What Happened?
Effective August 29, 2026, Pennsylvania enacted House Bill 1103 (the “Bill”) impacting discount points on residential mortgage loans by making amendments to Pennsylvania’s usury code (the Loan Interest and Protection Law (“Law”)), and the Mortgage Licensing Act. First, the Bill amends the Law by repealing the definition of discount points in section 101 and repealing all of section 402, which prohibits lenders from collecting discount points from sellers on non-government mortgages. Second, the Bill amends the Mortgage Licensing Act to permit licensed mortgage lenders of first and secondary mortgage loans to offer “discount points,” which the measure defines as “fees knowingly paid by the consumer for the purpose of reducing, and which result in a bona fide reduction of, the interest rate or time-price differential applicable to the mortgage.”
Why is it Important?
The Legislative history states that the purpose of these amendments is to allow borrowers to buy down their interest rate and align with the majority of states that do not restrict lenders from charging discount points. It is worth noting that the usury’s law restriction on discount points was very narrowly drafted to apply only to points paid by the seller with several exclusions and was arguably preempted for first-lien residential mortgage loans under the Depository Institutions Deregulation and Monetary Control Act. Moreover, in the context of residential mortgages the usury law applies only to residential mortgage loans with an original principal amount of the base figure or less (currently, $319,777 and adjusted annually for inflation).
As amended, mortgage lenders licensed under the Mortgage Licensing Act have the power to charge discount points on a “mortgage loan,” which includes both first or secondary mortgage loans, irrespective of the dollar amount, provided such discount points are for the purpose of reducing the rate and result in a “bona fide” reduction of rate. The statute does not define “bona fide.” While not dispositive, it is worth noting that the federal Truth in Lending Act (“TILA”) defines the term “bona fide” discount point in the context of high cost residential mortgage loans. More specifically, under TILA, “[t]he term bona fide discount point means an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer.” Absent concrete guidance from the regulators, it is not clear what constitutes “bona fide” for purposes of Pennsylvania law. With that said, Pennsylvania regulators have informally suggested that any actual reduction in rate would be deemed bona fide.
What to do now?
Given that violations of the Mortgage Licensing Act could result in fines of $10,000 per offense, licensed mortgage lenders should ensure that any discount points charged on first or secondary mortgage loans meet the Pennsylvania’s Department of Banking’s interpretation of “bona fide” and result in an actual reduction of the rate.
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