Proposed Change in Loan Officer Compensation Put on Temporary Hold
The Federal Reserve's proposed changes to the rules governing loan officer and mortgage brokers' compensation, scheduled to have gone into effect on April 1st, 2011 have been put on hold. The United States Court of Appeals for the District of Columbia has granted a stay in the implementation of the final rule on loan officer compensation. This comes shortly after the U.S. District Court for the District of Columbia denied a request for a temporary restraining order against the Federal Reserve's Regulation Z, part of the Truth in Lending Act.
The lawsuit brought by the National Association of Mortgage Brokers and the National Association of Independent Home Professionals attempted to stop the implementation of Regulation Z, which was put forth to prohibit "certain practices relating to payments made to compensate mortgage brokers and other loan originators. The goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators," according to the Federal Reserve.
Through federal legislation of the Dodd-Frank Act, Congress ordered the Fed to create a rule that prohibits mortgage brokers and loan officers from making money that is based on obtaining a a higher interest rate on a mortgage loan for borrower, what is called in mortgage industry the yield spread premium (YSP). Before Regulation Z goes into effect, mortgage brokers have received compensation based on the borrower's interest rate. This compensation is paid as a lump sum by the lender to the mortgage broker. Any interest rate percentage points above the best possible rate the borrower qualifies for - the yield spread premium - can be paid to the broker.
The Fed is concerned that the YSP gives the mortgage broker the incentive to steer the borrower to a higher interest rate loan because the profit for the broker is higher. The Fed stated that "when the yield spread premium is used to compensate the loan officer or mortgage broker's employee, that employee has a personal incentive to deliver a loan with a high interest rate in order to maximize his or her own compensation."
Mortgage brokers are concerned that the proposed Regulation Z focuses only on them and ignores the service release premium (SRP) that banks receive when they sell the loan on the secondary market. Both the YSP and SRP are costs that end up being borne by the consumer, but the Fed has focused solely on the YSP. Mortgage brokers argue that this will not benefit the consumer.