New Mandated Loan Options

The Federal Reserve Board amended the Truth in Lending Act, Regulation Z that is geared prohibiting three main areas of loan office compensation. The new rules which become effective April 1^st is the latest in a long line of regulations that have changed the face of residential mortgage lending over the past several years. The rules, affecting all loan originators, who for compensation, obtains an extension of consumer credit for another person outlaw certain practices. They include basing loan officer compensation on certain terms or conditions except loan amount, being compensated both by the lender and the client for the same transaction, and steering based on the loan officers ability to obtain greater compensation. As a result of these rules, clients are now able to negotiate a pre-determined compensation for acquiring the applicable mortgage loan or agree the lender can compensate the loan originator a preset percentage of the loan that does not vary based on rate.  When shopping for loans, you may hear these options commonly known as “Consumer-paid” option or “Lender-paid” option. The intention of the new rules is simply to have the loan officer’s interests to be better in line with that of their client’s. Unfortunately, certain originators or originator firms had made a practice of directing clients to overall higher cost loans solely for the benefit of extra compensation

While the spirit of the news rules is well intended, the resulting changes will unlikely have a meaningful benefit for the consumer. Several regulations including the Home Valuation Code of Conduct, Mortgage Disclosure Information Act, and the new Good Faith Estimate have been rolled out in the last two years, all with the same goal of helping improve real estate lending practices. In actuality, the new rules have burdened clients with increased paperwork, extra costs, fewer options, and unending regulations from numerous local, state and federal guidelines. Well, what’s so wrong with these new rules? Many consumers have limited home equity which preclude them from benefiting with lower rates by financing the “Consumer-paid” cost option.  Such an option generally would allow a consumer to obtain the lowest rate available. On the “Lender-paid” option, consumers will have less of an ability to renegotiate for lower rates with their originator. When banks compensate the originator a fixed percentage of the loan amount that cannot be allowed to decrease, the originator also is unable to lower their compensation under any circumstances.  While consumers are allowed to increase their interest rate in exchange for a fixed percentage of the loan amount as credit for their closing costs, the broker is not allowed to do the same. The practice of crediting the borrower money from originator compensation at closing to pay for an appraisal,  provide a special incentive, or help client’s  when they are short funds for closing is strictly forbidden.

As with any new policy, there are always unanticipated consequences that must be dealt with. Consumers, along with the originators who help them obtain their needed mortgages will have to adjust to yet another change in the housing industry. Perhaps the results will be more favorable that the current outcome. More than likely this new policy will result in yet another rule that will inundate an already overwhelmed consumer understand how this helps their bottom line.