We don't deal with discount points very often, but we have a situation where the borrower wants to buy down the rate.

We generally have a 1% origination fee. Is it OK to charge both a 1% origination fee and a 1% discount point?

As far as I know it's ok.
Use Block 2 and check the box re: the cost of this interest rate is ____.
That will clearly separate the origination fee from the point to buy down the rate.

Would only the 1% discount point be reported on a 1098?

I had already looked it up but I'm not sure I understand it correctly. My guess would be that both the 1% origination fee and the 1% discount point are reported as points on the 1098, since they are identified as “loan origination fee” and "points" on the HUD, they are both percentages of the loan amount-assuming it is a owner occupied purchase transaction. Correct?

Which of the 6 conditions under "Reportable Points" in this document gives you heart burn???

Correct if the transaction is for the purchase of the borrower's primary residence.

Reportable points. Report on Form 1098 points that meet all the following conditions.
1.
They are clearly designated on the Settlement Statement (Form HUD-1) as points; for example, “loan origination fee” (including amounts for VA and FHA loans), “loan discount,”“discount points,” or “points.”
2.
They are computed as a percentage of the stated principal loan amount.
3.
They are charged under an established business practice of charging points in the area where the loan was issued and do not exceed the amount generally charged in that area.
4.
They are paid for the acquisition of the payer of record's principal residence, and the loan is secured by that residence. You may rely on a signed written statement from the payer of record that states that the proceeds of the loan are for the purchase of the payer of record's principal residence.
5.
They are paid directly by the payer of record. Points are paid directly if either a or b below applies.
a.
The payer of record provides funds that were not borrowed from the lender of record for this purpose as part of the overall transaction. The funds may include down payments, escrow deposits, earnest money applied at closing, and other funds actually paid over by the payer of record at or before closing.
b.
The seller pays points on behalf of the payer of record. Points paid by the seller to the interest recipient on behalf of the payer of record are treated as paid to the payer of record and then paid directly by the payer of record to the interest recipient.
Report points paid under 5a and 5b on the payer of record's Form 1098 in box 2.

Exceptions. Do not report as points on Form 1098 amounts paid:For loans to improve a principal residence;For loans to purchase or improve a residence that is not the payer of record's principal residence, such as a second home, vacation, investment, or trade or business property, even though the borrower may be entitled to amortize points paid for the purchase of a second home, vacation home, etc., and deduct them over the life of the loan;For a home equity or line of credit loan, even if secured by the principal residence;For a refinancing (but see Construction loans, below), including a loan to refinance a debt owed by the borrower under a land contract, a contract for deed, or similar forms of seller financing;

Just the fact that points in Reg. Z is for the purpose of buying down the rate; origination charge is a different animal and may include other things such as an in house appraisal (as combined and disclosed on the GFE/HUD). I just want to be sure I understand that for 1098 reporting the IRS doesn't differentiate between what is paid to receive a discounted rate and what is considered the overall origination charge.

Confirmation from someone would be helpful.

Thanks

Thanks for the help!

First, Regulation Z does not define "points" as buying down the rate.

Second, what a bank might allocate the origination fee to cover is neither here nor there from an IRS perspective. If the charge meets the 6 points above, you report them.

rlcarey, you have me worried...I was basing that statement on reading 37(f)(1) Origination charges.
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.
and

1026.37(f)(i) The points paid to the creditor to reduce the interest rate shall be itemized separately / 37(f)(1) Origination charges. 3. Description of charges. Other than for points charged in connection with the transaction to reduce the interest rate,... / 4. Points. If there are no points charged in connection with the transaction to reduce the interest rate, the creditor leaves blank the percentage of points used in the label and the dollar amount disclosed under § 1026.37(f)(1)(i).

Didn't mean to imply that it was a Reg. Z definition.

Our Origination Charge is 1% of the loan amount but the rate is the rate - no buy down. Could this be construed as Points for Reg. Z. Please excuse my ignorance but I have only worked in shops with very simple loan terms so my experience is limited.

Any fee charged to originate a loan under Regulation Z is a finance charge.

I think you are mixing apples and oranges.

Is your question on IRS reporting of mortgage interest (1098 Reporting) or how to treat fees under Regulation Z from a finance charge perspective?

There is no direct relationship between the two.

The point is that you can label a fee anything you want too. Point, fee, service charge, etc. What it is called and whether or not it is a finance charge and whether it is reportable on a 1098 have really nothing in common. Both are governed under their own set of separate rules.

A bank could charge one "point" to eliminate closing costs for example. That has nothing to do with the interest rate.

Thanks