(09/06/2010) Newly-approved federal regulations target a mortgage brokerage and
origination practice that experts say contributed heavily to the mortgage
meltdown and ultimately the greatest recession since the Great
Depression.
Effective April 1, 2011, the Federal Reserve will prohibit loan
originators and mortgage brokers from receiving compensation based on a
borrower's interest rate or other loan terms.
That will save consumers thousands of dollars on a mortgage.
In the past, brokers and originators were compensated, in part, for
steering borrowers to more expensive mortgages. The more costly the
mortgage, the higher the so-called "yield spread premium" (YSP) payment.
Loan originators and brokers argued YSPs were legitimate payments for
their services, compensation earned in the open market and not loan costs.
They also said YSPs helped consumers avoid additional closing costs. In a
relatively few cases they did.
Pushing the argument, the profession fought to keep the fees off closing
statements until closing day, much to the chagrin of hundreds of thousands
of unsuspecting borrowers, faced with the close-of-escrow dilemma of paying
the exorbitant fees or losing the deal.
Consumer advocates, and ultimately federal regulators,
begged to differ, saying YSPs paid by the borrowers came with additional
compensation from the lender in what amounted to kickbacks. After years of
wrangling, advocates won the argument.
Under the old rules
Recently, the Center for Responsible Lending (CRL), in "Eliminating Systematic Charges on Home Loans" said YSPs
often targeted minority and lower income households and were tacked onto 75
percent of all subprime loans made by mortgage brokers.
Mortgages made by brokers cost Americans nearly $20 billion more than
comparable home loans made directly by the lender, as borrowers were socked
with both the YSP and the higher interest rate, which often unnecessarily
pushed the total loan cost up by $3,000.
Sixty percent of those who paid the YSP and the accompanying higher
interest rate attached to the subprime mortgage could have qualified for a
cheaper, prime loan, CRL reported.
As long ago as 2004, during the onset of predatory lending, YSPs and
other exorbitant loan costs that eventually put the market in a tailspin, CRL estimated the higher interest
rate attached to YSP-burdened mortgages was costing 600,000 families $2.9
billion each year.
• The average amount of a YSP was about $1,850 per loan, the largest
part of a broker's compensation. Broker's earned an average $1,046 more on
loans with YSPs than on loans without the fee.
• Loans that included YSPs cost borrowers an additional $800 to
$3,000 more than loans without YSPs.
• There was no legal requirement to inform borrowers about the
connection between the YSP and the interest charged on a loan.
Under the new rules
More than a half decade later, mortgage consumers are finally getting
their due -- to some extent. While those who suffered the extra costs may
not benefit from the new regulations, the new rules are designed to prevent
future gouging.
• In addition to forbidding compensation based on the loan's
interest rate or other terms, the law allows compensation based on a fixed
percentage of the loan amount.
• Brokers and officers also cannot receive payments directly from a
consumer, if they also receive compensation from the lender or another
person.
• Brokers and offers are forbidden from "steering" a consumer to a
lender offering less favorable terms in order to increase the
compensation.
• To prevent steering, brokers must present consumers with all types
of loans in which the consumer expresses an interest, say a fixed rate loan
(FRM), adjustable rate mortgage (ARM), or a reverse mortgage.
• Loan options presented to consumers must include the lowest
interest rate for which the consumer qualifies; the lowest points and
origination fees, and the lowest rate for which the consumer qualifies for a
loan with no risky features, such as a prepayment penalty, negative
amortization, or a balloon payment in the first seven years.
Heavily laden with stiffer mortgage protections the act establishes the
watchdog Consumer Financial
Protection Bureau and, among other provisions, it:
• Prohibits unfair lending, including YSPsand other financial incentives that encourage
lenders to steer borrowers to more costly loans. It also prohibits
pre-payment penalties that trapped so many borrowers in unaffordable
loans.
• Establishes penalties for irresponsible lenders and brokers who
don't comply with new standards. Lenders and brokers can be held accountable
by consumers for as much as three-years of interest payments and damages
plus attorney's fees. The law also protects borrowers against foreclosure
for violations of these standards.
• Expands consumer protections for high-cost mortgages by lowering
the interest rate level and points and fee triggers that define high cost
loans. Lenders must disclose the maximum a consumer could pay on an ARM and
disclose in detail how payments can vary based on interest rate changes.
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