A consumer mortgage origination is subject to Section 32 limitations and disclosures when the points and fees paid by the borrower before origination exceed:
- 5% of the total mortgage amount for a mortgage of $26,092 (in 2024) or more; or
- the lesser of 8% or $1,305 for a mortgage of less than $26,092 (in 2024). [12 CFR §1026.32(a)(1)(ii)]
These ceilings on the points and fees a borrower incurs to close a mortgage origination are adjusted annually for inflation, 2014 being the base year. The points and fees ceilings are published in the Federal Register each year after the June release of inflation figures for originations in the following calendar year. [12 CFR §1026.32(a)(1)(ii)]
Editor’s note — For 2023, the thresholds were 5% for mortgages of $24,866 or more, and the lesser of 8% or $1,243 for mortgages of less than $24,866.
The calculation of points and fees differs depending on whether the mortgage is closed-end — such as a fixed or adjustable rate mortgage (FRM or ARM) since they are fully funded at origination — or open-end — such as a home equity line of credit (HELOC) or reverse mortgage.
For closed-end mortgages, points and fees calculations follow the ability-to-repay rule for calculating points and fees. [See Realtipedia volume: Real Estate Finance, Chapter 2]
PMI and MIP charges excluded
Mortgage insurance premiums (MIPs), whether government or private, are not considered in the points and fees calculations on closed-end mortgages. MIPs, in essence, are a premium interest rate charge added to P&I payments to cover the excessive risk of default inherent in high LTV mortgages.
Significantly, the lender imposing MIP shifts their decisional risk to the government or private operators. For a fee, they guarantee payment of the principal and interest the lender bargains for on funding a mortgage – when the borrower does not cure delinquencies that arise. [12 CFR §1026.32(b)(1)(i)(B)-(C)]
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Bona fide discount points excluded as prepaid interest
A discount point is an amount of money a borrower pays a lender to originate a mortgage at a reduced interest rate, also called a time-price differential. The interest rate reduction charge must be a bona fide amount reasonable and consistent with industry norms for these “buy downs” of the interest rate over the term of the mortgage. Bona fide discount points, up to a threshold figure, are excluded from points and fees calculations. Any excess amount is included in points and fees. [12 CFR §1026.32(b)(1)(i)(E)-(F)]
These limits change depending on the mortgage’s interest rate. The closer the interest rate is to the APOR for the mortgage, the higher the threshold for excluding discount points. This is another way in which regulators are preventing lenders from overcharging borrowers.
When the par rate of interest for a mortgage – before discounting – is higher than the APOR for the mortgage by no more than one percentage point, up to two discount points may be excluded as bona fide.
However, when the par rate of interest is between one and two percentage points greater than the APOR, no more than one discount point may be excluded as bona fide.
Further, when the pre-discount interest rate exceeds the APOR by more than two percentage points no discount points may be excluded as bona fide. [12 CFR §1026.32(b)(1)(i)(F)]
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Offering mortgage points? There are better ways to catch a buyer
Remote mortgage originator compensation excluded
Compensation paid to mortgage originators which is included in other fees and charges is excluded from Section 32 points and fees calculations, since it:
- has already been accounted for in the finance charge;
- is paid by the mortgage originator’s employing mortgage broker from their earnings on the origination;
- is paid by the lender who employs the mortgage originator; or
- is paid by a retailer of manufactured homes to its employees. [12 CFR §1026.32(b)(1)(ii)]
Fees paid to a “mortgage originator,” includes:
- mortgage brokers and their employees; and
- officers employed by mortgage lenders.
A mortgage lender is to maintain bookkeeping records and employment agreements regarding all compensation paid to MLOs for three years after the date of payment. [12 CFR § 1026.25(c)(2)(i)]
Prepayment penalties included as voluntarily incurred
Additionally, points and fees include:
- the prepayment charges and penalties called for in the mortgage note and trust deed [12 CFR §1026.32(b)(1)(v)]; and
- when the origination refinances a mortgage made or presently held by the same lender, any prepayment charges or penalties the borrower incurs. [12 CFR §1026.32(b)(1)(vi)]
Points and fees on open-end mortgages
In addition to the fees which are collected under a closed-end mortgage, open-end mortgages also take into account:
- participation fees payable at or before the account is opened [12 CFR §1026.32(b)(2)(vii)]; and
- transaction fees, including minimum fees or per-transaction fees, charged on draws on the line of credit. [12 CFR §1026.32(b)(2)(viii)]
