MORTGAGE LOAN COMPLIANCE®

At first read, the proposed Truth in Lending Act rule appears to ban yield-spread premiums, which are a form of broker compensation that can be increased by pushing up the interest rate. American Bankers Association senior regulatory counsel Rod Alba points out that the Fed is prohibiting compensation based on the terms and conditions of the loan transaction.

The Federal Reserve Board is pushing the mortgage industry toward paying originators a flat fee under a proposed rule but lenders can continue to compensate loan officers and brokers based on the interest rate, according to regulatory experts.

"The proposed rule does not appear to ban the practice of compensating the mortgage broker through the interest rate. But it does intend to put limits on the more abusive uses of yield-spread premiums," Mr. Alba said. As proposed, lenders can pay a broker one point, for example, but not a range of one point to two points where brokers have the discretion to increase the mortgage rate and their compensation.

In addition, a lender cannot increase a LO or broker's compensation for "steering" borrowers into loans with adjustable rates or prepayment penalties. The Fed also is seeking public comment on allowing lenders to compensate LOs and brokers based on the principal amount of the mortgage.

The Fed notes that compensation based on the loan amount is a "common practice today."

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Mortgage Loan Compliance®

www.ml-compliance.com