home for sale - new mortgage broker lawYou get what you pay for, or so the saying goes. But consumer advocates have long bemoaned that the opposite is true in the world of mortgages.

Consumers choose between getting their loans through a mortgage broker, who can shop around with lots of lenders, or directly from the lenders themselves. The two options have historically had a long list of trade-offs in terms of customer service, speed and the number of programs each has to offer.Unfortunately, some borrowers who thought they were paying for a mortgage broker to find them the best loan and lowest rate were unaware that the middle man (or woman) was also being paid another, often larger fee from the lender called the Yield Spread Premium (YSP). And the higher the rate and more onerous the loan terms were for the borrower, the higher that YSP would be. Can you say "backwards?"

On April 1, a tweak to Regulation Z (the Loan Originator Compensation and Steering Amendment to the Regulation Z, better known as the Truth in Lending Act) will kick in, with the intention to eliminate this nonsensical state of affairs and prevent brokers from nudging borrowers into loans with excessive rates, penalties or risk. Approved by Congress in 2008, but just taking effect this spring, the amendment will impose new guidelines on how brokers can get paid for originating home loans, on behalf of buyers and refinancing homeowners:
  • Brokerages can still be paid by lenders, but the rate of pay must now be based solely on the loan amount; it can't be tied to the interest rate or other loan terms,
  • Brokerages have to pay their brokers an hourly rate or salary in most cases. They can't simply pass the commission on each loan on to the individual brokers, and most importantly ...
  • Brokerages can no longer take payment on the same loan from both borrowers and lenders; if they take a fee from the lender, the borrower can't be charged a loan origination fee.
Under the new amendment to Regulation Z, many borrowers will save the origination fees they have paid for loans in the past. However, the rule will hurt mortgage brokerages, big time.

In fact, National Association of Mortgage Brokers director Mike Anderson told the New York Times that the change will "likely put a lot of independent mortgage brokers out of business."

Also, the incentives lenders have traditionally paid for brokers to work on time-consuming loans at low price points will disappear. Those borrowers will be limited to working directly with lenders to get mortgages, and that may impact the timeliness with which their loans are originated and the service level they receive. In bank-owned property sales transactions where first-time buyers relying on slow bank loans are often up against all-cash investors, the amendment will undoubtedly render novices even less competitive than they already are.

Additionally, like so many mortgages, this law has a lot of caveats. It doesn't apply to bank lending money directly to consumers at all, nor to mortgage brokerages that lend their own money out to make home loans they later sell. And while consumers won't have to pay origination fees (which run about 1% to 2.5% of the loan amount, on average) on brokered transactions where the broker is taking a fee from the lender, they will still have to pay fees to other service providers, like those for escrow services, title insurance and property appraisals.

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