Compliance Blog

Written by Michael Coleman, Regulatory Compliance Counsel

We recently blogged about the CFPB’s proposed rule concerning loan originator compensation. Today, we would like to take a closer look at the restriction on upfront points or fees and the “zero-zero” alternative loan contained in the proposed rule.  

Restriction on upfront points or fees. Under the proposed rule, the creditor or mortgage broker would be prohibited from imposing upfront points or fees on a consumer in a closed-end mortgage transaction “unless the creditor makes available to the consumer a comparable, alternative loan that does not include discount points and origination points or fees, unless the consumer is unlikely to qualify for such a loan.” See proposed Section 1026.36(d)(2)(ii)(A). This alternative loan is referred to as a “zero-zero alternative” by the CFPB.

In addition to the “zero-zero alternative” loan, the proposed rule requires that no discount points and origination points or fees could be imposed on the consumer unless there was a bona fide reduction in the interest rate. See proposed Section 1026.36(d)(2)(ii)(C).

Here is an excerpt from the summary of the proposed rule concerning the CFPB’s proposed use of its exemption authority in relation to the zero-zero alternative:

“For mortgage loans in which a mortgage brokerage firm or creditor pays  a loan originator a transaction-specific commission, the Dodd-Frank Act bans the imposition on  consumers of upfront discount points, origination points, or fees that are retained by the creditor,  broker, or an affiliate of either.  Although bona fide upfront payments to independent appraisers and other third parties would still be permitted, this change would require creditors in the vast majority of transactions in today’s market to restructure their current pricing practices.

However, the Bureau is proposing to use its exemption authority under the Dodd-Frank Act to allow creditors to continue making available loans with upfront points and/or fees, as long as they also make available an alternative loan, as described below.  The Bureau believes this approach would benefit consumers and industry alike.  Making both options available could  make it easier for consumers to evaluate different pricing options, while preserving their ability  to make some upfront payments if they want to reduce their periodic payments over time.  And the proposed approach would promote stability in the mortgage market, which otherwise would face radical restructuring of its existing pricing structures and practices to comply with the new Dodd-Frank Act requirement.”

Note that back in May, the CFPB was considering a prohibition on origination charges that varied with the size of the loan, and permitting only “flat” origination fees. NAFCU members expressed their concerns with these “flat” fees at the SBREFA panel on the proposal.

As a result of industry feedback on this issue, the CFPB did not include this prohibition in the proposed rule.  The CFPB indicates in the preamble to the proposed rule that the “zero-zero alternative” and the bona fide reduction in interest rates where origination fees are imposed, was developed as an alternative to the “flat fee” requirement, and that it accomplishes its purpose.