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CFPB, DOE, Treasury Issue Joint Statement on Student Loan Servicing

Posted in Student Loans

A new Joint Statement issued by the Consumer Financial Protection Bureau, Department of Education, and Department of the Treasury presents a framework to standardize student loan servicing practices across the various federal and private borrowing programs. The agencies expect the new principles will guide rulemaking for better servicing practices and, ultimately, reduce student loan defaults.

The Joint Statement was released in conjunction with a new Student Loan Servicing Report. The Joint Statement and Report are the result of a March 2015 Presidential directive and highlight the CFPB’s recent efforts to establish industry-wide rules to increase minimum standards for servicing practices and borrower protections. The directive, included in the Presidential Memorandum on a Student Aid Bill of Rights to Help Ensure Affordable Loan Repayment, charged the CFPB to issue a report by October 1, 2015 with recommendations for student loan servicing standards. The CFPB launched a public inquiry in May 2015 to identify areas of concern.

The Joint Statement identifies four broad target areas for reform to ensure that student loan servicing is:

  • Consistent

The Joint Statement identifies a lack of clear expectations and minimum requirements for student loan servicers. The agencies view current industry practices as lacking effective customer service—including timely responses to consumer requests, error resolution, transfers, and payment processing. Particularly, the Joint Statement aims for improvements in practices to account for variations across loan products.

  • Accurate and Actionable

The agencies identified shortcomings in the accuracy of information provided to student loan borrowers by servicers. The Joint Statement aims to mitigate the risk of default by ensuring that basic information about account features, borrower protections, and loan terms are relayed in a more reliable fashion.

  • Accountable

The Joint Statement alerts all student loan servicers—government, for-profit, and not-for-profit—that they will be held accountable for violations of federal or state consumer financial laws, the HEA, contractual requirements, and federal regulations by ensuring that officials have continuing access to appropriate channels for recourse.

  • Transparent

The agencies also indicated that borrowers may benefit from increased information regarding the performance of individual loans, lenders, and servicers. Forthcoming initiatives will establish uniformity by raising private-sector lenders and servicers to current standards applicable to federal student loans.  Those standards include information related to loan origination, terms and conditions, borrower characteristics, portfolio composition, delinquencies, defaults, use of forbearance and deferment, and complaints.

The CFPB’s 151-page report incorporated over 30,000 public comments. Richard Cordray, CFPB director, stated in a press release announcing the report that the findings underscore the need for “market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers.” The press release attributed “a wide range of sloppy, patchwork practices” as creating obstacles to repayment that drive struggling borrowers to default.

The report indicates that with one in four of the nation’s 41 million student borrowers delinquent or in default, new rules are justified to standardize practices among servicers—the “critical link between borrowers and lenders.” The CFPB expressed particular concern with servicer practices causing lost records, slow payment processing, incomplete and outdated account information, surprise bills demanding extra payments, auto-defaults, and accounting procedures that maximize costs and fees.

The CFPB also noted the need for servicers to provide “additional support” so that borrowers can understand and access repayment options to avoid default. This support includes information about alternative repayment plans, deferments, forbearances, refinancing, and modification of loan terms. Specifically, the report identified special populations—service members, veterans, borrowers with disabilities, and older consumers—as underserved.

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CFPB’s Credit Union Advisory Council to meet on October 8

Posted in CFPB General

A meeting of the CFPB’s Credit Union Advisory Council has been scheduled for October 8, 2015 at the CFPB’s offices in Washington, DC.  The agenda indicates that the “Council will discuss consumer challenges in payments.”

On July 9 of this year, the CFPB released, and we blogged about, nine “Consumer Protection Principles” that are intended to express the CFPB’s “vision of consumer protection in new faster payments systems.”

CFPB Orders Indirect Auto Finance and Title Loan Companies to Pay $48.35 Million in Redress and Penalties For Abusive Debt Collection Practices

Posted in Auto Finance, CFPB Enforcement, Debt Collection

The CFPB has entered into a consent order with Westlake Services, LLC, an indirect auto finance company, and its wholly owned subsidiary, Wilshire Consumer Credit, LLC, for alleged deceptive debt collection practices. The consent order requires the companies to provide $44.1 million in redress and balance relief to borrowers and imposes a civil money penalty of $4.25 million.

