UPDATED: April 12, 2011 (Revisions are based on this article here.) 

Note: This article updates and modifies information contained in a number of separate articles regarding Freddie Mac's high cost tests published in prior editions of the Compliance Wizard. A list of those articles appears at the bottom of this article.

It is Freddie Mac's stated policy that any lender selling to Freddie Mac must represent and warrant that:

1. the total points and fees charged to the borrower do not exceed five percent (5%) of the original loan amount, or no more than $1,000 for loan balances less than $20,000; and/or
2. the "annual percentage rate" or "points and fees payable by the borrower" (as each such term is calculated under the Home Ownership and Equity Protection Act of 1994 ("HOEPA")) do not exceed the maximum thresholds prescribed under HOEPA.

Each of these separate Freddie Mac policies is discussed in greater detail below.

Freddie Mac Maximum Points and Fees Test

Freddie Mac will not purchase or securitize any mortgage where the total points and fees charged to the borrower exceed the greater of (i) five percent (5%) of the mortgage amount or (ii) a maximum of $1,000 for loans with original balances less than $20,000. Effectively, for loan amounts greater than or equal to $20,000, the points and fees limitation is five percent (5%) of the mortgage amount; for loan amounts less than $20,000, the points and fees limitation is $1,000. The specific Freddie Mac points and fees limitation policy is set forth in the Freddie Mac Single Family Seller/Servicer Guide, Volume 1, Chapter 22, General Mortgage Eligibility, 22.32 Predatory Lending Practices. (Freddie Mac's Single Family Seller/Servicer Guide is available here.) You may also refer to Freddie Mac's Industry Letter, dated February 12, 2009.

Applicable Loans: By its terms, Freddie Mac's points and fees test applies to:

• Mortgages secured by a primary residence, but not to investment properties or second homes. Purchase transactions as well as refinance transactions
• Mortgages secured by property in any state

Points and Fees Defined: Points and fees include:

• origination fees
• underwriting fees
• broker and finder's fees
• charges that the lender imposes as a condition of making the loan whether they are paid to the lender or a third party

Exclusions From Points and Fees: Points and fees that are excluded from this limitation include:

• No more than two (2) bona fide discount points; discount points are bona fide if they (i) are knowingly paid by the borrower (as demonstrated by the discount points being fully disclosed to the borrower); (ii) are funded through any source for the purpose of reducing the interest rate on the mortgage; and (iii) result in a "meaningful reduction" (defined as a minimum of 25 basis points or ¼ of a point provided all other terms of the loan remain the same) of the interest rate that, prior to discount, was consistent with current market rates based on the credit characteristics of the mortgage.
• fees paid for actual services rendered in connection with the origination of the mortgage, such as attorneys' fees; notary fees; appraisal fees; credit report fees; surveys; title examinations and extracts; flood and tax certifications; and home inspections
• mortgage insurance premiums
• credit-risk price adjustments
• the costs of title, hazard and flood insurance policies
• state and local transfer taxes and fees
• property tax and insurance premiums collected and deposited into an escrow/impound account
• other miscellaneous fees and charges (excluding those fees and charges specifically named) that, in total, do not exceed one quarter of one percent (0.25%) of the loan amount.

Please note that Freddie Mac's points and fees test treats some fees differently from the way they are treated under HOEPA and state high-cost home loan laws. For instance, as mentioned above, credit-risk price adjustments do not count toward the 5% threshold, but they do count when calculating the points and fees under HOEPA and state high-cost home loan laws.

Calculation of Points and Fees:

