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By Harvey S. JacobsNew loan-originator compensation rules promulgated by the Federal Reserve Board make three sweeping changes in the way residential lending business will be conducted. Although they were designed to enhance consumer protection, it is not at all clear yet whether these changes will improve conditions for borrowers more than they detract from them.
First, loan originators are now prohibited from being paid on the basis of the interest rate of the loan they sell to a borrower. Second, if a borrower pays the loan originator, that loan originator cannot receive compensation from any other party. Third, loan originators are prohibited from steering consumers toward loans that will benefit the originator to the detriment of the borrower. The purpose of these changes is to protect consumers from unfair or abusive lending practices.
Until April 1, it was perfectly legal, and in fact customary, for a mortgage broker to collect points (one point equals 1 percent of the loan amount) from a borrower and additional points (called yield-spread premiums) from the lender. Lenders were willing to pay mortgage brokers yield-spread premiums because the mortgage brokers had sold loans to the borrowers with interest rates higher than the rate commonly available on the market. The more the interest rate exceeded the market rate, the greater was a broker’s yield-spread bounty.
