The Veridian Blog

The Federal Reserve Board is amending Regulation Z (Truth-in-Lending) effective for all loan submissions on or after April 1, 2011.  The new changes will still allow loan originators to be compensated, as described below, while helping to protect consumers from unfair or abusive compensation practices. These rules will essentially prohibit mortgage brokers and lenders' mortgage loan officers from receiving compensation based on the interest rate or other loan terms - a practice commonly referred to as yield spread premiums (YSP), in which brokers and loan officers receive a bigger kick-back for steering borrowers towards a higher interest rate than that required by the lender.  This controversial pay structure has been widely blamed for pushing unsuspecting borrowers into high-cost, unsustainable mortgages during the subprime era. 

Here is a brief summary of some of the significant changes:

·      Brokers won’t be allowed to receive compensation from both the borrower and the lender.  In other words, there will be no more hidden YSP paid by banks to their retail loan officers.  Brokers weren’t allowed YSP at the beginning of 2010 anyway;

·      The mortgage broker or loan originator will be permitted to negotiate origination fees directly with the consumer;

·      Payments to the loan originator that are based on the loan’s interest rate or other terms are prohibited;

·      Compensation may be based on the percentage of the loan amount;

·      If the broker chooses compensation from the lender (used when doing a no-cost loan), it must be pre-determined and fixed.  The compensation structure you choose from the lender can be revised quarterly.

I may have been premature in bringing this topic to the forefront because at least here at Veridian, not much is going to change.  All YSP and origination charges disclosed in the 2010 Good Faith Estimate form have very little wiggle room, if any, to change as the loan process evolves.  For example, after a broker's origination charge has been disclosed, we are already prohibited from changing it - even if a mistake was made, or if a subsequent rate lock yielded a higher YSP.  The extra money would simply go back to the borrower.  As April 1st approaches, the lenders will begin implementing their new broker comp rules - and I will surely follow up with an update.