One of the big questions surrounding the Regulation Z Mortgage Reform Rules taking effect in January relates to the definition of “points and fees”. Specifically, whether hazard insurance premiums paid directly or indirectly to an affiliate are considered “points and fees”.
To say this is a bit confusing wouldn’t begin to do it justice. We’ve contacted the Consumer Financial Protection Bureau (CFPB) and have had clients contact the CFPB and gotten conflicting answers. Ugh! So what do we do? Probably the best place to start is to look at exactly what the regulation says (or doesn’t say).
12 CFR 1026.32(b)(1) indicates that points and fees are charges known at or prior to loan consummation. They include the following items listed in 1026.4(c)(7):
1. Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.
2. Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.
3. Notary and credit-report fees.
4. Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation or flood-hazard determinations.
5. Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.
As you can see in #5, escrowed amounts that aren’t typically included as finance charges are considered points and fees. The only exception is escrowed taxes; which are specifically excluded in the Commentary. The rule also allows other escrowed amounts to be excluded from points and fees if the charge is reasonable, the bank doesn’t receive any direct or indirect compensation and the charge isn’t paid to an affiliate. This is where it gets a little muddy. Unfortunately, the regulation doesn’t mention anything about hazard insurance premiums collected outside an escrow account that are paid to an affiliate.
So what does all this mean in plain English? At this point (pending further CFPB clarification), hazard insurance premiums collected in connection with an escrow account must be included within the points and fees test if they are paid to an affiliate. If hazard insurance is not collected in connection with an escrow account the premium does not have to be included within the points and fees test. Or so we think!