Points on Second Mortgages and Mortgage Brokers' Fees (2024)

The Connecticut General Assembly

OFFICE OF LEGISLATIVE RESEARCH

March 1, 1994 94-R-0371

Michael Paulhus, Legislative Fellow

You asked whether other states have limits on points or origination fees that can be charged on second mortgages.

SUMMARY

We did a computer search of the statutes in the 50 states, but found very few that had language that appeared relevant to your question. We then found those statutes at the state library and followed up with phone calls to those states. We also checked with several central organizations, including the local and national Mortgage Bankers Association, the Mortgage Brokers Association, National Conference of State Legislatures (NCSL), and the Conference of State Bank Supervisors (CSBS), but have so far not found any existing 50-state surveys on this. The CSBS is still looking for us and we will forward to you any information we receive from them.

Connecticut has an eight point limit on second mortgage loan points and includes the second mortgage brokers' fees in this maximum. There is no limit on the interest rate (CGS § 36-224l).

The states we looked at varied considerably in their limits on second mortgage loan points. Maryland allows up to two points on residential second mortgage loans and four points on commercial loans, with certain exceptions. Massachusetts allows one point, but has no limit for loans sold into the secondary mortgage market. Michigan allows no points, only specified actual costs and a small processing fee. New Jersey allows 3 points. Pennsylvania allows two points. New York and Rhode Island have no specific limit on points, but they must be calculated into the maximum interest rate limits.

There was also a range of limits on second mortgage brokers' fees. Maryland limits them to eight points. Michigan and New Jersey prohibit charging a borrower any mortgage brokers' fees, but allow the lender to pay a broker a fee or commission out of the lender's funds. Pennsylvania requires that brokers' fees must be "reasonable" but sets no specific limit. Massachusetts, New York, and Rhode Island have no limits.

LIMITS ON SECOND MORTGAGE LOAN POINTS, ORIGINATION FEES

Maryland

Maryland law allows a secondary mortgage lender to collect a loan origination fee not exceeding the greater of $250 or 2% on residential loans and $500 or 4% on commercial loans. The lender cannot collect any other commission, finder's fee, or point from the borrower for obtaining, procuring, or placing a loan. One exception to this restriction applies to federal second mortgage purchase programs in Md. Code Ann § 12-404.1. The law also limits the maximum interest rate to no more than 24%, but the point limits are separate from the interest rate calculation. Another section, which lenders can use as an alternative sets the maximum points at 2% for closed end credit, but prohibits points on secured open-end credit, according to Arthur Friedman, director of the Maryland banking department's complaints division (Md. Code Ann. § 12-405, 12-905, 12-1005).

Massachusetts

Massachusetts law prohibits a mortgage lender from charging a loan fee, finder's fee, points, or similar fees in a mortgage transaction involving a one- to four-family owner-occupied residential property located in the state with two important exceptions. Points can be charged if they constitute reasonable originating or underwriting expenses, as determined by the banking commissioner. The commissioner has determined that one point is reasonable under this provision, according to Joe Leonard, the Massachusetts Banking Department's general counsel. The second important exception is for points that are charged for loans sold into the secondary mortgage market or for government-insured loans. Since a large number of loans fall into this category, the custom on most loans, according to Mr. Leonard, is to charge a total of 2 points (Mass. Gen. Laws Ann. Ch. 183 § 63).

Michigan

Michigan statute prohibits requiring the borrower on a secondary mortgage to pay directly or indirectly a commission, finder's fee, or points for the obtaining, procuring, or placing of a secondary mortgage loan. Commissions, finder's fees, or points, if any, must be paid by the licensee and only to licensed real estate brokers, attorneys, or other licensees (Mich. Comp. Laws Ann. § 26.568(22)). The licensee can charge a nonrefundable processing fee of up to 2% of the loan amount, but no more than $200, and other reasonable fees for actual closing costs (Mich. Comp. Laws Ann. § 26.568(22).

There is a list of specified actual closing costs that can be charged in addition to the statutory maximum $200 processing fee, and there is a maximum interest limit of 18%, according to Mark Weigold, Senior Examiner with the Michigan banking department.

