The Federal Reserve Board's compensation rule is expected to reduce the use of yield-spread premiums, but that doesn't seem to bother the mortgage brokers.
"The mortgage broker industry is only going be to stronger after this rule," said Roy DeLoach, chief executive of the National Association of Mortgage Brokers.
He noted the Fed's rule finally resolves the uncertainty surrounding lender payments to brokers.
The final Truth in Lending Act rule imposes restrictions on loan officer and mortgage broker compensation to prevent unfair practices, such as steering borrowers into higher-priced loans.
The rule prohibits payments to these mortgage originators based on the terms of the loan, such as interest rates or prepayment penalties.
"Creditor payments to brokers based on the interest rate give brokers an incentive to provide consumers loans with higher interest rates," the Fed says in the final rule and staff commentary.
The Fed explicitly permits compensation based on the loan amount, which means the wholesaler can pay a broker a 2% commission based on the amount of the loan.
Banks can adjust compensation so loan officers have an incentive to make small-balance loans. The Fed allows lenders to base compensation on loan volume. It also allows lenders to pay brokers more than loan officers.
The staff commentary provides examples of "permissible compensation."
The final rule also allows financing of the broker's fee in the interest rate or YSP, provided the broker does not receive any compensation directly from the consumer.
Going forward, the brokers won't be able to increase the mortgage rate, which increases their compensation through the YSP.
"The final rule does not prohibit creditors or loan originators from using the interest rate to cover upfront costs, as long any creditor-paid compensation retained by the originator does not vary based on the transaction's terms or condition," the Fed says.
In other words, the broker's fee must be established upfront and the fee cannot go up because of changes in the loan terms.
"The TILA rule clears up the controversy about the payment of indirect compensation to brokers," DeLoach said in an interview.
"I think more loan officers at banks and credit unions will become brokers," the NAMB CEO and chief lobbyist said.
"A consumer would be smart to go with a broker," he added. Mortgage brokers are licensed and monitored by state regulators.
In addition, they have to meet state education requirements and pass a competency test. Bank loan officers are exempt from these requirements.
The final TILA rule goes into effect April 1, 2011. The Federal Reserve Board proposed the compensation rule back in August 2009. Congress subsequently incorporated the Fed's compensation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
After Congress passed the Dodd-Frank bill in July, it was unclear whether the Fed would move ahead with the TILA rule or leave it to the new Consumer Financial Protection Bureau to complete.
The Dodd-Frank bill hands TILA rulemaking over to the CFPB. But the Fed decided to move ahead.
The Fed maintains the compensation rule is "consistent" with the provisions in the Dodd-Frank bill that the president signed on July 21.
"The board further believes that it can best effectuate the legislative purpose of the Reform Act by finalizing its proposal relating to loan origination compensation and steering at this time," the final rule says.
Once CFPB is up in running in six to 12 months, it would probably take another 12 months for the new agency to complete a rulemaking.
The Fed also noted in the final rule that the Dodd-Frank bill expanded some of the restrictions on compensation. And the Fed will address those provisions in a "subsequent rulemaking."
Meanwhile, small banks and credit unions that rely in table funding to originate mortgages will be treated just like "mortgage brokers" under the new TILA rule.
The compensation restrictions apply to loan officers of banks, individual mortgage brokers and mortgage brokerage companies, as well as "companies that close loans in their own names but use table funding from a third party," the Fed says.
