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FEDERAL RESERVE BANS YIELD SPREAD PREMIUMS

By
Title Insurance with Key Title Corporation 63078
Federal Reserve Bans Yield Spread Premiums
press release
8/16/2010
   

 

The Federal Reserve Board on Monday announced final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.

Today, lenders commonly pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a "yield spread premium"). Under the final rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers' loan costs, such as by increasing the interest rate or points. 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. In consumer testing, the Board found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer's total loan cost. The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.

Additionally, the final rule prohibits loan originators from directing or "steering" a consumer to accept a mortgage loan that is not in the consumer's interest in order to increase the originator's compensation. The rule will preserve consumer choice by ensuring that consumers can choose from loan options that include the loan with the lowest rate and the loan with the least amount of points and origination fees, rather than the loans that maximize the originator's compensation.

The Federal Register notice containing the final rules is attached. The final rules are effective April 1, 2011.

 

Posted by

Charlene Perry
Key Title, Inc. 
35 Fulford Avenue
Bel Air, MD 20104
410-803-4800

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Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos

Hi Charlene,  I'm not in the finance end of the business but it seems fair to not charge a customer based on providing a loan at higher rates or for the loan rep to get paid by both competing parties.  I'll watch the comment thread on this one.

Aug 18, 2010 05:37 AM
Anonymous
Pat

Why stop here? If we're going to eliminate compensation, then why not do it in all industries?

 

The result of this move, is going to be higher rates and the masses are dumb enough to think this is a good thing. It's simple economics that this is going to be bad for consumers.

Aug 18, 2010 07:14 AM
#2
CHARLENE PERRY, CLTP
Key Title Corporation - Perry Hall, MD
Insuring the Past to Protect Your Future

Pat,

I don't disagree that compensation is necessary but I have seen cases where the "broker" is getting points up front as well as a huge yield spread premium on the back end.  The consumer loses no matter how you look at this.  Not only does the consumer pay more in closing costs up front but in many of these cases the consumer is "offered" a rate that is much higher than what would have been charged had the consumer used a the services of a lender who funded their own loans, relied upon the consumer's credit report, etc.

Additionally, most consumers don't understand the disclosures that are given to them and particularly don't understand yield spread premiums.  I too will be closely following the comments here.

Aug 19, 2010 08:29 AM