As mentioned in Jim Wiltse's post here on February 16, a monumental amendment to federal Regulation Z affecting mortgage loan originators will take effect on April 1, 2011. It's being called, somewhat ominously, the "Final Rule."
Currently, an MLO receives compensation in a transaction from both the yield spread premium and origination fees. Under the Final Rule, MLOs can no longer be compensated based on the yield spread premium or on any terms of a transaction, i.e., the interest rate, annual percentage rate, loan-to-value ratio, or existence of a prepayment penalty.
The Final Rule further states that if a mortgage loan originator receives compensation directly from a consumer, he may not receive any other compensation, directly or indirectly, from anyone in connection with that transaction. In addition, it prohibits a loan originator from steering a consumer to a residential mortgage loan for the purpose of receiving greater compensation from the creditor unless the resulting loan transaction is in the consumer’s interest.
On what, then, can MLO compensation be based? The Federal Reserve has suggestions for the perplexed. These include:
- The loan originator’s overall loan volume
- The long-term performance of the originator’s loans
- An hourly rate of pay
- Whether the consumer is an existing customer of the creditor or a new customer
- A payment fixed in advance for every loan the originator arranges
- The percentage of applications submitted by the loan originator to the creditor that results in consummated transactions
- The quality of the loan originator’s loan files submitted to the creditor
- A legitimate business expense, such as fixed overhead costs
- The amount of credit extended
The mortgage industry has largely opposed the Final Rule, which it believes will promote unfair competition and result in a mortgage marketplace controlled by four or five megabanks. The National Association of Independent Housing Professionals (NAIHP) and the National Association of Mortgage Brokers (NAMB) have filed a lawsuit against the Federal Reserve to prevent the April 1 implementation of the Final Rule. Senators David Vitter from Louisiana and Jon Tester from Montana authored a letter
to Ben Bernanke supporting the lawsuit.
Barring a court ruling or a serious change of minds at the Federal Reserve, after April 1, 2011, a person who violates the Final Rule will be in violation of TILA.
The Federal Reserve summarizes the Final Rule here
. Or you can find the full rule with (a lot of) discussion in the Federal Register
of September 24, 2010.
HUD addresses key procedural questions that may arise in complying with the Final Rule here