CFPB Issues Report on Use of Discount Points

The CFPB issued a report on trends it observed over the last few years in the use of discount points in connection with residential mortgage loans, and also identified several potential risks to consumers related to the offering and use of discount points.

Discount points allow a borrower to reduce the interest rate on their mortgage loan by making an additional one-time payment at closing.  Among other things, the CFPB’s report found:

• As interest rates rose in 2022 and 2023—compared to the very low rates in 2020 and 2021—the number of borrowers purchasing discount points rose significantly.  Among other things, this contributed to a large increase in loan costs over the last few years, and also suggested that borrowers believed interest rates would remain high for the foreseeable future (i.e., that they would not be able to refinance to a reasonably lower interest rate anytime soon).

• A majority of borrowers purchased discount points (approximately 57% of borrowers on purchase and non-cash-out refinances, and 89% of borrowers on cash-out refinances).

• Borrowers with lower credit scores were more likely to purchase discount points than borrowers with higher credit scores.

The CFPB noted several concerns about discount points, including: 1) whether borrowers understood the financial tradeoffs in purchasing discount points; 2) whether borrowers understood that they would need to keep their loans for longer without refinancing in order for the discount points to make financial sense and be worth the extra upfront cost; 3) whether advertisements which noted low interest rates and only made clear in the fine print that these rates were based on discount points might confuse consumers; and 4) whether the varied use of discount points among lenders made it harder for borrowers to compare quotes from different lenders. The agency indicated that it would continue to monitor the use of discount points for potential risks to consumers.