Small banks and credit unions that rely on table funding to originate mortgages will be treated just like "mortgage brokers" under the new compensation rule issued by the Federal Reserve Board.
The final Truth in Lending Act rule imposes restrictions on loan officer and mortgage broker compensation to prevent unfair practices, such as steering of borrowers into higher-priced loans.
The rule explicitly prohibits payments to these mortgage originators based on the terms of the loan, such as interest rates or prepayment penalties.
The Fed allows compensation based on the loan amount, which means lenders can pay a 2% commission, for example, to originators based on the amount of the loan.
The compensation restrictions apply to loan officers of banks, individual mortgage brokers, 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.
The Fed recognizes that the rule will impact small banks and credit unions and will increase their costs if they stop using table funding, and fund their loans through deposits or warehouse lines of credit.
But the board says the compensation restrictions must apply to all brokerage entities to prevent evasion of the rule. The consumer protection benefits "outweigh the associated compliance costs," the Fed says.
The final TILA rule goes into effect April 1, 2011.
