In March 2008, we wrote an article here about the impact of mortgage insurance premiums on some state high cost loan tests.  In May 2008, we wrote an article here about the treatment of discount points under various state high cost loan tests.  In this article, we explore the impact of non-borrower paid compensation to a mortgage broker, including but not limited to yield spread premiums (YSPs) paid by a lender to a mortgage broker, on various state high cost loan tests. 

Generally speaking, the "points and fees" test under Section 32 and most state-specific high cost loan tests include only points and fees paid by a borrower in connection with a loan; points and fees paid by the lender or other person do not, again generally speaking, impact most high cost loan tests.  However, a key component of the points and fees portion of virtually all high cost loan tests is the amount of compensation received by the mortgage broker in connection with a particular loan.  The following is a list of state-specific high cost loan tests that include all or a portion of non-borrower paid compensation to a mortgage broker, including but not limited to YSPs paid by a lender to a mortgage broker, in the definition of points and fees.

• Georgia: Under applicable Georgia law, points and fees are defined to include, among other things, all mortgage broker compensation from any source including yield spread premiums and other lender-paid compensation; provided, however, that the portion of any YSP that is disclosed to the borrower in writing and used to pay bona fide and reasonable fees to persons other than the creditor or a creditor-affiliate are excludable. For purposes of our high-cost home loan analysis and determination, we assume that the mortgage broker retains the entire YSP amount and that no portion of the YSP is passed through to unrelated third parties.

• Illinois: Under applicable Illinois law, points and fees include, among other things, the total amount of all non-prepaid finance charges (that is, not otherwise included in prepaid finance charges) paid directly or indirectly to a mortgage broker, including a broker that originates a loan in its own name in a table-funded transaction. Illinois law is ambiguous as to whether or not yield spread premiums and other "back end" compensation not paid directly by the consumer should be included in points and fees. On one hand, the Act specifically states that a high-risk home loan is one in which "the total points and fees payable by the consumer at or before closing will exceed the greater of 5% of the total loan amount or $800." On the other hand, "points and fees" are defined to include "all compensation paid directly or indirectly to a mortgage broker." While the issue is far from clear, to be conservative, DocMagic's positionis that yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker are considered indirectly paid to a mortgage broker and therefore included in the Illinois high cost test.
  

• Indiana: Under applicable Indiana law, points and fees are defined to include, among other things, all compensation paid directly or indirectly to a broker, including all non-prepaid finance charges paid to the broker and all premiums, regardless of the source of payment, i.e., yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker; however, up to one and one-half (1½) points in indirect broker compensation may be excluded from points and fees if the terms of the loan do not permit a prepayment charge in excess of two percent (2%) of the home loan principal.

• Kentucky: Under applicable Kentucky law, points and fees are defined to include, among other things, any yield spread premiums paid by a creditor to a mortgage broker.

• Maine: Under applicable Maine law, points and fees are defined to include, among other things, the total amount of all non-prepaid finance charges paid to a mortgage broker regardless of who pays it (i.e., not only borrower-paid items are included, but all items going to the broker regardless of source), including lender-paid premiums such as, for example, yield spread premiums.

• Massachusetts: Under applicable Massachusetts law, points and fees are defined to include, among other things, the total amount of all compensation paid directly or indirectly to a mortgage broker not otherwise included in prepaid finance charges or other charges paid to creditor regardless of the source of payment, including yield spread premiums and other lender-paid premiums.

• New Jersey: Under applicable New Jersey law, points and fees are defined to include, among other things, the total amount of all non-prepaid finance charges paid directly or indirectly to a mortgage broker regardless of the source of payment, including yield spread premiums and other lender-paid premiums.

• New Mexico: Under applicable New Mexico law, points and fees are defined to include, among other things, the total amount of all non-prepaid finance charges paid directly or indirectly to a mortgage broker regardless of the source of payment, including yield spread premiums and other lender-paid premiums.

• New York: Under applicable New York law, points and fees are defined to include, among other things, the total amount of all compensation paid directly or indirectly to a mortgage broker, including a broker in a table-funding transaction, not otherwise included in points and fees. Note that while "points and fees" are defined to include "all compensation paid directly or indirectly to a mortgage broker," without reference as to the source of such compensation, the New York Banking Department takes the position that yield spread premiums and other "back end" compensation paid by the lender to the mortgage broker are included in points and fees. See Staff Interpretation Letter, dated September 3, 2004 here.

• North Carolina: Under applicable North Carolina law, points and fees are defined to include, among other things, all compensation paid from any source to a mortgage broker, including compensation paid to the mortgage broker in a table-funded transaction. Accordingly, lender-paid compensation such as yield spread premiums and other back end compensation are included in points and fees.

• Ohio: Under applicable Ohio law, points and fees are defined to include, among other things, all compensation paid to a mortgage broker regardless of the source of payment, including yield spread premiums and other non-borrower paid compensation to a mortgage broker.

• Oklahoma: Under applicable Oklahoma law, points and fees are defined to include, among other things, all compensation paid to a mortgage broker that is not otherwise included in the prepaid finance charge.  The Act is ambiguous as to whether or not such things as yield spread premiums and other forms of "back end" compensation not paid directly by the consumer should be included in points and fees. On one hand, the Act specifically states that a high cost mortgage is one in which "the total points and fees payable by the consumer at or before closing" exceeds the applicable thresholds. On the other hand, "points and fees" are defined to include "all compensation paid to mortgage brokers," with no express consideration being given to the source of the payment. While the issue is far from clear, to be conservative, DocMagic's position is that yield spread premiums and other forms of "back end" compensation paid by the lender to the mortgage broker are included as points and fees for purposes of the Oklahoma high cost test.

• Vermont: Under applicable Vermont law, points include any loan origination fees and/or loan discounts payable by any person in connection with the loan. Accordingly, lender-paid compensation such as yield spread premiums and other back end compensation are included in points and fees.

• West Virginia: Under applicable West Virginia law, yield spread premiums (but not other forms of lender-paid back end compensation) are included as a point and fee; however, (i) yield spread premiums are not permissible if the loan's APR exceeds 18%; and (ii) if a yield spread premium is paid, the points and fees threshold is 6% of the total loan amount (if no yield spread premium is paid, the points and fees threshold is 5%).

For a detailed description of each of our high cost tests, please review our high cost memos available online here.

Please contact DocMagic, Inc.'s Compliance Department if you have any questions or comments regarding this article.