The Federal Reserve Board announced the final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. This 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. The new and final rules will take effect on April 1, 2011.
It is a common practice now a day that lenders pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender which is commonly referred to as yield spread premium. But because of the final rules, a loan originator may not receive compensation that is based on the interest rate or other loan terms. The final rules 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 the common practice.
The final rules seek 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. Moreover, the final rules prohibit 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.