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.
[Consumer resource: How to Correct an Error on a Credit Report]
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)|
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.
Image: Caitlin Childs, via Flickr.com