lender as a reward for steering you to a higher-rate loan?
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This practice causes several problems for the consumer. One problem is that the mortgage broker has no incentive to find the best deal for his or her client. Instead, the broker can look for the mortgage lender that offers the best referral fee. Another problem is the impact the higher interest rate has on the mortgage payments over the life of the loan. The consumer will pay thousands of extra dollars in the end simply because of a small increase in the interest rate. Finally, since the fees are not explicitly described in the mortgage documents, the consumer has no way of knowing that the broker was not representing his or her best interests.
Yield spread premiums are not necessary to support the business of mortgage brokers. Indeed, many loans from many brokers do not include yield spread premiums. They benefit neither borrowers nor lenders, but only the brokers. When yield spread premiums are paid in addition to the borrower paid broker fee, the result is not only a higher price loan to the borrower, the lender then also has a loan which will be refinanced sooner. Note that the mortgage lenders are not requesting this moratorium, just the brokers. Lenders do not benefit from yield spread premiums either.
Congress passed RESPA to prohibit unearned fees to keep loans secured by homes from being more expensive than necessary. Yield spread premiums are kickbacks generally paid to brokers without providing any benefit to the consumers who are ultimately paying for them in the higher price of their home loans. The federal courts are in the process of determining whether lender paid broker fees, when combined with borrower paid broker fees, violates RESPA's prohibition against unearned fees. Let the courts do their job.
4. The new disclosure should not include actual originator compensation, but note how and when compensation is paid, with actual estimated compensation disclosed on the Good Faith Estimate along with all other origination fees and closing costs.
It is very useful for a borrower to be informed at the earliest possible time that there are different options available for paying the originator's compensation and how these options affect the interest rate on the loan, the borrower's monthly payment, and the cash required to close. While NAMB believes that most responsible mortgage originators already provide this advice to their customers early in the process in order to help them choose loans that meet their objectives, it would be desirable to require this of all originators so that all consumers get the right information that is comparable across originators.
Originators should not be required to disclose their compensation. Because so many factors go into pricing an individual mortgage and determining the cost of originating a loan, even in the conforming market, it is virtually impossible for an originator to know the amount it must charge to arrange a loan at the time the application is taken. ****The borrower may choose to float the interest rate, so that compensation based on the interest rate would not be known until the rate is locked.**** The loan program may not be known until after the application is taken, the borrower's credit history and income are examined, and the property is reviewed. Once this information is known, the originator can often work with the borrower to improve his or her credit rating and qualify for a more favorable loan program that offers different compensation to the originator. Therefore it is not appropriate to require an early disclosure of the originator's compensation.
In addition to being impractical, disclosing the actual compensation of an originator at or before application would not help consumers in shopping. Other settlement costs would still not be known by the borrower until the Good Faith Estimate is delivered. This could mislead a borrower, for example, into choosing an originator whose origination fee appears lower, and paying a large non-refundable application fee to that originator, only to discover three days later that the closing costs for the loan offered by that originator are far higher than those offered by the other originators.
This is why the regime established in RESPA in 1974 for a Good Faith Estimate disclosure of all settlement costs still makes sense today. It does not make sense to require disclosure earlier than the GFE of only one of many settlement costs, especially when it is so impractical for brokers, lenders and originators to determine up front their exact compensation on the loan.
It appears from recent court decisions that mortgage brokers may have unfairly and unlawfully been closing homeowner's loans at inflated interest rates merely to secretly increase their fees in the form of yield spread premium payments