	Lender Origination Fees/Discount Points (the total amount of origination fees and discount points paid by the borrower to the lender)
+	Lender Underwriting Fees (underwriting fees paid by borrower to lender)
+	Total Mortgage Broker/Finder's Fees (the total amount of all fees and charges (whether or not prepaid or non-prepaid finance charges) paid by the borrower to a mortgage broker)
+	Other Lender-Imposed Charges (the total amount of all fees and charges charged to the borrower, whether or not prepaid or non-prepaid finance charges) to the extent not otherwise captured in any of the above categories; for purposes of this calculation, we assume that all fees and charges (excluding lien and other payoffs) paid by the borrower and not otherwise captured in any of the above categories is a fee or charge imposed by the lender)
-	Bona Fide Discount Points (for purposes of this calculation, no more than two bona fide discount points will be excluded from the points and fees calculation).
-	Fees Paid for Actual Services Rendered (fees paid for actual services rendered in connection with the origination of the mortgage, such as attorneys' fees; notary fees; appraisal fees; credit report fees; surveys; title examinations and extracts; flood and tax certifications; and home inspections (these fees include generally those fees set forth in Regulation Z Section 226.4(c)(7), (d) and (e) and mortgage insurance charges, and are excludable regardless of to whom the fee is paid to the extent the fee is included in any of the "Total Mortgage Broker/Finder's Fees" or "Other Lender-Imposed Charges" categories above))
-	Other Miscellaneous Fees/Charges Up To .25% of Mortgage Amount (this is a "catch-all" category which permits the deduction of up to .25% of the mortgage amount of any miscellaneous fees and charges only to the extent included in any of the "Total Mortgage Broker/Finder's Fees" or "Other Lender-Imposed Charges" categories above)
+/-	Creditor Requested Adjustments (the total amount of all customer requested overrides)

 

Mortgage Amount is not defined in the Freddie Mac policy. For purposes of the Freddie Mac points and fees test, we interpret mortgage amount to mean the original principal balance of the mortgage:

	Original Principal Balance/Credit Line Available
+/-	Creditor Requested Adjustments

Treatment of Seller-Paid Charges: Freddie Mac's position is that fees "charged" to the borrower are includable or excludable in the Freddie Mac points and fees test regardless of whether they are paid by the borrower or the seller. Whether or not a point and fee is included in the Freddie Mac points and fees test turns not so much on who pays the point or fee, but rather whether or not the point or fee is charged to the borrower. Accordingly, borrower-paid and seller-paid items are treated in exactly the same manner for purposes of the Freddie Mac points and fees test.

Freddie Mac HOEPA Test

Freddie Mac will not purchase or securitize a mortgage if the "annual percentage rate" or "points and fees payable by the borrower" (as each such term is calculated under the Home Owner Equity Protection Act of 1994 ("HOEPA," or as more commonly referred to, "Section 32")) exceeds the maximum thresholds described under HOEPA. For a detailed discussion of the applicable HOEPA/Section 32 thresholds, please go here.

Applicable Loans: Freddie Mac's HOEPA policy applies to all types of mortgage loans that finance owner-occupied primary residence properties, including:

• purchase money mortgage loans
• refinance transaction mortgage loans
• closed-end subordinate liens

Note that HOEPA, by its terms, does not apply to "residential mortgage transactions," which are defined essentially as loans to finance the purchase or initial construction of a consumer's principal dwelling. However, Freddie Mac's HOEPA policy makes clear that in the case of certain loans (specifically, purchase money mortgage loans), Freddie Mac will not purchase or securitize a mortgage that exceeds the applicable HOEPA points and fees or APR thresholds even though the loan itself is not actually subject to HOEPA's points and fees or APR limitations. (Freddie Mac Single Family Seller/Servicer Guide, Volume 1, Chapter 22, General Mortgage Eligibility, 22.33 HOEPA/Purchase Transaction Mortgages.)

Loans Excluded: Freddie Mac's HOEPA policy does not apply to:

• mortgage loans secured by investment properties
• mortgage loans secured by second homes
• home equity lines of credit
• reverse mortgage loans

Freddie Mac Points and Fees and HOEPA Audits

We have implemented a series of audits to identify those loans that are ineligible for purchase or securitization by Freddie Mac because they fail either or both of the Freddie Mac 5% points and fees test and/or the Freddie Mac HOEPA test. Each audit response will identify all the tests which the particular loan being tested fails generally and substantially as follows:

Loan Fails Freddie Mac Points and Fees Test Only: If the loan exceeds the Freddie Mac 5% threshold, an audit will display that reads substantially as follows:

WARNING: LOAN INELIGIBLE FOR FREDDIE MAC PURCHASE/SECURITIZATION: [Total Points and Fees exceed 5% of the Total Loan Amount] or [Total Points and Fees exceed $1,000.00 (which is greater than 5% of the Loan Amount)].

Loan Fails Freddie Mac HOEPA/Section 32 Test Only: If the loan does not exceed the Freddie Mac points and fees test but fails either or both of the HOEPA/Section 32 APR or points and fees thresholds, an audit will display that reads substantially as follows (the bracketed language will automatically display based on which threshold(s) is/are exceeded):

WARNING: LOAN INELIGIBLE FOR FREDDIE MAC PURCHASE/SECURITIZATION: Total Points and Fees do not exceed 5% of the Total Loan Amount but Loan exceeds [the HOEPA ('Section32') Points and Fees threshold] or [the HOEPA ('Section32') APR threshold] or [the HOEPA ('Section32') Points and Fees threshold and also exceeds the APR threshold].

