Mortgage Points and Fees, They Are a Changing

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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?

If you are not familiar with APR vs. APY, check out our mortgage rates table. You’ll see APY and APR listed. APR factors in fees, making it really easy to compare loans.

So what do you think–are these new regulations good or bad for consumers?

Published or Updated: May 22, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Ryan says:

    I’ve seen negative points on a mortgage, which gives you a slightly higher interest rate, but gives you cash back at signing, often enough to cover some of the origination fees, and other associated fees. An example would be something like this: A mortgage company offers a 30 year fixed mortgage at 3.90% APR. With negative points, you would pay a 4.00% APR and the mortgage company would give you the value of the point at closing. So if a point costs 1% of the loan and you buy a $200,000 home, the mortgage company would pay you $2,000 and you would pay a slightly higher interest rate. This works for the buyer if they want to use the money for closing costs or other associated fees, although if they take the loan to term,they would likely be better off not taking the negative points at closing and instead going for the fixed rate loan with no points, or even paying points if it makes a big enough difference.

    Anyway, I understand the CFPB’s angle with trying to simplify mortgages as they can be complex. I just don’t know how effective it will be in the long run.

    Side note: I’m currently reading The Big Short by Michael Lewis, which is about the sub-prime mortgage crisis and the events leading up to it – fascinating read. I think you would enjoy it if you haven’t read it yet.

    • Rob Berger says:

      Ryan, nice point on the negative discount points. I’d forgotten about that one.

  2. jim says:

    Well I for one certainly think its a good idea to ban banks from charging discount fees and then not providing a discount. That seems like outright fraud to me but I guess if its not technically illegal then some crooked lenders / brokers will just dupe unaware borrowers.

  3. Sandy says:

    I’m in the process of a refi with my bank (they have my checking/savings account, but are not my mortgage holders yet). They are charging an origination fee of $650 and charging 1 point ($1,700). I have 2 questions: Since the bank is not a ‘broker’ how can they be charging the origination fee (other than for the loan officer to make her money). and 2) How can the consumer know they are actually getting a lower rate when they pay the point – I guess I mean a rate lower than what – the guy without as good a credit score – and how much better – 1/8? 1/4? 1/2? How do I know?

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