Washington – Fed Adopts Rules Meant to Protect Home Buyer

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    Washington – The Federal Reserve on Monday moved to end a controversial lending practice that had helped propel the housing boom to unsustainable heights and then accelerated its collapse.

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    The Fed announced that it was adopting new rules banning yield spread premiums, which allowed mortgage brokers and lenders to gain additional profit from loans by charging borrowers higher-than-market interest rates.

    Reaction to the change was muted. For one thing, the recent package of financial reforms passed by Congress this summer already addressed the issue. And some thought a ban should have been imposed long ago, at a time when it could have directly affected loan quality.

    Michael D. Calhoun, president of the Center for Responsible Lending, described the action as “a real milestone,” but he said that he had been trying to convince regulators for at least 15 years that yield spread premiums were no more than illegal kickbacks.

    Many borrowers had little idea of what a yield spread premium was, even when it was costing them money.

    Traditionally, mortgage brokers were paid directly by the home buyer. The rise of the premium allowed the brokers to be compensated by the lender as well. Lenders in effect started paying bonuses to brokers who brought them high-interest loans that were naturally coveted by mortgage investors.

    From there, critics said, it was a short step for some brokers to put unsuspecting buyers into these loans and tell them it was the best deal they could get. Subprime lenders in particular often used yield spread premiums.

    “People didn’t just happen to end up in risky loans,” Mr. Calhoun said. “Mortgage brokers and other people on the frontlines were getting two to three times as much money to push buyers into those loans than they were into 30-year fixed-rate loans. So what do you think happened?”

    Brokers argued that it was frequently in the interest of the borrower, especially a low-income buyer, to pay a higher rate in exchange for bringing less cash to closing.

    Attempts at reform achieved little, and during the housing boom the yield spread premiums became ever more prevalent. In many cases, groups like the Center for Responsible Lending found, borrowers never realized they were paying both higher fees and a higher rate.

    While the new rules prohibit payments to a lender or broker based on the loan’s interest rate, they do allow for compensation based on a fixed percentage of the loan amount.

    To avoid steering the buyer into a loan that is offering less favorable terms, the rules now say that the borrower must be provided with competing options, including the lowest qualifying interest rate, the lowest points and origination fees, and the lowest qualifying rate without risky features like prepayment penalties.

    The National Association of Mortgage Brokers, which had long argued that efforts to reform the premium unfairly singled out its members, pronounced itself satisfied with the new rules.

    The Fed rules “put everybody on the same footing,” including brokers and banks, said Roy DeLoach, executive vice president for the brokers’ association.

    The rules take effect in April. Similar, and in some ways broader, rules in the financial reform bill will take effect later.


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    Real Estate Expert
    Real Estate Expert
    13 years ago

    I just love it when these so called “experts”discuss how Yield Spread works. They are undermining the entire mortgage industry and stifling borrowers of the few choices they still have left after all this regulation is implemented. They are punishing the average consumer just because of a few bad apples that don’t even represent the majority of loan officers. Most mortgage professionals that are still in the industry are hard working and reliable professionals.