Loan Fails Both Freddie Mac Points and Fees and HOEPA/Section Tests: If the loan exceeds both the Freddie Mac points and fees test and the Freddie Mac HOEPA/Section 32 test, an audit will display that reads substantially as follows (the bracketed language will automatically display based on which threshold(s) is/are exceeded):

WARNING: LOAN INELIGIBLE FOR FREDDIE MAC PURCHASE/SECURITIZATION: [Total Points and Fees exceed 5% of the Total Loan Amount] [Total Points and Fees exceed $1,000.00 (which is greater than 5% of the Loan Amount)] and Loan is ineligible for purchase by Freddie Mac because it exceeds the HOEPA ("Section 32") APR Threshold] or [the HOEPA ('Section32') Points and Fees threshold] or [the HOEPA ('Section32') Points and Fees threshold and also exceeds the APR threshold].

Please note that the above audits will not run in the case of FHA or VA loans.

As there are numerous permutations under which the audit messages above would be triggered, depending on whether a mortgage loan passes or fails the 5% Points and Fees Test or the maximum points and fees of $1,000 for loan balances less than $20,000, whichever test is applicable, and passes or fails the annual percentage rate (APR) and/or the points and fees test under the HOEPA Test, DocMagic's Compliance Department has prepared a Fannie Mae/Freddie Mac Audit Messages Matrix. The Matrix is designed to help DocMagic customers navigate their way through the various scenarios under which the Fannie Mae and Freddie Mac audit messages will return.

State "High Cost" Loans Ineligible for Purchase/ Securitization by Freddie Mac

In addition to the foregoing, pursuant to the Single Family Seller/Servicer Guide, Volume 1, Chapter 22, 22.18.1 State Anti-Predatory Lending Laws and Regulations, Freddie Mac will not purchase or securitize any "high cost," "high risk" or similar mortgage loan that meets the corresponding definitions under the laws of the following states in which the property is located (we include links to articles we have written describing each such state-specific high cost or high risk loan determination):

• Arkansas high-cost home loans under the Arkansas Home Loan Protection Act
• Colorado covered loans under the Colorado Consumer Equity Protection Act
• Georgia high-cost home loans under the Georgia Fair Lending Act
• Illinois high-risk home loans under the Illinois High Risk Home Loan Act
• Indiana high-cost home loans under the Indiana Home Loan Practices Act
• Kentucky high-cost home loans under Kentucky Revised Statutes Chapter 360, KRS §360.100 (the Kentucky High-Cost Home Loan Law)
• Maine high rate, high fee mortgages under Article VIII (Truth-in-Lending) of the Maine Consumer Credit Code (the Maine Anti-Predatory Lending Law)
• Massachusetts high cost home mortgage loans under the Massachusetts Predatory Home Loan Practices Act
• New Jersey high-cost home loans under the New Jersey Home Ownership Security Act of 2002
• New Mexico high-cost home loans under the New Mexico Home Loan Protection Act
• New York high-cost home loans under the New York Banking Law, NY CLS Bank §6-1 (the New York High-Cost Home Loan Law)
• New York subprime home loans under the New York Banking Law, NY CLS Bank §6-m (the New York Subprime Home Loans)
• Oklahoma subsection 10 mortgages under Article 1, Part 3 of the Consumer Credit Code (the Oklahoma Home Ownership and Equity Protection Act)
• Rhode Island high-cost home loans under the Rhode Island Home Loan Protection Act
• Tennessee high-cost home loans under the Tennessee Home Loan Protection Act

Because we already perform analyses for each of these categories of loans, we do not include a separate audit or warning that such loans are not eligible for purchase or securitization by Freddie Mac.

The information appearing in this article incorporates and updates the information contained in the following articles:

High Cost Memo: Fannie Mae/Freddie Mac Total Points and Fees
May 2008: At Your Service: High Cost Test Roadmap
February 2009: Freddie Mac Issues Industry Letter: Anti-Predatory Lending Requirements

Please contact DocMagic's Compliance Department if you have any questions regarding any of the information contained in this article.