When the Borrower has discount points being purchased and the Seller agrees to pay for a portion of them, in the finance charge calculation do you include the full discount point amount or just the amount the borrower is actually paying?

Official Interpretation
Paragraph 4(c)(5)
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.

yeah, these are the borrower's discount points for buying their rate down. The buyer and seller have an addendum in file now indicating the seller will be paying the full discount points. In this case though, based on the regulation, we even though the Seller is paying full amount the discount points will be counted in the amount financed and included for QM points and fees testing, correct?

Why? If that is included in an agreement between the buyer and seller, then why would these not be seller points?

Official Interpretation
32(b) Definitions
Paragraph 32(b)(1).

2. Charges paid by parties other than the consumer. Under § 1026.32(b)(1), points and fees may include charges paid by third parties in addition to charges paid by the consumer. Specifically, charges paid by third parties that fall within the definition of points and fees set forth in § 1026.32(b)(1)(i) through (vi) are included in points and fees. In calculating points and fees in connection with a transaction, creditors may rely on written statements from the consumer or third party paying for a charge, including the seller, to determine the source and purpose of any third-party payment for a charge.

iii. Seller's points. Seller's points, as described in § 1026.4(c)(5) and commentary, are excluded from the finance charge and thus are not included in points and fees under § 1026.32(b)(1)(i). However, charges paid by the seller for items listed in § 1026.32(b)(1)(ii) through (vi) are included in points and fees.

What matters is which party has the legal obligation to pay the points.

Section 1026.17(c)(1) is the foundation for answers to all questions about the correct disclosure (FC and APR) of third party payments. It's deceptively simple: "the disclosures shall reflect the terms of the legal obligation between the parties."

When the lender conditions a loan on the payment of points, the borrower becomes contractually liable to pay the points. Then, when the seller (or any other third party) agrees by separate contract (three party: seller, buyer, and lender) to pay a certain amount on the buyer's behalf, the legal obligation to pay the points shifts from buyer to seller. Now, Section 1026.17(c)(1) tells you "the disclosures shall not reflect (the points)"...because they are no longer the borrower's obligation.

Jumping in because I would like to understand this better. If the discount points are being paid by the seller via an agreement with the borrower after we initially disclosed the discount points as paid by the borrower, how would we reflect that on the revised subsequent disclosures? Would it be in the seller column of section A or some other way or would we remove the discount points from the subsequent LE and CDs entirely?

Since the CD would only reflect the charges that the borrower will pay at closing, then just the portion of the points that would be paid by the borrow would be reflected on the LE. On the CD, the portion being paid by the seller would be reflected in the paid by seller column.

Thank you rlcarey. That's a great explanation. Now if I could just get our LOS to do that. LOL.

We use Encompass and are able to show it when the seller is paying for the points. However when the borrower is still on the hook for a portion of the points then we do run into an issue since we have to count that portion as a finance charge.