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More Stupid Mortgage Rules from the Government

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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.

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

    Well-informed written article.

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  • Owl Tree

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

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    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.

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