On August 12, 2020, Fannie Mae and Freddie Mac announced that the cost to originate and to deliver single family limited cash out refinances and cash out refinance mortgage loans would increase by one half of one percent (0.500%), or 50 bps, as a loan level pricing adjustment (LLPA). Fannie Mae Lender Letter (LL-2020-12) states that “[i]n light of market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae, we are implementing a new [LLPA].” Freddie Mac Bulletin 2020-32 announced its “Market Condition Credit Fee in Price” citing its implementation as a “result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.” This “Adverse Market Fee,” as referenced by FHFA, applies to all whole loans purchased by, or loans delivered into MBS pools with issue dates on or after, September 1, 2020. On August 14, 2020, the Mortgage Bankers Association joined with other housing, financial services, and public interest trade groups in issuing a joint statement on the GSE Adverse Market Fee.
Lenders and Agency Quality Control Firms will understandably focus on the loan origination process and disclosure implications of adding this LLPA to loan pricing. Of particular interest will be how a lender elects to implement the LLPA. For example, potential methods to pass the cost of the LLPA on to the consumer include increasing the interest rate or imposing a fee on the consumer. The method of passing the LLPA on to the consumer will affect the lender’s disclosure obligations on the Loan Estimate and Closing Disclosure, and there may also be other regulatory implications.
For new applications, lenders who plan to pass the LLPA on to the consumer as a charge at consummation should disclose the LLPA as an Origination Charge on the Loan Estimate and Closing Disclosure, pursuant to Comment 5 to 12 CFR 1026.37(f)(1). Because the LLPA is a charge being passed on to the consumer, and not being paid to reduce the interest rate, the LLPA is not disclosed as points, even though it is calculated as a percentage of the loan amount. What the LLPA is labeled on the Loan Estimate and Closing Disclosure can be general, but must clearly and conspicuously describe the service that is disclosed. If, instead, a lender plans to include the cost of the LLPA in the interest rate paid by the consumer, there would be no specific disclosure related to the LLPA. However, if the consumer will pay an amount specifically to reduce the interest rate, that amount would be disclosed as points on the Loan Estimate.
Lenders and QC Firms need to understand the nuances of the various requirements impacted by the new LLPA and the potential of required changes or enhancements to policies and procedures, point of sale or loan origination technology, and document generation systems. For example, various impacts include qualified mortgage loan requirements, APR calculations and tests, and federal and state high cost mortgage loan laws.