According to the consent order, Westlake specializes in purchasing and servicing retail installment contracts, including subprime and near-subprime contracts. Wilshire offers auto title loans directly to borrowers and services those loans, and also purchases and services auto title loans made by other lenders.

The CFPB claimed that Westlake and Wilshire engaged in numerous illegal and deceptive debt collection practices. For example, the CFPB found that the companies used a web-based service, Skip Tracy, to place outgoing calls and choose the phone number and caller ID text the recipient would see. Collectors allegedly pretended to be repossession companies, pizza delivery services, flower shops, family members and friends to trick borrowers into answering the phone and disclosing the location of their vehicle or pressuring borrowers into making payments. The CFPB asserted that when Westlake and Wilshire pretended to be repossession companies calling to collect on the debt, they became “debt collectors” under the Fair Debt Collection Practices Act.

The CFPB also alleged that Westlake and Wilshire falsely threatened to refer borrowers for investigation or criminal prosecution, misrepresented the payment amount necessary to release a repossessed vehicle, falsely represented that borrowers’ vehicles were about to be repossessed to create a sense of urgency, and disclosed borrowers’ loan information to employers, friend and family members.

In addition to these debt collection practices, the CFPB also claimed that Westlake deceived borrowers regarding the effects of due date changes and extensions to loan terms by failing to disclose that these changes would result in the payment of additional interest. Finally, the CFPB claimed Wilshire misleadingly disclosed the monthly interest rate of its title loan products without also disclosing, or while minimizing in fine print, the annual interest rate in advertisements.

Westlake and Wilshire must pay $44.1 million in redress, which consists of $25.8 in cash payments and $18.3 million in balance reductions, as well as a $4.25 million civil money penalty. Additionally, Westlake and Wilshire must end all deceptive debt collection practices and ensure all advertisements comply with the Truth in Lending Act. Finally, Westlake and Wilshire must provide borrowers with accurate information regarding the effect of due date changes and extensions, and obtain borrowers’ informed consent to these changes before implementation.

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House Financial Services Committee Passes Bill to Change Management Structure of CFPB

Posted in CFPB General

Yesterday, the House Financial Services Committee passed by 35 to 24, H.R. 1266, which would replace the CFPB’s sole director with a bipartisan, five-member Commission.

Also, the Committee passed 56 to 3, H.R. 957, which would create an independent, Senate-confirmed inspector general for the CFPB.  It is unclear if and when these bills will be considered by the full House of Representatives.

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Director Corday testifies before House Committee on Financial Services

Posted in Arbitration, Auto Finance, CFPB General, Mortgages, Payday Lending, TILA / RESPA

On Wednesday, September 29, CFPB Director Richard Cordray appeared before the House Committee on Financial Services to answer questions regarding the Bureau’s activities since March.

Director Cordray used his introductory remarks to highlight the expansion of the marketplace for consumer credit over the last year. He specifically noted increases in home mortgage lending, auto loan origination and new consumer credit card accounts, with consumer loan delinquencies falling to an eight-year low. He also outlined recent Bureau enforcement actions, rulemakings and educational tools.

Members of Congress questioned Dir. Cordray on a range of issues reflecting recent Bureau actions. There were several noteworthy topics addressed which I have discussed below.

