New rules determining loan officer compensation are in effect as of October 24th.
In the past, mortgage brokers have been permitted to collect both consumer-paid origination fees and lender-paid yield-spread premiums in the same transaction with the option to offer part or all of the YSP to cover borrower’s closing costs, or to claim the entire portion as part of their compensation. Disclosures which mortgage brokers are now and have been required to provide consumers make clear that they are independent contractors and cannot guarantee the lowest price or best terms. Brokers have also been required to disclose any YSP being paid in connection with the loan.
In drawing up the new rules, the Fed maintains that when the consumer pays a loan originator by agreeing to an origination fee "the consumer could reasonably expect that making that direct payment would reduce or eliminate the need for the creditor to compensate the originator through a higher interest rate.” The Fed has devised a solution to require mortgage brokers to choose one form of compensation or the other and mortgage brokers now need to decide if they will be paid by lenders (through yield-spread premiums) or by consumers, but not by both. This requirement also helps prevent steering consumers into high cost loans, which is a primary intent of the new regulations.
Loan officers employed with banks offer loans with reduced or no upfront costs in exchange for a higher rate on the borrower's mortgage and banks recoup those costs by adding a "service release premium" (SRP) when those higher interest rate mortgages are sold on the secondary market. Bankers are not required to disclose the SRP at any time during the loan process.
That a bank might earn a service release premium by charging a high rate for a loan "does not present the same problem of a hidden conflict of interest" as paying both an origination fee and a YSP to loan originators, the Fed asserts. Consumers expect that a bank is not a "trusted adviser" in the transaction but is intending to participate in the free market economy to the fullest degree, which implies making a profit on its products.
There is certainly more heated debate ahead between bankers and brokers regarding YSP and SRP, and the rules are likely to remain on the books until the courts have an opportunity to reconsider the legal challenges mounted by the National Association of Mortgage Brokers (NAMB) and the National Association of Independent Housing Professionals (NAIHP).