I am not accustomed to dealing with brokers, and I am struggling with a question about broker's compensation under both 226.4 and 226.32 of Reg. Z.
First, with respect to whether or not the broker's fee is a finance charge, the Commentary to 226.4(a)(3) states as follows:
"The rule requires all mortgage broker fees to be included in the finance charge. Creditors sometimes compensate mortgage brokers under a separate arrangement with those parties. Creditors may draw on amounts paid by the consumer, such as points or closing costs, to fund their payment to the broker. Compensation paid by a creditor to a mortgage broker under an agreement is not included as a separate component of a consumer's total finance charge (although this compensation may be reflected in the finance charge if it comes from amounts paid by the consumer to the creditor that are finance charges, such as points and interest.)"
I understand this to mean that if the borrower was paying a higher interest rate so that the lender would cover costs, including the broker's fee, that the broker's fee would not be treated as a prepaid finance charge. Obviously the Finance Charge and APR on the loan will be higher due to the higher interest rate. But I wouldn't think that we would need to factor what we are paying the broker in this scenario into the finance charge since we are paying the broker ourselves out of the premium interest rate on the loan. If you included it as a finance charge in this situation, wouldn't you be artificially inflating the APR since you'd be including both the higher interest and the broker's fee? Am I looking at this correctly?
With respect to HOEPA, 226.32 states that "all compensation paid to mortgage brokers" shall be included in the definition of points and fees. The Commentary states the following:
"In determining 'points and fees' for purposes of this section, compensation paid by a consumer to a mortgage broker (directly or through the creditor for delivery to the broker) is included in the calculation whether or not the amount is disclosed as a finance charge. Mortgage broker fees that are not paid by the consumer are not included. Mortgage broker fees already included in the calculation as finance charges under section 226.32(b)(1)(i) need not be counted again under section 226.32(b)(1)(ii)."
Am I correct in assuming again that if the borrower is paying a higher interest rate to avoid paying the broker's fee, and the lender is paying the broker's fee out of that premium rate, that the amount of the broker's fee in this situation would not be included in the points and fees calculation for HOEPA?
And one final question...I'm not sure why/how this would happen, but what if the interest rate is a standard rate, but the lender is willing to pay the broker's fee out of their own pocket? Does that change the answer to either of these questions?