  • The extent of Bureau regulation of auto finance and its impact on dealerships: Several members of Congress expressed concern at the CFPB’s fair lending initiatives in the auto finance market. Members, such as Republican Congressman Williams of Texas, inquired as to whether the Bureau would be attempting to limit or eliminate the “dealer reserve,” or dealer markups on interest rates offered by auto finance companies that purchase motor vehicle installment sale contracts. Director Cordray expressed skepticism at this arrangement and acknowledged the possibility of curtailing the reserve or limiting it to a flat fee. Director Cordray noted that “if you set up a lending program where you’re going to allow people to mark up rates and be financially incentivized to do so and the consumer is none-the-wiser, we believe it creates great risk of discrimination.” When asked if the CFPB had asked dealerships how best to mitigate these risks, he noted that the Bureau has not communicated with auto dealers since they are not subject to Bureau jurisdiction under Dodd-Frank.
  • Referencing a recent article in the American Banker, a number of Congressmen questioned Director Cordray on the methodology for assessing racial discrimination in the auto finance market. Notably, Democratic Congressman Scott of Georgia challenged the Director on the use of last names as a proxy for race and expressed concern that this would result in large overestimates of the size of the affected population. Director Cordray defended the Bureau’s methodology in making these calculations as being based on the best efforts of Bureau officials to determine the most accurate means of assessing disparate impact discrimination.
  • Delayed enforcement for TILA-RESPA Integrated Disclosure (“TRID”) rule: Director Cordray fielded several questions about the possibility of delaying enforcement of the new TRID rules. Republican Congressman Hurt of Virginia asked the Director if “the CFPB has rejected the request by industry to grant a grace period of the implementation of [the rule] for the next six months . . .” He went on to ask if the CFPB would pledge not to take enforcement action against those institutions attempting, in good faith, to comply with the new rules. Director Cordray described the Bureau’s approach for the immediate future as “diagnostic-corrective,” emphasizing that the Bureau would avoid direct enforcement action and attempt to assist industry to comply with the new rules, although he was vague as to how this would look in practice.
  • Rulemaking regarding payday loans and small dollar, short term lending: Members of Congress on both sides of the aisle emphasized the need for a rule that allows for small dollar lending to continue in some form. The Florida Congressional delegation, in particular, expressed concern that the Bureau’s payday lending rule would preempt recent state action to create a functioning market for small dollar lenders. Director Cordray acknowledged the need to balance consumer protection concerns against the need for access to small dollar credit, but appeared to remain committed towards taking a hard stance against the industry.
  • Forthcoming rulemaking based on the Bureau’s arbitration study: Republican Congressman Neugebauer of Missouri questioned Director Cordray as to the desirability of prohibiting arbitration clauses based on some of the findings of the Bureau’s arbitration study. Referring to the report, the Congressman noted that “customers who prevailed in arbitration recovered on average more than $5,300 compared to $32.35 obtained by the average class action member in class action settlements.” The Director noted that the Military Lending Act and Dodd-Frank had previously prohibited arbitration in certain contexts and that the study found that arbitration was often not pursued by individual consumers because of the small amount of money at stake, relative to the aggregate costs of certain industry practices. As we recently noted in another blog, a field hearing will be held on October 7 in Denver to consider the imminent rule making that the Bureau is considering in the aftermath of the release of its arbitration study.

The hearing did not provide other significant newsworthy discussion, despite covering a broad range of topics, including student loans, consumer complaints, CFPB enforcement settlements, and several other issues.

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Director Cordray to testify tomorrow before House Committee on Financial Services

Posted in Arbitration, Auto Finance, CFPB General, Fair Lending, TILA / RESPA

On Tuesday, September 29, Director Cordray will testify once again before the House Committee on Financial Services at 10 am.   The Hearing is entitled “The Semi-Annual Report of the Bureau of Consumer Financial Protection”. While I’m not expecting Director Cordray ‘s prepared remarks to announce any new development, it seems likely that he’ll be fielding questions related to a variety of topics, including: (1) the status of the arbitration rule making in which the Bureau recently announced a field hearing in Denver; (2) the recent series of articles in the American Banker which reported about some internal, previously non-public documents about the Bureau’s auto finance fair lending investigations related to the disparate impact theory; and (3) the TILA-RESPA Integrated Disclosure Rule (TRID) which goes effective on October 3.

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CFPB and DOJ announce redlining settlement

Posted in CFPB Enforcement, Fair Lending, Mortgages

Consistent with recent indications from CFPB and Department of Justice officials that more redlining cases would soon be coming, the CFPB and DOJ have announced a proposed consent order with Hudson City Savings Bank to settle allegations that the bank had engaged in a pattern or practice of redlining predominantly Black and Hispanic neighborhoods in its residential mortgage lending.

