What are considered bona-fide discount points in the qualified mortgage rule?

Question

The qualified mortgage rule says that some points and fees are limited to 3% of the loan amount. But it goes on to state that up to two additional "bona fide" discount points are allowed, depending on the rate assigned to the loan. Am I correct on this so far? And if so, what is considered to be a bona fide discount point, as far as the CFPB is concerned. Does the QM rule define "bona fide" somewhere within its countless pages of text? Any insight would be much appreciated.

Answer 1

Apparently, this is an area of confusion among many lenders, brokers, LOs, etc. I'm hoping some others will join the discussion soon. In the meantime, here's what we know.

First of all, yes, you are correct. There is a provision about bona fide discount points within the Qualified Mortgage (QM) rule. It's also mentioned within several posts on the CFPB website, and in some of their other "explainer" documents and guides.

Here is some background information:

The original QM proposal included a cap on points and fees charged by the lender. They were limited to 3% of the loan amount. But this feature of the rule was modified in response to industry feedback (read "lobbying").

In September 2013, the CFPB published a final rule that amended certain provisions within the Qualified Mortgage definition. Here are some relevant quotes from the final rule, where it discusses bona fide discount points:

The final QM rule "provides for an exclusion from points and fees of certain bona fide discount points..."

Okay, so what does bona fide mean, in this context? We have to look elsewhere for that. In the "official interpretations" published by CFPB, and in other documents, a bona fide discount point is described as such:

"...to be bona fide, a discount point must reduce the interest rate based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer. To satisfy this standard, a creditor may show that the reduction is reasonably consistent with established industry norms and practices for secondary mortgage market transactions."

A CFPB blog post from May 2012 explained that a bona fide discount point "means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point."

So here's my take. If a point paid by the borrower reduces the borrower's rate by an amount that is in keeping with industry norms, it can be excluded from the 3% limit placed on points and fees under the Qualified Mortgage rule.

CFPB's "Small Entity Compliance Guide" states that mortgage lenders can exclude up to two bona fide points if "the interest rate before the discount does not exceed the Average Prime Offer Rate (APOR) for a comparable transaction by more than 1 percentage point."

Does anyone else have any insight to share on this subject?