YIELD SPREAD PREMIUM: YSP, that little understood compensation provision that provided the ultimate incentive to mortgage brokers to put consumers into higher priced mortgage loans. Brokers argued that it was frequently done for the borrower, especially a low-income buyer, to pay a higher interest rate in exchange for lower closing costs (needing less cash to closing). Did we really need more gas on the fire??
NOT A PREDATORY LENDING PRACTICE: The California Court of Appeals found that the payment of YSP was not a predatory lending practice in Wolski vs. Fremont Investment & Loan (where I was Deputy General Counsel). In its determination, the court found that a covered loan under the California Covered Loan Law had to have total points and fees payable by the consumer at or before closing in exceed 6 percent of the total loan amount. The court explained that Yield Spread Premium (i) was a bonus paid by a lender to a broker for delivering a loan with an interest higher than minimum otherwise approved by the lender, and (ii) that the payment was not made at or before the closing. The appellate court reasoned that the meaning of the phrase "at or before closing" was unambiguous and "does not include payments made after closing and over the life of the loan, such as interest." So, the court reasoned that the added interest over the life of the loan to be paid by the borrower to the lender was to be used by the lender to pay the mortgage broker a bonus at the time of the closing of the loan.
THE NEW RULE: Now, the Federal Reserve has stepped in to end this practice as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) by adopting new rules banning yield spread premiums. Provisions of the Reform Act amend the Truth in Lending Act (“TILA”) by imposing restrictions on loan originator compensation and on steering by loan originators. The final rules issued by the Fed on Monday prohibit payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended. The final rules further prohibit any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly. The finalized rules also prohibit loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.
START DATE: The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011. This allows for a bit of continuation of the YSP practice as the economy works through this “refi” bubble now going on. There is also a record retention requirement of two years for all mortgage transactions consummated following the April 2011 start date.
WHO IS COVERED: The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans (e.g., loan officers). Therefore, only parties who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain are covered by the new rules. Creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non-depository mortgage company. However, employees of such entities are loan originators.
As a little caveat, the final rule only applies to extensions of consumer credit and does not cover servicer modifications on an existing loans on behalf of the current owner of the loan. This final rule does not apply if a modification of an existing obligation’s terms does not constitute a refinancing. A question though outstanding is, while HAMP may not be covered, is HARP covered by these new rules?
THE KEY PROVISION OF THE ANTI-STEERING RULE:
(e) . . .
(3) . . .
(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and
(C) The loan with the lowest total dollar amount for origination points or fees and discount points.
(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.
THE FUTURE: There are still some holes in the Reg. Z that need to be patched, as acknowledged by the Fed. One of the more significant is the ability of brokers to be compensated based upon volume. Naturally, this could lead to the “flight to quantity over quality” that was seen in the past. Also, since the allowable compensation will be based upon the amount of credit extended, given the underwater equity positions, if and when underwriting requirements start to loosen, returning to a 125 LTV product (or its successor) may challenge the new rules once again. And while “tier compensation” has been addressed in the new rules, under the final rule, a consumer may finance upfront costs, such as third-party settlement costs, by increasing or “buying up” the interest rate regardless of whether the consumer pays the loan originator directly or the creditor pays the loan originator’s compensation. Thus, the final rule does not prohibit creditors or loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction’s terms or conditions. This could also lead to abuses.
So, in the end, the Fed has created another level of regulatory hoops in the mortgage business. And like with all of these new regulations, it is going to be the enforcement that will actually bring about change. So, will Congress let this dog to hunt by giving government enforcement teeth? Or will it just turn out to be posturing for another four years of administrative quagmire?
No comments:
Post a Comment