With the recent increased interest in government-insured loans (i.e., FHA, VA, and USDA loans), we have received many questions regarding the impact on high cost tests of certain fees and charges, including upfront mortgage insurance premiums (MIP), VA funding fees and USDA Rural Development guarantee fees paid by borrowers in connection with such loans.  For purposes of the federal Section 32 and most state-specific high cost tests, the fact that the loan is government-insured has no impact on the respective high cost tests: finance charges (including MIP, VA funding fees and USDA Rural Development guarantee fees) paid to the respective government entity are points and fees and, consequently, are included in the high cost tests.  However, some state-specific high cost tests apply different rules.

Based on a review of the various state high cost statutes, the following is a list of those states that offer some type of exclusion from their respective high cost tests for either FHA, VA and/or USDA loans or some or all FHA, VA and/or USDA fees:

High Cost Tests That Exclude FHA, VA and USDA Loans: Arkansas, District of Columbia1, Indiana, Minnesota and Tennessee.

High Cost Tests That Exclude Fees and Charges (including FHA MIP, VA funding fees and USDA Rural Development guarantee fees), if Paid to HUD, VA or USDA, as applicable: Connecticut2, Georgia, Kentucky, Maine (but only up to 1 point), Ohio and South Carolina.

High Cost Tests That Exclude Mortgage Insurance Premiums Generally: New Jersey3, New Mexico and New York.

Except as indicated above, absent some other independent basis for excluding the fee or charge from a high cost test, finance charges, including upfront MIP, VA funding fees and USDA Rural Development guarantee fees, are points and fees for purposes of a state's high cost test and the federal Section 32 high cost test.

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

1 USDA loans are not specifically identified in either the District of Columbia Home Loan Protection Emergency Act of 2002 or that law's implementing regulations.  Nonetheless, the DocMagic high cost test for the District of Columbia will exclude USDA loans from coverage.
2 All "premiums, fees or any other amounts paid to a governmental agency" are excluded from the definition of "prepaid finance charges" for purposes of the Connecticut audits described here.
3 In Bulletin No. 04-22, the Commissioner of the New Jersey Department of Banking and Insurance, in responding to the question whether FHA and VA funding fees are included in "points and fees," (See Question 26) concluded that "these fees should not be part of the equation as to whether the points and fees threshold for high cost loans has been exceeded."  The Commissioner noted that, "notwithstanding the VA funding fee being a guarantee fee, it operates in substantial part like a mortgage insurance premium" and as such should be excluded from points and fees given that premiums for guarantees and insurance are not included in the definition of points and fees.  Note that while the USDA rural guarantee fee is not specifically mentioned in this Question or in the Commissioner's response, the same rationale for excluding FHA MIP and VA funding fees is applicable to the USDA rural guarantee fee.  Accordingly, fees will be excluded from points and fees for purposes of the New Jersey high cost test.