Mortgage group wants to offer this product, but I'm struggling with how to disclose it on the LE/CD.

The product (2/1 Buydown) gives the borrower a lower rate and payment in years 1 & 2. The investor will receive a total payment equal to the year 3 rate and payment, and the builder will pay the difference in payment.

Example: Loan is locked at 5% with a monthly payment of $1,000. Year 1 payment will have a rate of 4% and payment of $750; Year 2 will have a rate of 4.5% and payment of $850; Year 3 will have a rate of 5% and payment of $1,000. The investor will have paid $X into a reserve account so that the full $1,00 payment will be made to the investor in years 1 & 2 with part of the $1,000 payment from the borrower and part from the reserve fund.

What should be the Product name? How many columns should there be in the Projected Payments section on the LE/CD? How should the reserve from the builder of $X be shown on the LE/CD?

Thanks!

Read Comment 3 to 17(c) Basis of Disclosures and Use of Estimates - Paragraph 17(c)(1)

It depends on whether the buy down is reflected in the note.

If the buydown amount is known at the time the LE is issued, should the total amount of the seller/builder assistance be shown on P. 2 as Seller Credits?

Are you showing the borrower as paying for the buydown? Otherwise, what is the seller credit offsetting?

Want to add another question to this string, all of my research is coming up with different answers:

For a consumer-paid buydown, are folks putting that fee in section F (prepaid) or section H (other)? Seller or lender paid buydowns we are putting in section H.

I can tell you one things for sure. A consumer paid buydown is payable to the lender and it would be reflected in Section A and it is a prepaid finance charge. Depending on the amount, this is likely to kill any hope of a QM and might even throw it into Section 32 territory.

These, I might have to think a little more about and would love some discussion on them.

A lender paid buydown is nothing more than a stepped rate loan from a TRID perspective and the establishment of the buydown escrow account and lender credit would be shown in the Summaries of Transaction, I believe since it is not really a closing cost.

On a third party buydown, since the lender is not a party to the third party buydown agreement (other than agreeing to service the loan payments according to the third party agreement, i.e., the borrower remains totally responsible for the entire monthly payment amounts.) and it is not a part of the lender/borrower legal obligation, it would be handled through a separate document and not otherwise reflected in the lender disclosure documents..

I'm reading the comments for § 1026.17(c)(1), and here is what I'm understanding- please let me know if you disagree and I'd appreciate any additional thoughts!

I agree with your assessment of a borrower-paid buydown subsidy - it should go in Section A and should be included in the APR. In addition, a composite rate of the lower and higher rate should be used in calculating the APR and the Payment Table should show multiple payment streams.

A seller-paid (or any other third party-paid) buydown subsidy should be handled according to whether or not the agreement is between the lender and seller for the seller to pay the points (in which case they are Seller's Points) or between the seller and borrower (in which case they are Buyer's Points being paid by the seller).

If they are Seller's Points, then the subsidy would not be included in the APR (since it is not the buyer's fee) and the Payment Table would reflect multiple Payment Streams. A composite rate of the lower and higher rate should be used in calculating the APR. The subsidy would be disclosed as seller paid in the Summaries of Transaction section.

If they are Buyer's Points paid by the seller, then the subsidy would not be included in the APR. The Payment Table would only reflect one payment stream and only the higher rate would be used to calculate the APR. The subsidy would be disclosed as a seller credit in the Summaries of Transaction section. I don't understand this as it seems this should still be included in Section A and listed in the seller's column to be consistent with TRID guidance on buyer's costs paid by the seller.

A lender-paid subsidy would be treated like the seller-paid subsidy. Depending on the terms of the agreement between the lender and buyer, it would be treated like either Seller's Points or Buyer's Points. This would be an issue on a refinance where there is no Summaries of Transaction screen - not sure where one would place it on a refinance. That is somewhat of a moot point for us as our investors only allow buydowns on purchases. Again, this seems like it should be included in Section A and listed as lender-paid to be consistent with TRID guidance on buyer's costs paid by the lender.

My eyes started to cross by the time I got to Split Buydowns, and I went into denial mode haha! They sure overcomplicated this.

Following this thread as we too are looking at buydown options.

We are looking at seller paid buydown options where the seller is not part of the contract. After reading commentary 1026.17(c)(3)(ii) I would agree with your assessment of the buyer's points paid by seller.

ii. If the third-party buydown is not reflected in the credit contract between the consumer and the bank and the consumer is legally bound to the 15% rate from the outset, the disclosure of the finance charge and other disclosures affected by it given by the bank must not reflect the seller buydown in any way. For example, the annual percentage rate and disclosures required under §§ 1026.18(g), 1026.18(s), 1026.37(c), and 1026.38(c), as applicable, would not take into account the reduction in the interest rate and payment level for the first two years resulting from the buydown. The seller-paid amount is, however, disclosed as a credit from the seller in the summaries of transactions disclosed pursuant to § 1026.38(j) and (k).