New Jersey

New Jersey statute, amended in 1992, allows second mortgage lenders to charge up to three points on a loan, and requires the points to be included in the calculation of the maximum interest rate of 30%. Prior law had prohibited points, according to Wayne Watkinson, an attorney with the New Jersey banking department (N.J. Rev. Stat. § 17:11A-46).

New York

New York has no specific limit on second mortgage loan points, but they are included in calculating the maximum interest rate of 25%, according to Michael Schussler, assistant general counsel in the New York banking department.

Pennsylvania

Pennsylvania statute allows licensed second mortgage lenders to charge up to 1.85% interest a month. It does not allow interest to be paid, deducted, or received in advance, with certain limited exceptions. It further allows closing cost fees to be charged if they are actually related to the granting of the loan and actually paid or incurred by the licensee. It allows an application fee of up to 2% of the loan amount (7 Pa. Cons. Stat. § 6609(a)(1),(2),(8)). Vic Seeshotz, an attorney with the Pennsylvania banking department, informed us that the 2% "application fee" is actually the same as points. It is not an application fee the way we understand the term in Connecticut, i.e. $150 or $200 paid to process the application which the lender can keep even if the loan is turned down. These points are separate from and do not have to be included in the calculation of the maximum interest rate.

Rhode Island

Rhode Island limits the interest on secondary mortgage loans to 21%. It allows a licensee to collect loan fees or "points" in advance from the borrower as long as they, plus the interest, remain under 21% of the amount of the loan.

The law further requires the regulator to prepare a schedule listing maximum amounts that can be charged on a secondary mortgage loan for costs, fees, services, collection charges, late charges, and all other reasonable expenses connected to the loan. These maximum amounts can vary with the amount of the loan and must bear a reasonable relationship to the loan, the services required, and the complexity of the transaction. Lenders cannot charge other fees that are not on the schedule (R.I. Gen. Laws § 19-25.2-23, 19-25.2-24).

LIMITS ON SECOND MORTGAGE BROKERS' FEES

Maryland

Maryland limits second mortgage brokers' fees to no more than eight points (8% of the loan amount). The brokers' fees also do not have to be included in the calculation for the 24% interest limit (Md. Code Ann. § 12-804).

Massachusetts

Massachusetts has no limit on what second mortgage brokers can charge, but these charges must be disclosed under a directive from that state's attorney general's office, according to Mr. Leonard of the Massachusetts Banking Department.

Michigan

Michigan law does not allow any mortgage brokers' fees to be charged to the borrower. If there are any such fees, they must be paid by the lender, according to Mr. Weigold. Mr. Weigold indicated that sometimes the broker may receive the $200 processing fee that is otherwise permitted.

New Jersey

New Jersey prohibits charging broker's fees to the borrower, and allows lenders to use brokers only if they are the ones paying the commission to the broker and there is no additional expense to the borrower for the broker's involvement, according to Mr. Watkins (N.J. Rev. Stat. § 17:11A-46(g, i, and j).

New York

New York has no limit on what mortgage brokers can charge. Their fees also do not have to be included in calculating the 25% maximum interest rate, according to Mr. Schussler.

Pennsylvania

Pennsylvania statute allows second mortgage loan broker licensees to charge a reasonable broker's fee as determined by regulation of the Department of Banking if the fee is disclosed to the customer (7 Pa. Cons. Stat. § 6609 (b) (2)). According to Mr. Seeshotz, the department has not yet issued any regulations on what constitutes a "reasonable" fee, so he counsels lenders who ask that since the lenders can charge 2 points, brokers are probably safe if they charge no more than that. If they charge more, they could have to defend it as "reasonable."

Rhode Island

Rhode Island has no limit on mortgage brokers' fees, and they do not have to be calculated into the 21% interest limit, according to Dennis Ziroli, an attorney with the Rhode Island banking department.

FEDERAL DISCLOSURE LAWS

Federal truth in lending law requires points to be calculated into the annual percentage rate disclosures provided to borrowers, but sets no limits on them.

Federal Housing and Urban Development (HUD) regulations require full, separate disclosure of mortgage brokers' fees under the federal Real Estate Settlement Procedures Act, but also sets no limits on them.

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