Looking for thoughts on BFDP, specifically if the starting adjusted rate includes discount points.

The document linked below from MBA appears to indicate that you would include any discount points charged for the starting adjusted rate in the QM Points and Fees test and only any balance could then be eligible for exclusion.

http://docs.cmgfi.com/correspondent/takeaways_from_cfpb_discount_point_meeting.pdf

The starting adjusted rate would then be compared to the relevant APOR to determine what amount of the balance of the discount points could be excluded (up to 2 bona fide discount points if the starting adjusted rate does not exceed APOR by more than 1% or up to 1 bona fide discount points if the starting adjusted rate does not exceed APOR by more than 2%).
Based on that is the example below consistent with your approach to BFDP's?

Starting Adjusted Rate 6.275% - 1.250 Discount Points
Note rate 5.50% - 2.500 Discount Points
APOR 4.500%
1.250 included in Points and Fees test and due to the difference in starting adjusted rate and APOR 1% of the balance of the discount points can be excluded for a total of 1.5 included in Points and fees test.

I don't understand the last part of your post. Without knowing what the interest rate might be without any points, you cannot make any determination, but if the APOR is 4.5% and you have a rate of 6.275% with 1.250% in points, then the rate without points has to be even higher than that. The interest rate without points would have to be 6.50% or less or you don't have any bona fide points.

Randy I agree, the approach you outline is how I have always understood the comparison between the APOR and the undiscounted rate, however, I was sent the MBA document linked above, in which it states:

Principle #4: Discount Points that may be excluded from points and fees are those applied to the starting adjusted rate for the consumer to reduce the interest rate - If the starting adjusted rate for the consumer includes a required point or portion thereof, when calculating the discount points to be excluded, such required points are included in the QM’s points and fees.
The following example was provided in the meeting: Starting adjusted rate of 4.125% with 0.125 discount points. The consumer agrees to pay 1.625 in discount points to lower the rate to 3.750%. Only 1.50 additional discount points paid by the consumer to lower the rate is eligible for exclusion from points and fees since the .125 points paid are required to get the starting adjusted rate.

Ultimately, I am looking to gauge whether this MBA material is familiar to anyone and if they utilize the approach, as I was not aware of it.

OK - I got it now. I think that is correct. If you are saying that your Starting Adjusted Rate is 6.275% - 1.250 Discount Points, then the 1.25% is not bona-fide and you work from there. You can only exclude 1% of the buydown so it would be 1.25% + .25% for 1.5% to be included in the points and fees test. I would agree with the MBA article.

It took me a minute.

Thanks Randy, I appreciate the consideration and feedback. I struggled with the concept myself on first reading as I had not seen or heard of the approach.

This comes up often in the Mortgage Banking Industry, hence you get the MBA being a primary impetus on getting guidance on this topic. It's a bit funky, but I this is my understanding as well. The main issue here is that for the starting adjusted rate, there may be "price adjustment" fees or whatever to get to the starting rate, but for the base rate in such deals, the borrower is not actually paying specific amounts to reduce the interest rate. So, at this point in time there are no actual discount points, as points paid correlate with a decreased interest rate. So, there really are no "discount points" existing with the base rate. If you have the base loan, the borrower hasn't specifically negotiated to pay discount points to decrease the rate. He/she is just getting the only product available to them. If they want to decrease the rate further, then that is when they are actually paying discount points.

I have a couple of issues with the calculations presented though. I would treat the APOR/APR spread calculation in line with the statement above. So, for me, the starting adjustment rate does not include a "discount" at all. I would compare the APOR to 4.125% in the above example. The what they have stated it, the APR/APOR calculation guidance contradicts the Excluded Bona Fide Discount Points guidance. If the initial discount to get to the starting rate is to be considered, then it should be eligible for exclusion as well, if they really believe that the borrower has "paid" to decrease the rate. You can't have it both ways, imho. Also, the discount point paid is generally construed to have to equate to a .25% reduction in the rate. If the borrower paid 1.625 points, then the rate should be way lower. I would consider only .75 points eligible for exclusion here, as there was only a 3/8 percentage decrease in the interest rate after the discount points paid (4.125% to 3.75%).