We would need a buydown agreement but based on the information above, we would treat this as any other fixed rate loan, correct?

Related question. How are lenders offsetting seller paid buydowns on the LE? We are also looking into offering some sort of seller paid buydown option but there seems to be little agreement in the industry on how to properly disclose.

Third-Party buydowns are reflected in the disclosure documents if the buydown is reflected in the credit agreement.

[i. If the third-party buydown is reflected in the credit contract between the consumer and the bank, the finance charge and all other disclosures affected by it must take the buydown into account as an amendment to the contract's interest rate provision. For example, the annual percentage rate must be a composite rate that takes account of both the lower initial rate and the higher subsequent rate, and the disclosures required under §§ 1026.18(g), 1026.18(s), 1026.37(c), and 1026.38(c), as applicable, must reflect the two payment levels, except as otherwise provided in those paragraphs. However, the amount paid by the seller would not be specifically reflected in the disclosure of the finance charge and other disclosures affected by it given by the bank, since that amount constitutes seller's points and thus is not part of the finance charge. The seller-paid amount is disclosed, however, as a credit from the seller in the summaries of transactions disclosed pursuant to § 1026.38(j) and (k).]

Well, if I were you, I would never let a Seller or Third-party agreement be reflected in the credit contract. That puts an end to all of that.

A Seller paid buydown amount would just be listed in the Seller's Summaries of Transaction in Section N.

I think you are correct in most of what you wrote, though I don't see where you are coming up with the buydown being between the Seller and the Buyer (Seller Paid Buyer Points you call it). The Commentary only mentions whether the buydown is reflected in the credit agreement between the borrower and the Bank. If it is, then you disclose how you mentioned regarding Seller's Points. If it is not, then the buydown isn't reflected on the disclosures at all, except as a Seller Credit . . . well, I guess that is perhaps what you said in a more complex way. I would opine that it's not reflected in Section A for that scenario because it is not considered an actual "Fee" associated with the loan, since it is not in the credit agreement, so, therefore it doesn't really exist for disclosure purposes. You disclose the seller credit generically because, at then end of the day, the borrower received amounts from the seller.

If the lender paid it, then my understanding would be it's removed from the APR, FC, etc. However, since the lender is paying it, I would assume it is established somewhere in the credit agreement; therefore, I would disclose it in Section A, but it would be fully in the "Paid by Others" column. The result of that being it doesn't make its way to any of the calculations.

I may be combining regulations in a weird way. Here is my understanding:

If the agreement to pay points is between the buyer and the seller in the sales contract, then the buyer is still obligated so the points are Buyer's Points and then the points are seller-paid. These are included in the APR and the QM Points and Fees test and reflected on the CD with a matching seller credit.

If the agreement to pay points is between the lender and the seller, then the seller is the one obligated and the points are Seller's Points. These are excluded from the APR and the QM Points and Fees test. These would not be reflected anywhere on the CD since they are not part of the borrower's transaction.

There is a big difference between the payment of discount points and the 2-1 or 3-2-1 buydowns. If the seller tells the lender that they want to pay discounts points in order for the borrower to get a lower interest rate, then these would be considered seller's points and not be included in the APR.

What a lender cannot do is apply a general seller credit that a seller might be providing to reduce the buyer's closing costs to closing costs and fees that would be considered prepaid finance charges.

Here's a recent article about buy-downs that is worth a read:

MSN article about Buy-Downs

It seems the approach hinges on the commentary wording "the credit contract between the consumer and the bank". Presumably this means the note, but could it also mean the Buydown Agreement (which we are required by FNMA to provide)? If so, could the CFPB say that via our Buydown Agreement it was part of our credit contract and we therefore failed to follow the commentary in 17(c)(1)-3.i?

FNMA: The buydown agreement must provide that the borrower is not relieved of his or her obligation to make the mortgage payments required by the terms of the mortgage note if, for any reason, the buydown funds are not available.

I am not sure how the buydown agreement then becomes part of the credit contract?

1026.30 commentary provides a definition of "consumer credit contract" that helps shed light on your question. (Emphasis is mine.)

"7. Consumer credit contract. Creditors are required to specify a lifetime maximum interest rate in their credit contracts—the instrument that creates personal liability and generally contains the terms and conditions of the agreement (for example, a promissory note or home-equity line of credit agreement). In some states, the signing of a commitment letter may create a binding obligation, for example, constituting consummation as defined in §1026.2(a)(13). The maximum interest rate must be included in the credit contract, but a creditor may include the rate ceiling in the commitment instrument as well.

Keep anything having to do with a Buydown out of the promissory note to make life easier.

What you do mean by "we are required by FNMA to provide" the Buydown Agreement? Do you mean you are responsible for providing it to the borrower, or to FNMA - i.e. you are just gathering it for documentation? Their selling guide (Here) just says "A copy of the buydown agreement must be included in the delivery documentation for the mortgage."

