New Fed Rule for Mortgage Brokers
STARTING April 1, under a new compensation rule from the Federal Reserve, borrowers who get their mortgages through brokers will most likely pay less for their services and must be offered the lowest possible interest rate and fees for which they qualify.
The new rule also affects those dealing with small banks and credit unions, which typically do not fund loans from their own resources. Unfortunately most banks and other direct lenders, including the few mortgage companies that function like banks, are exempt.
The new rule is known as the Loan Originator Compensation amendment to Regulation Z, part of a strengthened Truth in Lending Act passed by Congress in 2008. Designed to prevent consumers from being steered into high-cost, risky loans, it covers how a loan originator, or any person or company that arranges, obtains and/or negotiates a mortgage for a client, is paid.
Under the new rule, a lender can no longer pay a loan originator a lucrative rebate known as a yield-spread premium, (made a lot of loan originators rich duringthe real estate boom) which is tied to the rate or terms of the mortgage. Banks and other lenders can continue to pay commissions to brokers, but these payments must now be based solely on the loan amount.
In the past, the higher the interest rate and points, the more money a broker earned in commission.
Brokerage firms typically earn a yield-spread premium of 1 to 2.5 % of the loan amount, with higher interest rates as high as 2 % more. On a $500,000 loan a 1% loan origination fee equal $5,000, extra commission for a loan officer who stirred a consumer into a higher rate loan.
In the new system, the brokerage can earn a fixed commission from the lender, but the amount is not tied to the loan terms. Also, the brokerage cannot pass on a part of the commission to the broker, who must now be paid an hourly wage or salary. The exception is for loans where the lender pays the borrower’s points to the brokerage, typically for higher-rate loans. (The commission range is expected to be 1.5 to 2.5 points.)
It is also forbidden for a loan originator to collect payments from both the consumer and the lender in a single transaction. If a broker is paid a commission by a lender (based on the loan amount), he or she cannot also charge the consumer points, or fees for application or processing. The consumer will still, however, need to pay the broker for third-party services like appraisals.
An exception to the new rule involves lenders who finance mortgages in their own names from their own resources, a practice known as warehouse-lending, and then sell the loans to investors like Fannie Mae. The exception also applies to other companies that fund mortgages from their own resources.
Some mortgage companies originate and close mortgages in their own names through funds from third parties, typically other banks, a practice known in the industry as table funding. The new rule applies to them as well.
Under the new rule, a lender can no longer pay a loan originator a lucrative rebate known as a yield-spread premium, (made a lot of loan originators rich duringthe real estate boom) which is tied to the rate or terms of the mortgage. Banks and other lenders can continue to pay commissions to brokers, but these payments must now be based solely on the loan amount.
In the past, the higher the interest rate and points, the more money a broker earned in commission.
Brokerage firms typically earn a yield-spread premium of 1 to 2.5 % of the loan amount, with higher interest rates as high as 2 % more. On a $500,000 loan a 1% loan origination fee equal $5,000, extra commission for a loan officer who stirred a consumer into a higher rate loan.
In the new system, the brokerage can earn a fixed commission from the lender, but the amount is not tied to the loan terms. Also, the brokerage cannot pass on a part of the commission to the broker, who must now be paid an hourly wage or salary. The exception is for loans where the lender pays the borrower’s points to the brokerage, typically for higher-rate loans. (The commission range is expected to be 1.5 to 2.5 points.)
It is also forbidden for a loan originator to collect payments from both the consumer and the lender in a single transaction. If a broker is paid a commission by a lender (based on the loan amount), he or she cannot also charge the consumer points, or fees for application or processing. The consumer will still, however, need to pay the broker for third-party services like appraisals.
An exception to the new rule involves lenders who finance mortgages in their own names from their own resources, a practice known as warehouse-lending, and then sell the loans to investors like Fannie Mae. The exception also applies to other companies that fund mortgages from their own resources.
Some mortgage companies originate and close mortgages in their own names through funds from third parties, typically other banks, a practice known in the industry as table funding. The new rule applies to them as well.
No comments:
Post a Comment