The joint complaint filed by the CFPB and DOJ in federal district court in New Jersey states that the action resulted from a joint investigation by the agencies of the bank’s lending practices following the CFPB’s referral of the bank to the DOJ pursuant to the ECOA.  The referral was triggered by a CFPB examination of the bank.  In the complaint, the agencies alleged that from at least 2009 to 2013 (the “relevant time period”), the bank violated the ECOA and FHA by locating branches and loan officers, selecting mortgage brokers, and marketing loan products to avoid and thereby discourage prospective borrowers in predominantly Black and Hispanic neighborhoods in at least three Metropolitan Statistical Areas that generated the vast majority of its residential mortgage applications.  Those MSAs were the New York City-Northern New Jersey- Long Island MSA (the “NY/NJ MSA”), the Philadelphia, PA-Camden, NJ –Wilmington, DE MSA (the “Camden MSA”), and the Bridgeport-Stamford-Norwalk, CT MSA (collectively, the “three Affected MSAs”).

According to the complaint, the bank’s unlawful redlining practices included the following:

  • In carrying out a program to expand the bank’s branches outside of New Jersey from 2004 through 2010, the bank’s management focused on markets in areas of New York and Connecticut that “form a semi-circle around the four counties in New York with the highest proportions of majority-Black-and-Hispanic neighborhoods.”  The complaint alleged that based on 2000 and 2010 census data, more than 90 percent of the branches opened or acquired as a result of this expansion effort were outside of majority-Black-and-Hispanic neighborhoods. It also alleged that during the relevant time period, the bank did not accept first lien mortgage loan applications at all of its branches and referred applicants to one of seven retail loan officers working at branches outside of and not in proximity to majority-Black-and-Hispanic areas.
  • The bank generated approximately 80 percent of its mortgage applications through mortgage brokers who were heavily concentrated outside of majority-Black-and-Hispanic areas.
  • The bank engaged in limited marketing outside of its branch network that focused on neighborhoods with relatively few Black and Hispanic residents and therefore “failed to advertise meaningfully in majority-Black-and-Hispanic neighborhoods.”
  • In delineating its assessment area under the Community Reinvestment Act (CRA), the bank excluded most of the majority-Black-and-Hispanic neighborhoods in the NY/NJ and Camden MSAs.
  • During the relevant period, the bank failed to exercise adequate oversight or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance.

The proposed consent order requires the bank to pay a $5.5 million civil money penalty to the CFPB.  In addition, the bank must:

  • Invest $25 million in a loan subsidy program to increase the amount of credit the bank extends in majority-Black-and-Hispanic neighborhoods in the Affected MSAs.  The program will offer residents in such neighborhoods home mortgage loans “on a more affordable basis than otherwise available from [the bank].”  To make the loans “more affordable,” the bank must offer specified subsidies (such as interest rate reductions, closing cost assistance, or down payment assistance) for mortgage loans made to “qualified applicants” as defined by the consent order.
  • Spend at least $200,000 annually (for at least five years) on a targeted advertising and outreach campaign that advertises the loan subsidy program and is targeted to generate mortgage loan applications from qualified residents in majority-Black-and-Hispanic neighborhoods in the Affected MSAs.
  • Spend at least $750,000 on partnerships with community-based or governmental organizations that provide financial or other assistance to residents in majority-Black-and-Hispanic neighborhoods in the Affected MSAs.
  • Spend at least $100,000 annually (for at least five years) to sponsor at least 12 annual financial education events offered by community and governmental organizations, with the events to cover credit counseling, financial literacy, and other related educational programs “to help identify and develop” qualified loan applicants from majority-Black-and-Hispanic neighborhoods in the Affected MSAs.  (The amount the bank must spend cannot include salaries or other compensation paid to bank personnel participating in the events.)
  • Open or acquire two new full-service branches within majority-Black-and-Hispanic neighborhoods in the Affected MSAs, with the branches to be located in “retail-oriented spaces in visible locations  accessible to concentrations of owner-occupied residential properties in the majority-Black-and-Hispanic neighborhoods in the Affected MSAs” and that “will provide the complete range of services typically offered at [the bank’s] full-service branches and will accept first-lien mortgage applications.”
  • Revise its CRA assessment areas to include all of Bronx, Kings, Queens, and New York counties in New York; the city of Camden; and the city of Philadelphia.
  • Hire a third-party consultant to assess the credit needs of the majority-Black-and-Hispanic communities within the Affected MSAs and, based on the consultant’s written report, submit a remedial plan to the CFPB and DOJ that details the actions the bank plans to take to comply with the requirements of the consent order “to best achieve the [order’s] remedial goals.”
  • Hire a third-party consultant to assess the bank’s redlining compliance management system and, based on the consultant’s written report, submit a written ECOA/FHA compliance plan to the CFPB and DOJ that includes various elements such as policies and procedures for the selection and oversight of brokers to address redlining risks and monitoring for redlining.  The bank must also conduct fair lending training for its employees and hire a full-time Director of Community Development whose responsibilities include overseeing the bank’s continued lending in majority-Black-and-Hispanic neighborhoods within the Affected MSAs consistent with the remedial plan and building relationships with community organizations.

