If you base a fee on a percentage, it is 'points' and can be a tax deduction. If it's a $ based fee, it's not 'points' or 'deductible'. I've seen attorneys attempt to break down a $ based fee to a fraction of a percent and I have them change that based on (IRS) definitions.
From the IRS:
The term “points†is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
[one of the requirements for deductibility]
8.The points were computed as a percentage of the principal amount of the mortgage.
But under the TRID rule, CFPB says that only points charged in connection with a reduction in the interest rate may be disclosed as points on the form.
Based on that, if a lender charges an origination fee, it can be disclosed as a percentage of the loan amount but cannot be called a "point." (And if it's used to reduce the rate, it must be disclosed simply as "point(s)" not "origination point/fee" as we often see it on the HUD today).
From the one of the CFPB webinars last fall:
Origination Charges (1026.37(f))
If a creditor charges an origination fee that is a percentage of the loan amount, but it is not a “point paid to the creditor to reduce the interest rate,†may the creditor identify it as a point in some way to preserve its tax deductibility for the consumer? (1026.37(f)(1))
No. It could not. Section 1026.37(f)(1)(i) is clear that only points charged in connection with a reduction in the interest rate may be disclosed as points on the form. If there are no points charged to reduce the interest rate, the creditor leaves this row blank. The answer also relies on comment 37(f)(1)-3, which, for charges other than the points paid to reduce the interest rate, requires clear and conspicuous terminology that describes the service. The answer also relies on comment 37(f)(1)-4, which states that the creditor should leave the points line blank if there are no points paid to reduce the interest rate.
1. OFFICIAL INTERPRETATION TO 37(F)(1)
37(F)(1) ORIGINATION CHARGES.
1. 1.1. ORIGINATION CHARGES. Charges included under the subheading “Origination Charges†pursuant to § 1026.37(f)(1) are those charges paid by the consumer to each creditor and loan originator for originating and extending the credit, regardless of how such fees are denominated. In accordance with § 1026.37(o)(4), the dollar amounts disclosed under § 1026.37(f)(1) must be rounded to the nearest whole dollar and
the percentage amounts must be disclosed as an exact number up to two or three decimal places, except that decimal places shall not be disclosed if the percentage is a whole number. See comment 19(e)(3)(i)-3 for a discussion of when a fee is considered to be “paid to†a person. See § 1026.36(a) and associated commentary for a discussion of the meaning of “loan originator†in connection with limits on compensation in a consumer credit transaction secured by a dwelling.
1. DESCRIPTION OF CHARGES. Other than for points charged in connection with the transaction to reduce the interest rate, for which specific language must be used, the creditor may use a general label that uses terminology that, under § 1026.37(f)(5), is consistent with § 1026.17(a)(1), clearly and conspicuously describes the service that is disclosed as an origination charge pursuant to § 1026.37(f)(1). Items that are listed under the subheading “Origination Charges†may include, for example, application fee, origination fee, underwriting fee, processing fee, verification fee, and rate-lock fee.
Previous Thread
Index