New Rules Announced to Protect Mortgage Borrowers

Dennis Norman St Louis

Dennis Norman

Over the past couple of years lawsuits have been filed against several lenders over “yield spread premiums” that were paid by the lenders to mortgage brokers originating loans on their behalf. These suits brought a lot of attention to a common practice in the mortgage industry which was to compensate the companies (or loan officers) originating loans based upon the rate and points charged to the borrower. There have been numerous debates on the topic and I’m staying out of it, however, last week the Federal Reserve announced new rules that will go in effect on April 1, 2011 that will end this practice.

The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions (Banks) and other lenders.

Under the new rules a loan originator “may not receive compensation that is based on the interest rate or other loan terms.” According to the Fed Reserve, this will “prevent loan originators from increasing their own compensation by raising the consumer’s loan costs, such as by increasing the interest rate or points.” Loan originators will, however, be able to continue to receive compensation that is based on a percentage of the loan amount.

The final rule also prohibits a loan originator that receives compensation direclty from the consumer from also receiving compensation from the lender or another party. In consumer testing it was found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer’s total loan cost. The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.

Additionally, the final rule prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation. The rule will preserve consumer choice by ensuring that consumers can choose from loan options that include the loan with the lowest rate and the loan with the least amount of points and origination fees, rather than the loans that maximize the originator’s compensation.

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