One wonders whether the CFPB and DOJ consulted with the OCC, the bank’s prudential regulator, about the terms of the proposed consent order.

CFPB issues final rule expanding definition of “small creditor” and “rural areas” under TILA

Posted in CFPB General, CFPB Rulemaking, Mortgages, TILA / RESPA

The CFPB has issued a final rule that revises the definitions of “small creditor” and “rural areas” under Regulation Z of the Truth in Lending Act (TILA). The final rule is effective January 1, 2016. We previously reported on the CFPB proposal to adopt these amendments.

The CFPB believes that small creditors play an important role in the mortgage industry because they generally try to maintain ongoing relationships with customers in a single community. The CFPB created special small creditor provisions with regard to certain Regulation Z requirements. Certain provisions apply to small creditors in general, while other provisions apply to small creditors that operate predominantly in rural or undeserved areas.

More specifically, small creditors are able to do the following:

  • Extend qualified mortgages that are not subject to the 43 percent debt-to-income ratio or the underwriting requirements of Appendix Q under the ability to repay (ATR) rule, if the loans are retained in portfolio;
  • Extend balloon-payment qualified mortgages, if they operate predominantly in rural or underserved areas;
  • Extend balloon payment qualified mortgages under a temporary provision whether or not they operate predominantly in rural or underserved areas;
  • Include balloon-payment features in high-cost mortgage loans that satisfy certain small creditor qualified mortgage loan provisions; and
  • Avoid the requirement to establish escrow accounts for certain higher-priced mortgage loans.

Additionally, the annual percentage rate ceiling for a first lien loan to be a non-higher priced mortgage loan that is eligible for the qualified mortgage safe harbor under the ATR rule is higher for small creditors than other creditors (i.e., less than 3.5 percentage points above a benchmark rate as opposed to less than 1.5 percentage points above the benchmark rate).

To increase the number of financial institutions eligible for these special provisions under Regulation Z, the final rule does the following:

  • Revises the definition of “small creditor” by increasing the loan origination limit for determining eligibility for small-creditor status from 500 originations of covered transactions secured by a first lien to 2,000 originations. Significantly, originated loans held in portfolio by the creditor and its affiliates are excluded from the 2,000 loan cap.
  • Includes the assets of the creditor’s affiliates that regularly extended covered transactions in the calculation of the $2 billion asset limit for small-creditor status. The CFPB took this step to prevent larger creditors from attempting to fit within the small creditor provisions through organizational changes.
  • Expands the definition of “rural area” to include either: (a) a county that meets the current definition of a rural county; or (b) a census block that is not in an urban area as defined by the U.S. Census Bureau. Additionally, the rule allows creditors to rely on a new automated tool provided on the CFPB website to determine whether properties are located in rural or underserved areas, or on the Census Bureau’s website to assess whether a particular property is located in an urban area (based on the Census Bureau’s definition).

However, the final rule reduces the time period used to determine whether a creditor is operating predominantly in rural or underserved areas from any of the three preceding calendar years to the preceding calendar year. To address burdens based on this change the rule adds a grace period in some circumstances, allowing a creditor that does not meet one or more of the requirements for a small creditor or a creditor that operates predominantly in rural or underserved areas in the preceding calendar year to still act as such a creditor with respect to applications for covered transactions received before April 1 of the current year.

