earning families subsidizing higher income earning families). Moreover, I cannot discern any particular benefit or rationale associated with such a policy, unless the concept is to simplify it for borrowers who cannot calculate a fee of 1%. If that is truly the case, the problem (and solution) lies with our education system–not lenders.
