As soon as we recover from the Real Estate Settlement Procedures Act (RESPA), the Federal Reserve Board (FRB) has substantially amended Regulation Z (the Truth-in-Lending Act) governing mortgage loan originator (MLO) compensation for new submissions effective April 1, 2011.
Needless to say, the Board’s leapfrog over pending regulations to implement the Dodd–Frank Wall Street Reform and Consumer Protection Act has generated a lot of negative press. Misinterpretation and misunderstanding of the rule’s effect on the payment of yield spread premiums (YSPs) and broker compensation have sounded alarm bells throughout the industry, and the question, “What are you doing for the New Year” sparks endless discussion among mortgage lenders.
Do you see what I see?
If the truth be told, the FRB’s rule entrenches the mortgage broker as a viable origination source—ending a 12-month death watch for the broker community and YSP—by eliminating the controversy over lender-paid compensation. Further, the mortgage brokers see before them the flexibility to decide how they will be fairly compensated for the valuable services they perform.
Responding to Congressional pressure to protect the borrower from unfair or abusive compensation practices, the FRB’s rule disallows steering borrowers to loans that are not in their favor in the form of compensation incentives based on loan parameters that result in higher costs to the borrower. To that end, the banks’ will no longer have the advantage of paying a hidden YSP to its originators. This means that you, as a mortgage broker, can compete fairly with the banks for your origination services!
Some of the relevant provisions of the FRB’s rule include:
►MLOs will not be allowed to receive compensation from both the borrower and the lender.
►MLO compensation based on the loans interest rate or other terms of the loan—other than the loan amount—is prohibited.
►The FRB’s rule does not set caps on the amount of compensation that a MLO may receive.
►MLOs will have the flexibility to negotiate origination fees directly with their borrowers or elect to be paid by the lender at their discretion.
►Compensation may be based on a percentage of the loan amount.
►Lender-paid compensation must meet fixed, predetermined requirements.
O come all ye brokers
At PRMG, we believe the FRB’s final rule ultimately levels the playing field for mortgage brokers, stimulating favorable competition with banks, credit unions and retail lenders, all of us faced with the same compensation barricade. Essentially, no one will be able to hide the payment of YSP from the borrower. Again, these are GOOD TIDINGS for the mortgage broker!
Over the last year, PRMG has stood behind—and will remain committed to—our brokers and the wholesale business channel we all serve. We know the broker community plays a vital role in the mortgage lending industry. Mortgage brokers bring competition to the marketplace and offer a broader range of choices to borrowers.
Going forward into 2011, PRMG continues its pledge to invest in the wholesale arena with new product offerings, continued education through PRMG Campus, and program enhancements to better serve you and your customers. Together, we have the opportunity to work and sustain the wholesale business channel and ultimately provide the American dream of homeownership to our customers.
Paul Rozo is chief executive officer and president of Paramount Residential Mortgage Group (PRMG). For more information, visit www.prmg.net.