April 1st was indeed a whirlwind day. Job reports announced an improving economy- which led to increased interest rates on mortgages. April 1st is also the day a new rule for mortgages was implemented.
The Federal Reserve Board recently employed a new rule in an attempt to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. This rule went into effect on April 1st.
These new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers.
In the world of mortgages, lenders commonly pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender. This means a mortgage broker/banker is making more money off a buyer’s mortgage package.
Under the recent rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. 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. Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.
In addition, this new rule also prohibits a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. In other words, they cannot be paid by both the bank and mortgagee.
In consumer testing, the Board found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect their total loan cost. The new rule seeks to ensure that consumers who agree to pay the mortgage broker directly do not also pay the broker indirectly through a higher interest rate, thereby paying more in total compensation than they realize.
Additionally, loan originators are prohibited 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 is supposed to 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.
How will this affect real estate?
Buyers looking to obtain a mortgage should have a simpler time understanding the costs associated with the loan they choose- by having a clearer picture of what the broker will be getting paid, and from whom. Many brokers will need to be more creative with their packages and interest rates to attract mortgagees.
But only time will tell.