NY Times: Fed Rule Likely Puts Mortgage Brokers at Disadvantage

The New York Times is reporting that the new compensation rules from the Federal Reserve will require that brokers offer the lowest possible interest rate and fees for which they qualify.

The new rule, which goes into place on April 1, is known as the Loan Originator Compensation amendment to Regulation Z, part of a strengthened Truth in Lending Act passed by Congress in 2008.  Designed to prevent consumers from being steered into high-cost, risky loans, it covers how a loan originator — or any person or company that arranges, obtains and/or negotiates a mortgage for a client — is paid.

Thomas Martin, the president of America’s Watchdog, told the NY Times, the yield spread premiums that brokers were previously paid “a rip-off” and said the Fed rule was “very welcome.”  Brokers don’t agree.

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Mark Yecies, an owner of SunQuest Funding, a mortgage broker and lender in Cranford, N.J., told the Times, “it unfairly makes these brokers less competitive” against the big banks.”  He added that “bigger banks will capture a bigger percentage of the origination market, and they will raise rates.”

Mike Anderson, a director at the National Association of Mortgage Brokers, said that the rule would “likely put a lot of independent brokers out of business.”

New Fed Rule for Mortgage Brokers

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  • This comment is neither a defense nor a criticism of Dodd-Frank or the Fed. It is simply a presentation of fiduciary standards being applied to the mortgage industry.

    Many California brokers are complaining about this new rule even on RMD. But under California law, brokers and many mortgage bankers are already subject to fiduciary standards. They must work for the best interests of their customers even if that is to their own financial detriment. The same is true in Minnesota.

    The trouble in California is not with YSP. It is providing a higher cost mortgage to any borrower when a lower cost mortgage is available despite the issue of broker YSP. Thus if a broker can make 1.5% on the back end of a 2.25% adjustable rate HECM Standard and 2% on back end of a 2.5% adjustable rate HECM Standard, all other things being reasonably equal, the California broker must only present the 2.25% margin HECM even if the borrower is willing to take the 2.5% margin HECM.

    I do not believe the requirements of the fiduciary standard under California law since 1/1/2010 have fully sunk in. Fortunately since it is covered in the NLMS exams, California brokers are without excuse.

    The Fed rule is an application of fiduciary standards as reflected in the Dodd-Frank Act. While Mr. Smaldone and others may want this act repealed, it is highly unlikely to occur. It is considered one of the major accomplishments of the 111th Congress by the then dominant party in Congress as well as the Obama Administration. As long as the Senate has a Democratic majority there is no chance that a repeal will survive any vote in the Senate.

  • The April 1 ruling allows direct lenders to receive significantly more revenue than a brokerage company on an identical transaction, which results in an unfair advantage. Thousands of small businesses across America will close as a result of it. These businesses served a public need.

    • Lance,

      While doing little more than implementing Dodd-Frank, the law and the rule seem to be forcing lenders to keep more profits and not sharing them with brokers. Somehow that is believed to force brokers to act in a more fiduciary manner.

      Here is what is not apparent. Lenders can decide to limit brokers to any interest rates they choose. It seems the problem lies more at the lender level than the broker level.

      The rule seems aimed at destroying confusion in the lending process not terminating a clear potential for steering. It is almost as if Congress and the Fed are saying brokers are the problem for steering seniors to higher interest rate products where YSP is greater. It is as if their eyes were and are closed to the fact higher interest rates also increase lenders profits.

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