The Federal Reserve Board published a final rule that prohibits mortgage originators from receiving compensation based on the interest rate or other loan terms on Monday. The rule is meant to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.
”This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points,” said the Fed in a statement. “Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.”
Loan originators are also prohibited from receiving compensation directly from both the consumer and the lender or another party. During consumer testing, the Fed found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer’s total loan cost. The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.
Additionally, the final rule prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation. The rule will preserve consumer choice by ensuring that consumers can choose from loan options that include the loan with the lowest rate and the loan with the least amount of points and origination fees, rather than the loans that maximize the originator’s compensation.
The new rules apply to reverse mortgage mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders. According to the Fed, the final rules are effective April 1, 2011, to provide lenders and originators time to develop new business models, implement necessary changes to their systems, and train personnel.