Changes To Mortgage Originators Compensation Ahead

Radical changes in loan officer pay practices laid out by the Federal Reserve Board in late August mean that major alterations in how the industry works could be around the corner.

“Yield-spread premiums [YSPs create a conflict of interest between the loan originator and consumer,” the Fed states in its rule proposal. A 120-day public comment period is slated to end Dec. 25, 2009.

In its 195-page rule rewrite, the Fed asserts that consumers don’t know what they’re paying loan originators, and as a result they are often being taken advantage of. “Creditors’ payments to mortgage brokers are not transparent to consumers and are potentially unfair to them,” adds the Fed.

Payments from lenders to brokers often include a YSP, which results in a higher rate for the borrower. “Yield-spread premiums … present a significant risk of economic injury to consumers,” notes the Fed in its rule proposal. “Currently, consumers typically are not aware of the practice or do not understand its implications and can't effectively negotiate its use.”

The Fed adds, “The Board’s recent consumer testing suggests that many consumers do not shop for mortgages and often rely on one broker or lender because of their trust in the relationship.” By not shopping a consumer may not get a competetive rate, according to the Fed.
Under the proposal, consumers still could choose a higher rate loan if they want to finance closing costs. However, the Fed rule would “prohibit any person from basing a loan originator’s compensation on the loan’s rate or terms.”

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