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Lending, Home Equity: Points and Origination Fees
Printer-friendly VersionQuestion:
I have a home equity application and I have a state law question as well as a fair lending question.
1) I'm checking to see if we are able to charge a 1% point on a 2nd lien home equity? The loan officer says the fee is because we aren't going to make any money off the loan - loan is $33,000 and our origination charge is normally $185. The applicant plans to pay this off in April, so it's only supposed to be on the books a few months, although it's being booked as a normal 15 year home equity loan to keep the payments down.
Based on what I've read, I believe we can charge it so long as we are still within the 3% cap.
2) I think I'm more concerned about the fair lending implications of this since it's not a fee we normally charge on home equity loans.
1) I'm checking to see if we are able to charge a 1% point on a 2nd lien home equity? The loan officer says the fee is because we aren't going to make any money off the loan - loan is $33,000 and our origination charge is normally $185. The applicant plans to pay this off in April, so it's only supposed to be on the books a few months, although it's being booked as a normal 15 year home equity loan to keep the payments down.
Based on what I've read, I believe we can charge it so long as we are still within the 3% cap.
2) I think I'm more concerned about the fair lending implications of this since it's not a fee we normally charge on home equity loans.
Answer:
If the fee is to buy down the interest rate, then it doesn’t count toward the 3% fee cap. If it doesn’t buy it down, then it would count against the 3% fee cap.
However, if it doesn’t buy down the interest rate, then it isn’t points and isn’t an allowable fee under the Finance Code. Remember, the Finance Code is pretty specific when it comes to fee. In almost all cases, the Finance Code either specifically allows a fee or that fee is disallowed. So, you can charge the 1% fee provided it is “points” and used to buy down the interest rate, but you can’t charge it if you call it an “origination fee” and it is not used to buy down the interest rate. If you treat it as an “origination fee” it would be considered additional interest, might make the interest rate go over 18%, and it would certainly make the interest rate not competitive. You could charge the allowable administrative fee instead. This would be different for a first lien mortgage as they aren’t regulated by Texas law. In some courts what you call a charge matters.
As for the fair lending issue, you always run the risk of running afoul of fair lending laws when you do something on an inconsistent basis. Certainly if it is a fee you don’t normally charge, and the loan was to a protected class, it would be reasonably easy to say it was discriminatory. If you are stepping outside your policy and procedures, and your actual practice, because the loan officer says you “…aren’t going to make any money off the loan…” you can quickly get into trouble.
However, if it doesn’t buy down the interest rate, then it isn’t points and isn’t an allowable fee under the Finance Code. Remember, the Finance Code is pretty specific when it comes to fee. In almost all cases, the Finance Code either specifically allows a fee or that fee is disallowed. So, you can charge the 1% fee provided it is “points” and used to buy down the interest rate, but you can’t charge it if you call it an “origination fee” and it is not used to buy down the interest rate. If you treat it as an “origination fee” it would be considered additional interest, might make the interest rate go over 18%, and it would certainly make the interest rate not competitive. You could charge the allowable administrative fee instead. This would be different for a first lien mortgage as they aren’t regulated by Texas law. In some courts what you call a charge matters.
As for the fair lending issue, you always run the risk of running afoul of fair lending laws when you do something on an inconsistent basis. Certainly if it is a fee you don’t normally charge, and the loan was to a protected class, it would be reasonably easy to say it was discriminatory. If you are stepping outside your policy and procedures, and your actual practice, because the loan officer says you “…aren’t going to make any money off the loan…” you can quickly get into trouble.