This article reviews the changes made to mortgage loan broker (MLB) compensation by the Dodd-Frank Wall Street Reform and Borrower Protection Act.
Mortgage loan brokers (MLBs) were dealt another heavy blow in July 2010 by the Dodd-Frank Wall Street Reform and Borrower Protection Act. Among the various new consumer protection regulations, the legislation has redefined the roles of MLBs and, most importantly, the basis for the income they receive.
It was common practice for lenders to compensate MLBs when a homebuyer accepted a mortgage at a higher rate than the yield rate at which the lender “bought” the loan, called the par rate. This basis of earnings for MLBs, called a yield spread premium, is now prohibited.
Mortgage loan brokers have in the past generated income from borrowers and lenders through various avenues in connection with loan transactions, including:
- referral fees;
- loan origination fees;
- points, discounts and processing fees;
- yield spread premiums;
- administrative fees; and
- commissions based on principal.
MLB income from these sources was rarely disclosed or made known to the buyer. Agency duties owed to the buyer by most all MLBs when arranging a loan create disclosure conflicts for them under California agency law regarding their earnings and benefits for arranging the loan. Further, the income received by the MLB for arranging a loan is a direct result of the homebuyers paying more for their loan than they would otherwise pay if the MLB were not involved.
The new Truth in Lending Act (TILA) legislation has targeted these secret fees, and now requires full disclosure to homebuyers of all fees received by MLBs arranging a loan in a sales or refinance transaction.
The purpose of a mortgage loan broker
An MLB’s role is that of an intermediary between a borrower and a lender. The MLB is considered the agent of the borrower. Individuals becoming homebuyers are not naturally prone to shop for a loan, mainly because they do not know the details of what they are shopping for, other than the loan amount needed to close escrow on a home purchase. As the mortgage market becomes increasingly competitive in the coming recovery, the expertise of an MLB will become useful to homebuyers looking for the best rates and charges.
The traditional relationship between a borrower and a lender is competitive — adversarial in law. Homebuyers looking to finance the purchase of their home with the help of the bank are often ill-equipped to cope with such a tedious, multifaceted task. Most borrowers lack the experience needed to discover what the lender knows about the loan sought and then make an informed, educated decision that will either make or break their financial health for decades to come.
However, the purpose of engaging an MLB as an intermediary breaks down when the MLB receives compensation for helping the lender charge the borrower a higher interest rate, more fees or both. This will not legally happen in the future.
Is a yield spread premium a kickback or bona fide compensation?
MLBs began asserting influence in the real estate market during the late 1980s, which brought yield spread premiums to the forefront of consumer protection legislation efforts through the 1990s.
The Department of Housing and Urban Development (HUD) proposed an amendment to regulations in 1992 that would have required any fee received by an MLB from a lender or borrower, including yield spread premiums, to be disclosed on the HUD-1 Settlement Statement.
However, HUD, under political pressure from lenders who relied on broker- and agent-generated mortgage borrowers, chose instead to leave the legitimacy of yield spread premiums up to interpretation. The controversy surrounded the prohibition of kickbacks and referral fees in the Real Estate Settlement Procedures Act (RESPA), with the exception of bona fide compensation.
Consumer protection advocates argued a yield spread premium qualified as a righteous kickback — an indirect financial reward given out by lenders as incentive to bring them business. MLBs contended they received a yield spread premium as bona fide compensation related to the market value of the service they provided.
The Dodd-Frank Wall Street Reform and Borrower Protection Act, effective in 2012, finally clarifies what RESPA and TILA have hinted at for decades — a yield spread premium is a kickback; and kickbacks are prohibited as unlawful conduct by all involved.
If anybody thinks this legistlation is helping the consumer is a fool. They just limit the consumer’s options. Let’s face it, brokers will NOT work for FREE. They will leave the business before they do that. But the consumers need them because they provide a valuable service. Go try to get a loan from BOA, then you know what I mean.
We always disclosed YSPs, on the GFE, California MLDS, and on the estimated HUD-1 and on the final HUD1. If any anybody claims YSP is a kickback, knows nothing and full of BS.
They did the same thing for the appraisals, thinking they will benefit the consumer or lender, but it is not because it reduced the number of comanies and it is becomeing almost like a monopoly. You have to work with one of the larger companies to get business. If anybody disagrees with me or have diffrerent feeling, please share.
These legistlations should be repealed to benefit the consumer. But is anybody listening? Simple GFE form became 3 page non-sense. When clients are looking at it, they are even more confused now then ever. It shows you how smart our legistlators are. They should have beta test the GFE before they made it into law.
Now it is even worse. Everybody is trying to over disclose so they are not stuck. It is still not accurate.
In my opinion,YSP should come back
Brokers should not give GFEs because it is non-sense.
Once the loan is locked, the lender or the escrow should send GFE or estimated HUD to the Buyer within 48 hours for Buyer to sign to accept the lock and clsoing expenses. Because by then you more or less know more about the accurate fees and expenses.
Appraisals should still compete for business.
Every file should have certain percent tolarance between appraisers opinion and automated evaluation.
Yes, there were and possible still are some bad people in our industry who not ethical and have no mercy. But this is not the way to deal with them.
Anyways, I was in starbucks and wanted to share my feelings with you guys.
Cheers.
As a prior underwriter and a long term Mortgage Loan Originator in California, I have always disclosed upfront all fees that will show on a closing statement. The fact that they now call it something else ‘credit for rate chosen’ makes no difference to me. Here is what I charge or make and here is what you pay – including the interest to payoff your current loan. This occurred because of all the ‘bad’ loan agents pretending those YSP were not really going to them. I still think what we do as loan originators can be much harder than a realtor (Which in CA I have to be licensed for) yet they make up to 3 times as much money. What about them? I like the flat fees also!
Who ever wrote this crap does not know a thing about how mortgage brokers work or get paid or how the new GFE works. What a biased bunch of bull this is. Please call me to get yourself educated on the issues.
This is worse than FOX so-called news. I am disappointed in 1st Tuesday for not fact checking this before publishing.
925-983-3023
yield spread premiums have also been based on the rate chosen. How could that be considered a kick back? It gives borrowers options such as not paying any fees, partial fees or full fees. I personally, with rates being what they are now, probably do more no-cost loans than any other type of pricing. It makes no sense, whatsoever, to completely eliminate borrower choises.
This new set of laws squashes competition amongst mortgage brokers and banks. To only charge a fee based on the loan amount is a silly and overly simplistic way of looking at the business, loan amount is not the only factor to consider. How much work does the loan take to close, should be the main factor in pricing a loan. And what about giving the borrower choices, which is what I have always done. I give borrowers the option, pay points up front or not. Let the bank pay me, or you pay me. I’ve always given options, YSP has to be disclosed now and in the last few years, and it’s not a kickback to choose one lender over another, if everyone is offering it as a way you can be compensated for originating loans. These new TIL laws will limit the options borrowers have to close loans, in different ways, that can better suit their situation.
RESPA changes which became effective January 1, 2010 made YSP obsolete new RESPA law requires the credit of YSP to the borrower. If the broker wanted to make money they had to charge points which then the credit covered.
In addition as a long time mortgage lender the YSP has always been disclosed on the HUD and the lenders instructions to a loan. In California the Mortgage Loan Disclosure Statement also required the disclosure for many years now. To say it was undisclosed and a kickback is simply wrong.