Home > 2011 > Mortgages

More Stupid Mortgage Rules from the Government

Advertiser Disclosure Comments 6 Comments

One of the problems with the mortgage business is that too many regulatory fingers are in the pie. Not surprisingly, none of these entities talks with any other entity. The current issue on the table is that of compensation of loan originators, or more specifically, mortgage brokers.

It is probable that the genesis for this is the “Yield Spread Premium,” or YSP. It is no secret that in the old days many disreputable mortgage lenders – not just mortgage brokers – used YSP as a way of making more money off the customer. Even though this compensation was disclosed on the HUD-1 closing statement, most borrowers didn’t understand how to read the statement because the last regulation was poorly written.

What could and did happen is that the lender would quote a loan origination fee of 1 point but then when he locked in, the pricing would be such that in addition to getting one point from the borrowers, he would get an extra half point from the lender. He wouldn’t pass it on to the borrower.

A small bunch of us decided back in 2000 that promoting honesty was a good thing. We started an organization called the Upfront Mortgage Brokers Association, UMBA. Our members promised to disclose every charge up front and then not change any fees during the process. If you say, “Well, you were just being honest,” you’d be right. And that’s the point ¬– but many, many mortgage loan officers weren’t.

The government moves at the speed of a glacier, so it took ten years for the Department of Housing and Urban Development, HUD, to figure out that it would be good to stop dishonest mortgage brokers from cheating their clients. On January 1st, 2010, over a year ago, they finally got around to incorporating into RESPA what we UMBA brokers had been doing for ten years. Now when a loan originator describes his compensation on the Good Faith Estimate, it’s not allowed to change. That’s great, and just what we needed.

But wait a minute…

You would think that this would solve the problem. But now the Federal Reserve Board has come up with rules changing TILA, the Truth-in-Lending Act. Some Congressmen have stated that they do not believe that the Fed has regulatory power to regulate our compensation, but the Fed is moving ahead. They believe they do and that’s what counts. Here’s what they say.

The goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators.

At its core is a stipulation that broker compensation to be either Borrower paid or Lender paid, but not both. Why not? Because the Fed does not understand that with the new rules that HUD put into effect a year ago, this change in TILA is completely unnecessary.

What it definitely does is raise the cost of borrowing to some consumers. Let me show you how. Here are some numbers from today’s rate sheet, assuming I was going to make 1 point on the transaction in accordance with the current law.

Rate Wholesale Points Points to Borrower
5 (1) 0      (1 point YSP to me)
4.875 (.625) .375
4.75 (.125) .875
4.625 .5 1.5

Under the Federal Reserve Board’s new rule, the two transactions in red would not be allowed. In both those cases, part of the compensation would come from the borrower and the lender. That is prohibited. Which means that you, as a borrower, would have to choose 5% or 4.625% even though one of the other options might be best for you.

Second, lenders are requiring that I declare my compensation for all loans originated with them. That compensation must include the fee for processing which is NOW on a “dollar per loan” basis. Note that the lender is still allowed to charge a flat fee per loan for underwriting and documents regardless of size, but we brokers can’t. I have to try to compensate for that by fixing my compensation.

The Unintended Consequence

By fixing our compensation, this hurts consumers, exactly the OPPOSITE of what is intended. Legislators have not figured out that the most valuable service we provide is advice and helping people. We are not selling widgets that have common characteristics.

Let me demonstrate, assuming I say I want to make 1 point but I have to pay my processor $600, so now I need to charge 1.25 points.

Example 1 – Borrower with clean credit, W-2 income, and low LTV. This is an easy loan. He wants to borrow $500,000.

Example 2 – Borrower is like #1 above but only wants $250,000.

Example 3 – Borrower is self-employed with two different companies, he owns 4 rental properties and wants to borrow $250,000. His credit shows a tax lien he says is paid. This loan requires a lot of work. I must get two years personal tax returns, two years returns on each business. We need tax and insurance information on all rental properties and we need to work to get the lien released. This is a 2” thick file.

Example 4 – Elderly borrower needs $75,000.


Ex 1 Ex 2 Ex 3 Ex 4
Old way $5,000 $2,500 $3,125 $2,000
New way $6,250 $3,125 $3,125 $937.50
Processor $600 $600 $600 $600
Net $5,650 $2,525 $2,525 $337.50

I am happy with Example 1 although borrower would not be if he could figure out all the details. Note that I cannot reduce my compensation to him or legally give him back any money Example 2 is pretty much a wash.

In Example 3, I have to do a LOT more work but I can’t make any more money.

As to Example 4, frankly, I would rather take the day off rather than work on a loan for $337.50. I wonder if I can decline to work on the loan … or by some interpretation of the Equal Credit Opportunity act, I MUST accept the application.

You can see that the Fed’s approach to this problem isn’t going to solve anything. More specifically, every originator is going to increase his compensation to make sure that they still get enough money to run their businesses.

In the last iteration of this fiasco, the Small Business Administration has told the House Finance Committee that they think that this rule will be to tough on small business and that they should reconsider.

So now we have HUD, the Fed, the SBA, and Congress with fingers in the pie. Whatever they do, it is likely that it will cost consumers more. What a mess.

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • http://www.kentuckyloan.blogspot.com joel lobb

    Well-informed written article.

  • Pingback: ‘Do not sign this form if you do not understand it’ – The Spokesman Review | LoanZrr()

  • Pingback: Home Refinance Mortgages » ‘Do not sign this form if you do not understand it’ – The Spokesman Review()

  • Owl Tree

    This was a perfect presentation of the negative consequences of the upcoming rule. Well done.

  • Pingback: New Mortgage Broker Law Aims to Save Home Buyers Money - WalletPop | Loans Mortgage Borrowers()


    I appreciate your putting this in a format I can understand. Small wonder I am looking for an additional job and wanting to start yet another one. Seems like the FRB doesn’t understand anything. (expletive deleted!)

  • http://www.geneperez.net Gene

    its going to be that brokers are going to cushion for those market swings as well since you cannot change the rate from what I hear but when the market moves and your are negative then what do you do .. I don’t know the govt seems to do things that are counter to a market recovery for real estate… at least. .. Santa Maria Real Estate

  • http://www.intellestate.com Brad Norris

    If there is a minimum baseline lender paid compensation, then it limits the ability to reduce your margin to get a deal. The lowest baseline comp, I’ve seen is 100 basis points. There is no competition distinction made between Conventional and FHA/VA financing though it is a prevailing fact that Government loans have more disclosures, rules, challenges and cost more to originate/process. I foresee see a future where larger loan borrowers pay more for the same service. I know I am willing to originate a $400,000 loan for 50 basis points, but under this new arrangement, I won’t be able to. The consumer will pay more as they are now presented only with these “padded” rates and competition will be strangled. If the want to approach compensation (which I am NOT in favor of) in an “equitable” manner, why not start with a base line dollar profit that’s allowable rather than basis points. Some of the smaller dollar loans are some of the most challenging.

    Regulators have spent the last 3 years trying to regulate the industry into a state of perfection. There are standards of behavior that are expected here that aren’t expected anywhere else in the economy. We are not allowed to make mistakes. God forbid you fail to quote the 1% transfer tax on a $400,000 property. It’s not bad enough however that we may have to PAY THE BORROWER for the service we perform, we now have to give up our ability to negotiate and determine for ourselves what our work is worth.

  • http://www.qmortgage.net/rate_quote Jon Berry

    It’s good to see someone else trying to expose the truth and harmful consequences of this Fed rule on loan officer compensation. Because RESPA/GFE 2010 made yield spread the borrower money, this is not only unnecessary, but harmful to the borrower.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team