I'm aware of the difference in a discount point and a buydown and am using the term "Seller's Points" as found in the Official Interpretation of 1026.4(c)(5), which is also referenced in 1026.32(b)(1), and which is not necessarily limited to Discount Points.

1. Seller's points. The seller's points mentioned in § 1026.4(c)(5) include any charges imposed by the creditor upon the noncreditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller's points are frequently involved in real estate transactions guaranteed or insured by governmental agencies. A commitment fee paid by a noncreditor seller (such as a real estate developer) to the creditor should be treated as seller's points. Buyer's points (that is, points charged to the buyer by the creditor), however, are finance charges.

2. Other seller-paid amounts. Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower's behalf by a noncreditor seller. The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available.

My interpretation is that if the lender is charging the buydown costs to the buyer and the seller is agreeing to pay the buyer's costs in the sales contract, then the buyer is still legally obligated and the costs are included in the APR and in QM Points and Fees even if the seller pays it.

If the lender is charging the seller (i.e. has a contract with the seller to pay the buydown costs), then the seller is legally obligated and the costs are not included in the APR and in QM Points and Fees.

A lender is not involved in the buydowns we are talking about. It is purely between the buyer and the seller and the creditor discloses the underlying transaction based on the consumer's legal obligation. If the note is at 5%, then that is how the transaction is disclosed. If the seller effectively buys down the rate to 3% in the first year and 4% in the second year, then those supplemental payments are placed in a separate escrow account. But that does not impact the creditor's disclosures.

The bank wants to be out of the legal loop between the buyer and seller. Buyer and seller have their own side written agreement that seller will provide the buyer funds to be held in escrow for the buyer to use to augment the buyer's payment on the loan contract. The seller payment to the buyer for this purpose doesn't show up at all in the lender's disclosures to the buyer because the buyer will be responsible for making the full contractual periodic payments at the full rate on the loan. The seller payment is not a seller credit to the buyer toward closing costs, so don't even think about listing it as a seller credit.

Buyer and seller agree between them how much each payment during the buydown period needs to be subsidized, and the funds are either put into escrow up front or on some agreed-upon schedule that conforms to their agreement with one another. If the seller fails to satisfy the agreement, the buyer has to continue paying the loan as per the mortgage loan agreement with the bank, and may have to take legal action against the seller to force the seller to pay up. The bank has no involvement between the buyer and seller.

We had a few buydown question on our LCT lending conference so with rates going up these are generating some interest.

Below is from a fairly large investor on buydowns which seems to echo Randy in regard to the credit contract piece:

Regulation Z, 1026.17(c)(1), Comment 2 states in part, “The legal obligation normally is presumed to be contained in the Note or contract that evidences the agreement between the consumer and the creditor.” ************'s interpretation is that the buydown agreement does not modify the legal obligation between the consumer and the creditor, and that the Mortgage Note represents the legal obligation.

Hopefully if someone else is looking for an answer, the direction seems to be letting your LE/CD reflect the normal credit terms and reflect your buydown terms in the buydown agreement.

The point is -- they are not YOUR buydown terms. The lender is not party to the buydown agreement, although the bank knows about it. The buydown agreement is strictly between the buyer and seller. The bank's disclosures and documentation ignore its existence.

Let me rephrase this (hopefully) more succinctly, leaving out placement on the LE/CD. The reason I'm asking is we are getting some interest in a 3-2-1 buydown paid by the seller. This fee would generally create a non-QM loan unless the cost is able to be excluded as Seller's Points as defined in 1026.4(c)(5). My question is, is it possible to exclude the buydown fee as seller's points?

Reading 1026.4(c)(5), if the lender and the seller had a contract between them (NOT the credit contract, i.e. Note) designating any cost to be paid by the seller, then this cost would be designated "Seller's Points" and would be excluded from the APR, the QM Points and Fees test, and the LE/CD entirely since the borrower is not obligated to the cost.

So, in a situation where the buydown is not part of the credit contract but where the lender has a separate agreement with the seller for the seller to pay the cost of the buydown, would the lender be able to exclude the buydown cost from the Points and Fees?

In the section of the comments to 1026.17(c)(1)3-i regarding 3rd party buydowns reflected in the credit contract, it acknowledges that when the terms of the buydown are reflected in the credit contract and the terms state that the seller is paying the cost, then that cost constitutes seller's points. However, it does not reference a situation in which the terms of the buydown are not reflected in the credit contract, but where the lender has a separate agreement with the seller to pay the cost, thus also making them seller's points under 1026.4(c)(5). Is the buydown cost then only considered Seller's Points if the terms of the buydown are reflected in the credit contract?

I appreciate all of your insight very much - I learn so much from you all and find your expertise invaluable.