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: [Resource: Misconceptions May Keep Homeowners From Getting Low-rate Refis]
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