The High Risk Home Loan Act does not elaborate on the meaning of “reasonably consistent with established industry norms and practices for secondary mortgage market transactions.” However, the phrase is used in Regulation Z’s Official Interpretations, which do provide further guidance on the meaning of this term.

Regulation Z’s Official Interpretations state that to satisfy the requirement that a discount point be “bona fide,” “a creditor may show that the reduction is reasonably consistent with established industry norms and practices for secondary mortgage market transactions.”

For example, “a creditor may rely on pricing in the to-be-announced (TBA) market for mortgage-backed securities (MBS) to establish that the interest rate reduction is consistent with the compensation that the creditor could reasonably expect to receive in the secondary market.” A creditor also may show “that its calculation complies with requirements prescribed in Fannie Mae or Freddie Mac guidelines for interest rate reductions from bona fide discount points.” While Fannie Mae and Freddie Mac have since removed guidance related to bona fide discount points from their guidelines, the 2013 version of Fannie Mae’s Selling Guide stated that discount points would be considered bona fide if they resulted in “a minimum of 25 basis points reduction in the interest rate for each discount point paid.”

Note that the supplementary information to the CFPB’s final rule on Ability-to-Repay and Qualified Mortgage Standards states that “these examples from the secondary market are merely illustrations of how a creditor could comply with the ‘established industry practices’ requirement for bona fide interest rate reduction,” and “creditors, and in particular creditors that retain loans in portfolio, will have flexibility to use other approaches for complying with this requirement.”

For resources related to our guidance, please see:

• High Risk Home Loan Act, 815 ILCS 137/35 (“For the purposes of determining whether the amount of points and fees meets the definition of ‘high risk home loan’ under this Act, either the amounts described in paragraph (1) or (2) of this Section, but not both, shall be excluded:

(1) Up to and including 2 bona fide discount points payable by the consumer in connection with the mortgage, but only if the interest rate from which the mortgage's interest rate will be discounted does not exceed by more than one percentage point:

     (A) the average prime offer rate, as defined in Section 129C of the federal Truth in
     Lending Act (15 U.S.C. 1639); or

     (B) if secured by a personal property loan, the average rate on a loan in
     connection with which insurance is provided under Title I of the National
     Housing Act (12 U.S.C. 1702 et seq.).

(2) Unless 2 bona fide discount points have been excluded under paragraph (1), up to and including one bona fide discount point payable by the consumer in connection with the mortgage, but only if the interest rate from which the mortgage's interest rate will be discounted does not exceed by more than 2 percentage points:

     (A) the average prime offer rate, as defined in Section 129C of the federal Truth in
     Lending Act (15 U.S.C. 1639); or

     (B) if secured by a personal property loan, the average rate on a loan in
     connection with which insurance is provided under Title I of the National
     Housing Act (12 U.S.C. 1702 et seq.).

Paragraphs (1) and (2) shall not apply to discount points used to purchase an interest rate reduction unless the amount of the interest rate reduction purchased is reasonably consistent with established industry norms and practices for secondary mortgage market transactions.”)

• Regulation Z, 12 CFR 1026.32(b)(3)(i) (“The term bona fide discount point means an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer.”)

• Regulation Z, Official Interpretations, Paragraph 32(b)(3)(i), Comment 1 (“Section 1026.32(b)(3) provides that, to be bona fide, a discount point must reduce the interest rate based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer. To satisfy this standard, a creditor may show that the reduction is reasonably consistent with established industry norms and practices for secondary mortgage market transactions. For example, a creditor may rely on pricing in the to-be-announced (TBA) market for mortgage-backed securities (MBS) to establish that the interest rate reduction is consistent with the compensation that the creditor could reasonably expect to receive in the secondary market. The creditor may also establish that its interest rate reduction is consistent with established industry practices by showing that its calculation complies with requirements prescribed in Fannie Mae or Freddie Mac guidelines for interest rate reductions from bona fide discount points. For example, assume that the Fannie Mae Single-Family Selling Guide or the Freddie Mac Single Family Seller/Servicer Guide imposes a cap on points and fees but excludes from the cap discount points that result in a bona fide reduction in the interest rate. Assume the guidelines require that, for a discount point to be bona fide so that it would not count against the cap, a discount point must result in at least a 25 basis point reduction in the interest rate. Accordingly, if the creditor offers a 25 basis point interest rate reduction for a discount point and the requirements of § 1026.32(b)(1)(i)(E) or (F) are satisfied, the discount point is bona fide and is excluded from the calculation of points and fees.”)

• Fannie Mae SEL-2013-06, page 4 (August 20, 2013) (“The term ‘bona fide discount point’ has been removed. This term is no longer used in the Selling Guide.”)

• Freddie Mac Industry Letter [Note that this is a link to an archived version of this resource], page 2 (October 1, 2013) (“In light of the CFPB final rule, some of the direction we provided in our February 12, 2009 Industry Letter on anti-predatory lending requirements is no longer operative. Accordingly, we are withdrawing the guidance contained in the ‘Excessive Points and Fees’ section (including the ‘Charges Included in the Points and Fees Calculation’ and ‘Charges Excluded from the Points and Fees Calculation’ subsections) and the ‘Pass-Through of Freddie Mac Delivery Fees’ section of that Industry Letter, including the instructions on bona fide discount points.”)

• 2013 Fannie Mae Selling Guide, page 242 (July 30, 2013) (“Bona fide discount points are specifically excluded from the points and fees limitation. Discount points will be determined to be bona fide if they: . . . result in a meaningful reduction of the interest rate, provided that, prior to discount, the rate was consistent with current market rates based on the credit characteristics of the mortgage. A meaningful reduction is defined as a minimum of 25 basis points reduction in the interest rate for each discount point paid, provided all other terms of the mortgage remain the same.”)

• CFPB Final Rule, Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act, 78 Fed. Reg. 6407, 6442 (January 30, 2013) (“However, because these examples from the secondary market are merely illustrations of how a creditor could comply with the ‘established industry practices’ requirement for bona fide interest rate reduction, creditors, and in particular creditors that retain loans in portfolio, will have flexibility to use other approaches for complying with this requirement.”)