If you’ve ever applied for a mortgage, you know just how convoluted the whole process can be. Just trying to read a HUD-1 statement is enough to send you over the edge. And then there are origination fees and discount points.
Discount points are fees charged that generally result in a lower interest rate on the home loan. These points are a percentage of the loan amount and generally range between 0% (no discount points) to 3%.
An origination fee is a fee charged by a brokerage firm to originate your loan. You can think of it as a processing fee, although your loan may also come with a processing fee separate and apart from the origination fee. This fee is sometimes confused with discount points because it too is often a percentage of the loan amount (1% is not unusual). But unlike discount points, an origination fee does not lower the interest rate on your loan.
Enter the Consumer Financial Protection Bureau. Earlier this month the CFPB announced that it would be proposing new regulations this summer to simplify discount points and origination fees.
Here’s what the CFPB plans to do:
- Require an interest rate reduction when discount points are paid: This one surprised me. Apparently there are mortgage loans out there that charge discount points but don’t actually reduce the interest rate on the loan. The CFBP will mandate that consumers receive a minimum reduction in their interest rate for each discount point paid.
- Require lenders to offer loan options with no discount points: Comparing different home loans that have different discount points can be difficult. It’s always a tough call as to whether you should pay discount points, and if so, how much. Under the CFPB rules to come out later this year, lenders would be required to offer a no-discount-point option to make it easier to compare loan offers.
- Ban origination fees that are based on the size of the loan: To prevent consumers from confusing origination fees with discount points, the CFPB plans to prohibit mortgage companies from charging an origination fee as a percentage of the loan.
So are these good changes?
I think the requirement that discount points actually result in a lower interest rate is a good change. Frankly, I had never heard of discount points that didn’t lower the rate, but apparently there were some shady mortgage companies engaging in this practice. It was probably fraudulent anyway, so making it clearly illegal is a good step.
The other changes, however, have me concerned. Whenever the government comes in and tells a business they can’t do something that is perfectly legitimate all in the name of “consumer protection” I get nervous. Recall the Durbin Amendment that capped fees that could be charged on debit card transactions? It sounded like a great consumer protection, until you realized that all it did was line the pockets of big retailers and force banks to pass on more fees to their customers.
In the case of origination fees, if banks can’t charge more for larger loans, those getting smaller loans may end up paying more. I don’t see the fairness in that. And why force a bank to offer a no-discount-points option when consumers can use APR to easily compare loans?
So what do you think–are these new regulations good or bad for consumers?