New regulations from the Federal Reserve to restrict loan originators compensation will likely lower rates and fees for borrowers according to a report from Moody’s. The regulations, which go into effect on April 1st, 2011, prohibit double-charging for origination fees and steering borrowers to less-than-optimal mortgage products in return for higher compensation.
“We expect rates to be lower as a result of the elimination of commercially motivated overcharges, ” Moody’s says. “Lower rates should result in lower payments, which would translate, all else being equal, into lower defaults, a credit positive.”
Additionally, the new rules no longer permit mortgage brokers or loan officers to charge both the borrower and the lender an origination fee for the same loan, and as a result, some borrowers’ monthly payments will include fewer add-ons in the form of amortized points and fees.
Moody’s believes the changes will result in competitive market segments where lenders pay the origination fees in the form of commissions rather than having them paid by borrowers in the form of points and fees. However, the report says that in less competitive segments, the broker or salesperson might still opt to charge the borrower directly through points and fees rather than charge the lender, resulting in these borrowers not necessarily benefitting from the new rule.
“From a lender’s or investor’s perspective, the fact that the borrower bears the cost of the origination fee suggests a riskier profile, which is additional valuable information that the loan file may not otherwise reflect.”
Moody’s remains uncertain about the consequences for securitized loans originated after the effective date that fail to comply with the new rule.
“We are in the process of evaluating the legal implications of non-compliance to determine if any penalties associated with non-compliance could eventually result in a loss to the securitization trust.”