A tactic used by mortgage brokers to fool homebuyers into paying higher mortgage rates may soon become illegal, making it cheaper for many Americans to buy homes. The trick, called a “yield-spread premium,” is a kickback paid by banks to mortgage brokers. For every quarter-percent increase in the mortgage interest rate, the higher the premium that banks pay to brokers. (For a good, in-depth discussion of the practice, check out this story by our own Randy Johnson.)
Beginning April 1, the yield-spread premium is scheduled to become illegal, according to new rules by the Federal Reserve. But Congress may yet get involved, possibly delaying the rule or overturning it altogether.
Under the current system, brokers are not required to tell borrowers that they qualify for lower interest rates. The hidden rate increases cause 1.5 million families to pay $2.6 billion extra for their mortgages every year, according to a study by the Center for Responsible Lending.
In a 2005 report, the center profiled a woman who bought a home for $43,750. Her mortgage broker gave her a loan with a 14% interest rate, even though she qualified for a rate of 10%. The difference cost her $9,000 over the life of the loan. Meanwhile the broker received a $2,700 kickback from the bank.
“Yield-spread premiums are a destructive feature of the subprime market because they give brokers an incentive to act contrary to a borrower’s best interest,” according to a press release by the center. “They cause families to be steered into loans that cost more than is appropriate and that borrowers can’t afford over the long run.”
Under the new rules proposed by the Fed, instead of getting paid more for steering consumers into loans with higher interest rates than they actually qualify for, brokers will be paid a fixed percentage of the total loan amount.
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But the rule is not necessarily a slam-dunk. Mortgage brokers have been lobbying Congress to stop implementation of the rule, fearing that it will put them out of business. They won a hearing from the House Financial Services Committee, which “is concerned that the rules may have an adverse impact on the ability of small businesses that originate mortgages to remain in business,” according to the committee’s oversight plan.
In a video sent to members of the National Association of Mortgage Brokers, Mike Anderson, chair of the association’s government affairs committee, praised the group’s members for their active lobbying efforts.
“Guys, this is great news,” Anderson said of the committee’s decision to investigate.
Image: Jay Santiago, via Flickr.com