In the current market of higher interest rates, we’ve been seeing trends in lending such as both a buyer and seller paying to buy down a loan’s interest rate. When this happens, one of the more confusing questions that arises is whether the amount that the seller is paying is included in the High-Cost Mortgage/HOEPA loan points and fees test. Generally, the answer is “no,” but there are circumstances in which the answer is, “yes.” The existing regulation, commentary, and guidance are not as clear as you’d like them to be, but the determining factor in whether the answer to the above is, “no” or “yes,” appears to be whether an agreement between the parties requires the buydown amount provided by the seller to be paid into an escrow account.
The Rule
It’s a complex analysis, but the “standard” rule is that seller’s points are not included in the finance charge, therefore they are excluded from being considered points and fees. The part of the regulation that specifically discusses finance charges (1026.4) states that seller’s points, or a rate buydown paid for by the seller is excluded from the finance charge. The specific citation for this is 12 CFR 1026.4(c)(5). The commentary further explains that buyer’s points are finance charges but reaffirms that seller’s points are not. Further, the commentary to the part of the regulation that discusses High-Cost Mortgages/HOEPA loans (1026.32) states that because seller’s points are excluded from the finance charge, they are also be excluded from points and fees. The commentary goes on to clarify that not all seller-paid fees are excluded from the points and fees test, but seller’s points are excluded. The specific citation for this is Commentary to 12 CFR 1026.32(b)(1)-2.iii.
The Exception to the Rule
The “exception” to the standard rule involves a fee being required to be paid into escrow. The part of the regulation that discusses High-Cost Mortgages/HOEPA loans (1026.32) states that you’d generally include in the points and fees test all of what are described as “real estate related fees” listed in the finance charges section of Regulation Z found in 1026.4(c)(7). However, certain real estate related fees would not be included in points and fees, such as those for which the charge is reasonable, the creditor receives no compensation, and the charge is not paid to an affiliate of the creditor. The specific citation for this is 12 CFR 1026.32(b)(1)(iii).
Since seller’s points would be considered compensation to the creditor, seller’s points would be among those real estate related fees included in the points and fees test, if they’re considered “real estate related fees” by 1026.4(c)(7). What determines whether seller’s points are included in the real estate related fees is whether the amount is required to be paid into escrow, provided that the amounts would not have otherwise been included in the finance charge. The specific citation for this is 12 CFR 1026.4(c)(7)(v). We know that based on the aforementioned “standard” rule that seller’s points are not included in the finance charge, so if the amount of the seller’s points is required by an agreement between the parties to be paid into escrow, then you’d include these seller’s points in the points and fees test. Ultimately it will depend on exactly how this is spelled out within the agreement between the parties as to whether these seller’s points get included in the points and fees test.
Other Considerations
Also, keep in mind that the above is solely focused on the regulatory requirements, and that if any investor is involved, the investor could have further restrictions on these buydowns, for example, the restrictions found in Fannie Mae’s Selling Guide.
If you have any questions about seller’s points and their inclusion or exclusion as points and fees, reach out to us on the hotline and we’ll walk you through the citations to help you make a determination.