Under the Consumer Financial Protection Bureau’s regulation, all such fees are included in a points and fees test that says they cannot exceed 3% of the loan amount and still qualify for QM status.
But observers said the CFPB appears likely to ease its interpretation of affiliated fees, allowing transactions that are passed through an affiliate to a third-party provider to be excluded from the test.
“I understand from unofficial sources that the CFPB is working on some clarifications to the ability-to-repay rule,” said Leonard Chanin, a partner at Morrison Forester and a former top official at the agency.
He said addressing fees passed through an affiliate would be “relatively easy to fix or clarify.”
Richard Andreano, an attorney at Ballard Spahr, agreed, saying he expects the CFPB to address the issue when it issues a proposal this spring that will “clean up some technical issues” with the QM rule.
At issue is a provision of the Dodd-Frank Act that said fees “retained by” affiliates should be part of the points and fees test for QM. But in its rule, the CFPB used language from a previous Federal Reserve Board rule that instead included any fees “paid to” the affiliate as part of the test.
Many believe the CFPB will clarify the rule to echo the language of the statute.
“CFPB has concluded it should be ‘retained by,'” said Andreano, who heads up Ballard Spahr’s Mortgage Banking Group, at a real estate conference last week.
The issue is critical to many integrated firms, which have been forced to drop certain affiliates to avoid the 3% limit. Other firms have even discounted their fees to avoid the restriction or refer homebuyers to nonaffiliated firms.
Speaking at the same conference, Tim Donovan, the corporate counsel for Title Source/Quicken Loans, said the restriction has already had a large impact.
“The 3% rule has caused us to dismantle portions of our pro-consumer structure,” he told a Real Estate Services Providers Council conference last week. “We do know that we are losing business.”
He said consumers are paying the price.
“They are likely to be charged more by a nonaffiliate,” he said. “That is somehow being lost in the discussion.”
Robert Moline, president and chief operating officer of HomeServices of America, said fees on low-balance loans generally bump up against the 3% limit more than larger-balance loans.
“The 3% rule is the biggest disservice to the first-time home buyers,” Moline said at the conference. “The government set out to help the little guy and, in doing so, harmed them dramatically.”
Moline also noted that the “lack of direction on the rules has been very problematic.”
HomeServices, based in Minneapolis, is an affiliate of Berkshire Hathaway. It has a joint venture arrangement with Wells Fargo Home Mortgage, which is in the process of being wound down. (In July 2013, Wells Fargo announced it was winding down eight such ventures due to the increasing regulatory complexity and difficulty of operating joint ventures.)
The Mortgage Bankers Association drafted a memo on points and fees last year after talking with the CFPB’s staff in an effort to clarify the issue.
It includes an example of a creditor paying an affiliated title agency. Under the group’s scenario, the total fee paid for title services is $1,500 at closing. The affiliated title agency retains $1,000 and pays a nonaffiliated title insurance underwriter $500.
In this example, “only the $1,000 portion of the fees paid to and retained by the affiliate is counted toward the points and fees,” the MBA memo says.
The MBA drafted the memo with the understanding that it reflects the CFPB staff’s position with respect to fees that are retained and fees that are passed on to third-party providers. Still, the group is urging the CFPB to weigh in directly.
“We believe it reflects what we believe to be the correct interpretation of the law,” said Ken Markison, the group’s regulatory counsel. “We would hope that the bureau would reiterate this position in a written rule.”
Despite this anticipated change, title fees will continue to impact first-time homebuyer transactions, according to Sue Johnson, RESPRO’s executive director.
“Ending the confusion over the question whether charges retained by an affiliated title company count as points and fees is helpful,” Johnson said. “But the requirement to count retained affiliated title fees will continue to make it difficult for smaller loans to stay under the 3% cap, even if the costs are the same (or even lower) and even if the loan meets all other QM standards.”
Still, Justin Ailes, the vice president for government and regulatory affairs for the American Land Title Association, said a change on what counts toward the points and fees test would be welcome.
“It confirms what most people believe to be true. But it has been a hazy area. Any attempt to clarify it would be a good thing,” he said in an interview.