DISCOUNT POINTS

On November 28, the Federal Reserve Board (FRB) issued a consent order against Peoples Bank (Peoples), Lawrence, Kansas, for deceptive residential mortgage origination practices in violation of section 5 of the Federal Trade Commission Act. Apparently Peoples told certain borrowers that they were paying an additional amount for discount points that would lower the borrowers’ interest rate. In fact, many borrowers did not receive a reduced rate.

The consent order requires Peoples to pay approximately $2.8 million into an account to provide restitution to these borrowers. Peoples will be required to refund all payments for discount points that did not reduce borrowers’ interest rates, and avoid violations of section 5 of the Federal Trade Commission Act in the future.

Although Peoples’ disclosures gave an accurate quantitative picture of the loans’ costs, they mischaracterized the nature of those costs by indicating that a specified portion of the fees paid at closing were being used to purchase a lower, discounted rate, but sometimes that was not accurate.  Many borrowers who paid discount points did not actually receive a reduced interest rate or received a rate that was not reduced commensurate with the price paid for the Discount Points. A simple disclosure error can have significant ramifications.

The deficiencies specified in the consent decree occurred during the period from January 1, 2011 through and including March 5, 2015. During the period within which the violations occurred creditors were required to provide mortgage borrowers with a Good Faith Estimate and a HUD-1 Settlement Statement, as required by the Real Estate Settlement Procedures Act. The pertinent section of those disclosures appears below.

Your Adjusted Origination Charges

2. Your credit or charge (points for the specific interest rate chosen

__ You pay a charge of $ ____ for this interest rate of ___%. This charge (points) increases your total settlement charges.

Use of TRID disclosures became mandatory on October 3, 2015. The pertinent section of the Loan Estimate and the Closing Disclosure appears below.

A. Origination Charges                 $______

___% of Loan Amount (Points) $______

Each form contains a section for discount points. Only discount points should appear in that section of the forms. Other origination points should be disclosed elsewhere. When discount points are disclosed the creditor should be able to demonstrate that the points resulted in a lower rate. The expected rate reduction is 25 basis points for each point paid. For example if the rate is 5.00% and the borrower pays two discounts points the rate should be reduced to 4.50%.

This is the first case we have seen on this matter. Every creditor should test TRID loans to assure proper handling of discount points.

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