We receive customer questions on a daily basis regarding DocMagic's Section 32, state-specific high cost, and Fannie Mae/Freddie Mac points and fees tests.  The questions vary greatly but often they are reducible to the following: which test applies, when does it apply and what are the differences between them.  This article contains a brief roadmap for our customers of our high cost analysis process.

A short synopsis is in order:

• Federal Law: Section 32 (shorthand for Regulation Z Section 226.32) has been with us since 1994. A couple of important points to remember: (i) Section 32 is a federal regulation, meaning that it applies in all jurisdictions; and (ii) Section 32 is somewhat limited in scope in that it applies generally only to owner-occupied refinance transactions.  The Section 32 high cost test is a two-prong test, consisting of both a points and fees test with a threshold of 8% of the total loan amount and an APR test with a threshold of either 8% (for first lien loans) or 10% (for junior lien loans) over the yield for the corresponding Treasury security.  A loan that exceeds either the points and fees threshold or the APR threshold is a high cost loan.
  
  
• State Law: The first state to adopt its own high cost law was North Carolina in 1999. Today, well over 30 states have some form of high cost law or regulation.  State high cost tests vary widely. Broadly speaking, state high costs tests are more restrictive than Section 32.  This is because most state high cost tests were developed at least in part based on a belief that Section 32, the federal standard, did not go far enough in protecting consumers from predatory lenders.  Again, broadly speaking, state high cost laws, among other things: (i) expand the coverage of the high cost law to more loans (e.g., purchase transactions, HELOCs, etc.); (ii) expand the definition of what constitutes a point and fee (e.g., prepayment penalties, yield spread premiums, etc.); and (iii) lower the applicable points and fees and/or APR thresholds.
  
  
• Fannie Mae/Freddie Mac: Fannie Mae and Freddie Mac got into the act in 2002 when they announced that it was their policy not to purchase or securitize loans if total points and fees exceed the greater of 5% of the loan amount or $1,000.  Strictly speaking, the Fannie Mae/Freddie Mac points and fees test only applies to loans purchased or securitized by Fannie Mae or Freddie Mac.  However, a number of investors default to the Fannie/Freddie 5% points and fees limitation for all loans that are originated in states that do not have a state specific high cost law and for those loans that fall outside the coverage of either Section 32 or a state-specific high cost law.  DocMagic performs the Fannie/Freddie test on all loans without exception.

The results of our high cost tests are easy to access and understand.  At any time while in a loan worksheet, a DocMagic user can click on the "32" tab appearing either in the tool bar at the top of the program or the "Section 32/Predatory Lending Determination" heading appearing under the "Tools" menu and view the computations and results of the Section 32 high cost test.  From the Section 32 page, DocMagic users can also access and view the computations and results of the state high cost test (if applicable) and the Fannie Mae/Freddie Mac 5% points and fees test by clicking the links appearing at the top of the Section 32 results page.  Each high cost results page unambiguously states either "Yes" or "No" if the loan in question is or is not a high cost loan.  In addition, if the loan exceeds one or more of the applicable high cost thresholds, a "Warning" message will appear when the loan worksheet is processed.  If you wish, you may request our Customer Service Department to change this Warning to a Fatal error message; a "Fatal" error means quite simply that the worksheet request cannot be processed until the necessary changes are implemented to pass the applicable high cost test(s).  Finally, the results of the high cost tests will also appear at the bottom of the second page of the loan document worksheet generated after processing. 

We encourage you to review carefully the individual Section 32, state high cost and Fannie/Freddie high cost memos available on our website for more specific information about each of these tests.  Please note that while the state high cost tests, in particular, may at first blush appear to be very similar, there are many differences, often quite subtle, between them.  For example, please refer to our recent article on which high cost tests include upfront MIP in their respective points and fees test.

In closing, please remember that the goal of each of these high cost tests is to keep you from making a high cost loan.  If you do originate a high cost loan, either intentionally or accidentally, it is your responsibility to ensure that the high cost loan meets the substantive requirements, restrictions and limitations generally imposed on high cost loans, such as additional disclosures or limitations on fees or loan terms.  Please refer to our state high cost memos for further information.

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