New federal regulations, effective April 1, will impose some major changes in how lenders compensate mortgage brokers for their services in the loan origination process.
Here's a summary:
- Lenders won't be allowed to pay any direct or indirect compensation to a mortgage broker based on the terms or condition of the loan, other than the loan amount.
- Lenders won't be allowed to pay any compensation to a mortgage broker who is also paid by the borrower in the same transaction.
- Mortgage brokers won't be allowed to steer borrowers to loans that are more highly compensated, unless the loan benefits the borrower as well as the broker.
That last item effectively ends lenders' practice of paying brokers incentives to push borrowers into more costly loans. These so-called yield spread premiums will be allowed only if the premium is applied to the borrower's closing costs. That's according to "Regulation Z: Loan Originator Compensation and Steering 12 CFR 226," a compliance guide published by the Federal Reserve.
"The rule does not prohibit creditors or loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction's terms or conditions," the guide states.
Consumer groups have welcomed the rules, but mortgage brokers have been less than enthusiastic about government restrictions on the structure of their compensation. Critics have suggested the rules will benefit major banks at brokers' expense, create a disincentive for brokers to help borrowers who have complex or special needs and force some brokers out of business.
The new regulations don't apply to home equity lines of credit, time shares or financing secured by property that doesn't include a dwelling. Nor do they apply to loan officers who are bank employees. Other technical exemptions also exist.
The new rules are in the form of amendments to Regulation Z, which implements the federal Truth in Lending Act. The compliance guide states that the goal of the amendments is "to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators."