QM points and fees: Affiliated businesses (Part 1)

The Consumer Financial Protection Bureau (CFPB) finalized its ability-to-repay (ATR) rule on Jan. 10, setting forth the criteria for a qualified mortgage (QM). Despite vocal opposition from some industry participants, the final rule includes certain loan originator compensation and fees paid to lenders’ affiliates in the calculation of a cap on points and fees established as part of the QM definition.

In part one of this two-part series, Dodd Frank Update examines the ATR rule’s provisions as they relate to lenders’ affiliates. Part two will focus on the rule’s provisions related to loan originator compensation.   

QM’s points and fees provisions

The Federal Reserve first proposed rules implementing Dodd-Frank’s ATR provisions in May 2011. The rulemaking later transferred to the bureau.

Like the Fed’s proposal, the CFPB’s final rule provides that a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed 3 percent of the total loan amount, although certain “bona fide discount points” are excluded for prime loans. The 3 percent cap applies to loan amounts of $100,000 (indexed for inflation) or greater. The rule establishes other points and fees thresholds for smaller loans. The rule also provides guidance on the calculation of points and fees.

LO comp and fees paid to affiliates

The rule states that in connection with a closed-end credit transaction, “points and fees” includes certain fees and charges that are known at or before consummation of the loan. For instance, the points and fees calculation includes fees and charges that are included in the finance charge with certain exceptions.

Notably, under the rule, bona fide third party charges not retained by the creditor, loan originator or an affiliate of either are generally exempted from the points and fees calculation. Such fees payable to affiliated companies, however, must be included in the calculation.

Compensation paid directly or indirectly by a consumer or creditor to a loan originator “that can be attributed to that transaction at the time the interest rate is set” must also be included in the calculation of points and fees.

AfBA impact

The scope of the CFPB’s points and fees definition is of particular importance for industry participants who have affiliated business arraignments (AfBA), and these industry participants watched the issue closely after the Fed proposed to include fees paid to affiliates in the QM cap.

Industry participants decried the Fed’s proposal, concerned that the inclusion of affiliate charges in the points and fees definition could prevent otherwise satisfactory loans from meeting the requirements for a QM.

The CFPB’s final rule noted industry arguments that a creditor’s affiliation with a service provider, such as a title insurance agency, does not have any impact on the consumer’s ability to repay a loan. The Fed’s proposal would harm consumers by reducing competition among settlement service providers and by eliminating operational efficiencies. Several industry commenters also noted that affiliated business arrangements are permitted under the Real Estate Settlement Procedures Act (RESPA), which provides certain protections for consumers in relation to AfBAs. 

In its final rule, the bureau acknowledged that including fees paid to affiliates in the points and fees definition could serve to dissuade creditors from using affiliated service providers. However, the CFPB’s rule retains this element of the Fed’s proposal. In substantiating its decision, the bureau noted that Congress, through the Truth in Lending Act (TILA), mandated the inclusion of fees paid to affiliates.

“Despite RESPA’s regulation of fees charged by affiliates, concerns have nonetheless been raised that fees paid to an affiliate pose greater risks to the consumer, since affiliates of a creditor may not have to compete in the market with other providers of a service and thus may charge higher prices that get passed on to the consumer,” the CFPB wrote. “The bureau believes that Congress weighed these competing considerations and made a deliberate decision not to exclude fees paid to affiliates.”

Will the CFPB’s points and fees definition force lenders to abandon their affiliates in the name of QM compliance? Jeff Arouh, an attorney at McLaughlin & Stern LLP in West Palm Beach, Fla., said probably not.

“Like everything else, I think they will figure out how to deal with it,” Arouh said. “If you go back to exercising real prudence and real lending practice when you are qualifying your borrower and doing your underwriting, none of it should be an issue. The reality is if you run the bank like a bank the hope is that would not be an issue.”

Richard Andreano, a partner at Ballard Spahr LLP, said the debate surrounding the CFPB’s inclusion of affiliate fees in the points and fees cap will probably continue.

“The industry is assessing the issue and will likely continue to pursue a resolution in Congress,” he said.