The 'Mandatory' CEMA and the Points-and-Fees Test
A Queens borrower is refinancing. Her first mortgage balance is $472,000 at 7.375% with 27 years remaining; she also carries a $38,000 HELOC at prime plus 1.50% from a different bank. She wants one $512,000 thirty-year fixed at 6.500%, priced with 1 point ($5,120), $1,890 in lender fees, a $695 processing fee, $1,450 in third-party fees, and $2,300 in title charges. The home appraises at $640,000. Her income is $4,300 monthly from Social Security and a pension; her only other debt is a $310 car payment, and the new payment puts her near a 38% debt-to-income ratio. The lender's affiliated title agency will handle the closing. The originator, citing the 1.925% New York City mortgage recording tax, tells her a consolidation, extension and modification agreement is 'mandatory and we use our own attorney for it.' She asks whether the CEMA helps her and whether she can bring her own lawyer.
1. Run the CEMA economics for the borrower and identify the conditions and disclosures that apply.
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A CEMA lets the existing mortgage continue and taxes only the new money. Without it, New York City recording tax at the applicable rate on $512,000 is roughly $9,856 (about 1.925%, the rate that applies at $500,000 and above; below that threshold it is about 1.8%). With a CEMA covering the $472,000 first mortgage, the taxable new money is $512,000 - $472,000 = $40,000, or about $770. Gross saving is therefore roughly $9,000. The $38,000 HELOC payoff is new money unless that bank also participates, so it stays in the taxable amount.
Against that, subtract the CEMA preparation and lender fee, commonly $1,000 to $2,500, plus recording of the agreement. Net saving is still typically several thousand dollars, so the CEMA is usually worth doing on a balance this large.
Conditions: the existing lender must participate or assign the loan, the first mortgage must generally be current, and the consolidated amount cannot exceed program limits. The borrower must be told the CEMA is optional, that she may use her own attorney to prepare it, and what the fees are. Telling her it is mandatory, and that the lender's attorney must act for her, is a misrepresentation and a conduct violation.
2. Test the loan against New York's high-cost home loan thresholds and explain what would change if it were high-cost.
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New York's high-cost test under Banking Law Section 6-l is triggered when points and fees exceed 5% of the total loan amount for loans of $50,000 or more, or when the annual percentage rate exceeds the comparable Treasury yield by more than 8 percentage points on a first lien (the points-and-fees trigger is 6% for loans under $50,000).
Count only what counts. Points and fees here are the $5,120 point, the $1,890 lender fee, and the $695 processing fee, for $7,705. Excluded are the third-party and title charges, which are bona fide real-estate-related fees. $7,705 / $512,000 = 1.50%, far below the 5% ceiling, and a 6.500% note rate is nowhere near eight points over the benchmark. The loan is not high-cost.
That matters because high-cost status would strip flexibility: no prepayment penalty, no balloon payment, no negative amortization, no financing of single-premium credit insurance, no rate increase on default, and the borrower would have to complete homeownership counseling before closing. The originator should run the test and keep the worksheet, because a larger point or a broker fee on a smaller loan could cross the line.
3. The borrower asks two questions: is the CEMA required, and can she use her own attorney? How should the originator answer, and what other New York conduct issues are present?
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Answer both plainly: the CEMA is optional, and she may use her own attorney. New York does not require a CEMA on a refinance, and nothing requires the lender's attorney to represent the borrower; a borrower is entitled to independent counsel, and a lender that conditions the transaction on its own attorney is misrepresenting the deal. The originator should put the choice in writing with the estimated cost and saving, so the borrower can decide with numbers in front of her.
The affiliated title agency raises a separate issue: the RESPA affiliated business arrangement disclosure must be given, she must not be required to use the affiliate, and the lender may take only a return on ownership. New York's originator conduct rules also require honesty and fair dealing, and Banking Law Section 597 reaches misrepresentations and deceptive practices in the origination of a covered loan. Saying 'mandatory' to close a deal is exactly the kind of statement that draws both state discipline and a general business law claim. The originator should correct the statement now, in writing, and route the file through compliance before the closing is scheduled.