A repost of information from DSNews.com, by Carrie Bay on 8/16/2010 at http://www.dsnews.com/articles/print-view/fed-issues-new-mortgage-disclosure-and-compensation-rules-2010-08-16
The U.S. Federal Reserve on Monday published a long list of new rules intended to protect consumers from what the central bank describes as "unfair, abusive, or deceptive lending practices." The documents outline new requirements that will govern compensation to mortgage professionals and disclosures to borrowers regarding their home loans.
The Fed announced final rules prohibiting mortgage brokers and lenders' mortgage loan officers from receiving compensation based on the interest rate or other loan terms - the practice commonly referred to as yield spread premiums, in which brokers and loan officers receive a bigger kick-back for steering borrowers to accept a higher interest rate than that required by the lender.
This controversial pay structure has been widely blamed for pushing unwitting consumers into high-cost, unsustainable mortgages.
"[The new rule] will prevent loan originators from increasing their own compensation by raising the consumers' loan costs, such as by increasing the interest rate or points," the Fed said in a statement. "Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice."
The final rule also prohibits a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. It addition, it makes it illegal for loan originators to direct a consumer to accept a mortgage loan that is not in the consumer's interest in order to increase the originator's compensation.
These final rules on mortgage broker and loan officer compensation become effective April 1, 2011.
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