Fed proposes ban on payments for steering customers to higher-cost loans
Filed under: Borrowing, Home, Real Estate
In attempt to put on a more consumer-friendly face, the Federal Reserve proposes a ban on side payments to mortgage brokers that encourage them to steer customers to higher-cost mortgage loans.
Consumer groups have been fighting these payments, known as yield spread premiums, for years. It's these payments that likely helped to drive so many people to the subprime loans that caused much of the mortgage mess today.
Most people didn't even know that these payments were being made to brokers because disclosure in some cases was not required and in other cases not easily seen because they were hidden on closing documents.
The payments were never part of the closing costs that buyers or sellers paid. They were payments made on the side when a mortgage broker steered a person to a higher-cost loan.
The Fed likely is putting on this consumer-friendly face in a effort to kill the consumer financial protection agency being proposed by President Obama and Congress. They want to show that they too care about consumers.
The problem is that they've had the responsibility to protect consumers taking out mortgages since 1994 and didn't do anything to rein in abuses until 2008. By then the housing bubbled burst and many subprime loans were already in default.
In addition to killing the yield spread premium, the new rules will:
Changes will also be made to the disclosures for home equity loans to clearly spell out the risks of taking such loans.
Within three days of getting an application lenders must furnish consumers with tailored cost information that will enable them to shop for and compare mortgage deals. Right now equity line shoppers don't receive information about the APR or the credit amount of the loan until after the account is open, making it impossible for them to compare offers.
The Federal Reserve will take public comments on this proposal for 120 days before the rules are finalized. Let's hope they stick to their guns and don't cave in to what will likely be negative comments from brokers on the yield spread premium ban.
Lita Epstein has written 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."
Consumer groups have been fighting these payments, known as yield spread premiums, for years. It's these payments that likely helped to drive so many people to the subprime loans that caused much of the mortgage mess today.
Most people didn't even know that these payments were being made to brokers because disclosure in some cases was not required and in other cases not easily seen because they were hidden on closing documents.
The payments were never part of the closing costs that buyers or sellers paid. They were payments made on the side when a mortgage broker steered a person to a higher-cost loan.
The Fed likely is putting on this consumer-friendly face in a effort to kill the consumer financial protection agency being proposed by President Obama and Congress. They want to show that they too care about consumers.
The problem is that they've had the responsibility to protect consumers taking out mortgages since 1994 and didn't do anything to rein in abuses until 2008. By then the housing bubbled burst and many subprime loans were already in default.
In addition to killing the yield spread premium, the new rules will:
- Require more streamlined cost disclosures to people after they apply for a mortgage.
- Require a one-page document warning about risky loan features, such as negative amortization and balloon payments.
- Require clearer information about how payments may change with an ARM.
- Require more disclosure about the routine costs associated with a mortgage.
Changes will also be made to the disclosures for home equity loans to clearly spell out the risks of taking such loans.
Within three days of getting an application lenders must furnish consumers with tailored cost information that will enable them to shop for and compare mortgage deals. Right now equity line shoppers don't receive information about the APR or the credit amount of the loan until after the account is open, making it impossible for them to compare offers.
The Federal Reserve will take public comments on this proposal for 120 days before the rules are finalized. Let's hope they stick to their guns and don't cave in to what will likely be negative comments from brokers on the yield spread premium ban.
Lita Epstein has written 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."
Reader Comments (Page 1 of 1)
7-24-2009 @ 7:25PM
john said...
Without the yield spread premium, the upfront costs of getting a mortgage will increase significantly. It will add 1 or 2 points to the cost of getting a mortgage. On a 100,000 mortgage, it will add 1,000 to 2,000 in upfront costs.
It will decrease choice for the consumer, and will keep some consumers from being able to qualify for a mortgage. The feds proposal sounds good, but it is not good for the consumer.
I could sell you a baseball for 5 dollars. However if you did not have 5 dollars, but only had 3 dollars. but the baseball wholesaler would pay me 2 dollars to sell it to you, would you mind?
I have helped hundreds of people get buy and refinance homes. I have NEVER steered anyone to a subprime mortgage because I was paid more to do so. Everyone knew how to shop for a mortgage. They would compare the rate and costs.
If my rate and costs were lower than a different lender's rate and costs, then I was less expensive. End of story !!!
By the way, banks have a yield spread premium too. They call it a servce release premium. It functions the same way. However the difference is that the banks don't have to disclose it !! They never have and they still don't ! I have worked at banks and as a mortgage broker. The bottom line is that the consumer will be hurt by this proposal.
Regarding sub prime loans. They are gone anyway. The markeplace eliminated them. That's too bad because they did serve a purpose.
Were there bad apples providing mortgages? Yes. However licensing laws have been put into place to remove the bad apples.
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7-25-2009 @ 8:46AM
Elliott said...
I agree the baby need not be thrown out with the dirty bath water.Are big banks behind this idea?
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