One of the results of mortgage reform is government-imposed limitations on the amount of fees and points lenders can charge for mortgages. The hard cap on mortgage fees and points applies to loans designated "qualified mortgages," which are loans considered especially safe for borrowers. The advantage to lenders making "qualified mortgages" is that they are granted protection from borrower lawsuits -- it's assumed that the lender acted responsibly if the loan meets these guidelines.
As part of Wall Street Reform lenders who make "qualified mortgages" with an initial balance of $100,000 or more can charge not more than three percent of the total loan amount for points and fees, not including up to two bona-fide discount points that lead to a mortgage rate reduction, lower closing costs, or both.
Mortgage Refunds for Accidental Overcharges
Lenders who go over the three percent threshold can face huge penalties, perhaps even a requirement to buy back the loan from investors. That's a real problem because it's fairly easy for a lender to accidentally go over the limit.
To avoid the issue of fees and charges over the qualified mortgage limit, the CFPB says lenders are likely to take three steps -- none of which will make borrowers happy.
First, lenders might make loans with points and fees of less than three percent, a process known as buffering. This sounds good for borrowers, but it can also mean fewer loans and tighter application standards. If lenders can't charge more for the added risk some applicants represent, they're unlikely to lend to anyone but top-drawer borrowers.
Second, lenders can stiffen loan requirements -- a process called layering and again this could mean fewer mortgages (and fewer home sales) because marginal borrowers might not be able to get financing, or the mortgage rates they pay could be higher.
Third, lenders could offer fewer qualified mortgages and instead make non-qualified loans (non-QMs), financing with potentially higher costs because they represent more lender risk. Because riskier lending is thought to be a main cause of the mortgage foreclosure crisis, the government does not want to encourage this practice.
Lenders Can Avoid Penalties by Issuing Refunds
As an alternative, the CFPB has come up with a new proposal: If a lender finds they have accidentally over-charged they can simply issue a refund check to the borrower within 120 days of closing. That's it -- no harm, no foul, no penalties.
The CFPB proposal makes a lot of sense because the idea of the three percent limit on fees and charges for most qualified loans is not to penalize the lender; it's to assure that borrowers are not overcharged. The three percent standard was passed by Congress and cannot be changed without new legislation, but what can be changed are the regulations, the rules which interpret the standard.
The CFPB approach keeps the three percent requirement in place but also recognizes that among millions of loans originated every year there can be innocent mistakes. Rather than make a big deal over glitches here and there -- and rather than cause fewer loans to be made -- the proposed standard gives lenders a way to handle a minor problem without major consequences.
You can bet that lenders will support the CFPB proposal because it means fewer headaches for them. It also means something else: Lenders will now review loans after closing with greater scrutiny to assure that mistakes are resolved.
That's good not only for lenders and borrowers but also for investors who buy mortgage loans in the secondary market. Fewer mistakes equal less risk and when there is less risk there is pressure to hold down mortgage rates.