With regard to the exemption from the requirement to establish an escrow account for a higher priced mortgage loan, the rule ensures that creditors who established escrow accounts solely to comply with the current rule will still be eligible for this exemption if they qualify under the rule as a small creditor operating predominantly in rural or underserved areas.

Finally, the rule extends the sunset date of the temporary provisions for small creditors to make balloon-payment qualified mortgage loans and high cost mortgage loans without regard to whether they operate predominantly in rural or underserved areas to transactions with applications received before April 1, 2016.

CFPB schedules October 7 field hearing on arbitration; Alan Kaplinsky to represent industry

Posted in Arbitration

The CFPB has announced that it will hold a field hearing about arbitration in Denver, Colorado on October 7, 2015 and has asked Alan Kaplinsky, Practice Leader of Ballard Spahr’s Consumer Financial Services Group, to represent industry at the hearing.

As the CFPB typically uses field hearings as the venue for announcing new developments, we expect the CFPB has scheduled this hearing in anticipation of taking the next step towards issuing a proposed arbitration rule.  That step would be the convening of a small business review panel required by the Small Business Regulatory Enforcement Fairness Act (SBREFA) and the Dodd-Frank Act to provide input on the proposal the CFPB is contemplating.  We expect the hearing to coincide with the CFPB’s release of materials it will distribute to the SBREFA panel, which are likely to include an outline of its proposal and  related information.  We understand that the CFPB has already begun extending invitations to prospective SBREFA panelists.  (In March 2015,  in conjunction with holding a field hearing on payday lending, the CFPB released a factsheet and outline of its contemplated proposals for regulating payday and other small-dollar, high-rate loans in preparation for convening a SBREFA panel.)

On March 10, 2015, the CFPB held a field hearing on arbitration in Newark, New Jersey that coincided with the release of the final results of the CFPB’s consumer arbitration study as mandated by Section 1028 of Dodd-Frank.  Section 1028 of Dodd-Frank requires the CFPB to conduct the study and allows it to regulate, limit, or even prohibit the use of arbitration in the offering of consumer financial products or services if doing so is found to be “in the public interest and for the protection of consumers.”  At the March hearing, Alan presented the industry’s perspective on arbitration agreements.  (The CFPB has released a video of the field hearing on which Alan’s remarks can be found.)


CFPB publishes annual CARD Act, HOEPA and QM adjustments

Posted in Credit Cards, Mortgages

The CFPB has published a final rule regarding various annual adjustments it is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank.  The adjustments made by the final rule are effective January 1, 2016.

The CARD Act requires the CFPB to calculate annual adjustments of (1) the minimum interest charge threshold that triggers disclosure of the minimum interest charge in credit card applications, solicitations and account opening disclosures, and (2) the fee thresholds for the penalty fees safe harbor.  The calculation did not result in a change to the current $1.00 minimum interest charge threshold.  However, in the final rule, the CFPB did not change the current penalty fee safe harbor of $27 for a first late payment but decreased the safe harbor for a subsequent violation within the following six months by one dollar to $37.

HOEPA requires the CFPB to annually adjust the total loan amount thresholds that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent of such amount.  In the final rule, the CFPB decreased the current dollar thresholds from, respectively, $20,391 to $20,350 and $1,020 to $1,017.

Pursuant to its ability to repay/QM rule, the CFPB must annually adjust the points and fees limits that a loan must not exceed to satisfy the requirements for a QM.  The CFPB must also annually adjust the related loan amount limits.  In the final rule, the CFPB decreased these limits to the following :

  • For a loan amount greater than or equal to $101,749 (currently $101,953), points and fees may not exceed 3 percent of the total loan amount
  • For a loan amount greater than or equal to $61,050 (currently $61,172) but less than $101,749, points and fees may not exceed $3,052
  • For a loan amount greater than or equal to $20,350 (currently $20,391) but less than $61,050, points and fees may not exceed 5 percent of the total loan amount
  • For a loan amount greater than or equal to $12,719 (currently $12,744) but less than $20,350, points and fees may not exceed $1,017
  • For a loan amount less than $12,719 (currently $12,744), points and fees may not exceed 8 percent of the total loan amount