Which fee is included in the points and fees coverage test?

The points and fees coverage test is an important aspect of determining whether certain types of mortgages are subject to additional regulations under the Truth in Lending Act (TILA) and the Dodd-Frank Act. One critical component of this test is the inclusion of specific fees that could affect how the total costs of the loan are perceived.

Loan originator compensation is included in the points and fees coverage test because it directly impacts the total cost of obtaining the mortgage for the borrower. It encompasses all forms of compensation paid to the loan originator, whether it's a flat fee, a percentage of the loan amount, or a combination of both. This inclusion ensures that borrowers are fully aware of how much they are paying in terms of origination costs, which can influence their decision-making process when choosing between different loan offerings.

In contrast, fees like loan modification fees or reasonable appraisal fees paid to third parties do not typically count toward this coverage test, as these expenses are viewed differently under regulatory guidelines. Items such as interest are also excluded from the points and fees test, as they are considered part of the loan's overall cost rather than a separate fee that burden borrowers upfront. Understanding these parameters helps ensure compliance and protect borrowers from excessive costs.