REAL Exclusive Magazine

New Laws Governing Mortgage Originators

By Budd Moore

New lending laws regulate originator compensation and help protect the borrower’s “best interest.”

April brings Tax Day and this year it also brings new laws to govern mortgage originators. The new lending laws, effective April 1st, have leveled the playing field for all originators, including banks, mortgage companies, and mortgage brokers. While most of the larger banks adopted these new rules over a year ago smaller lenders and brokers have waited until April 1, 2011 to adjust their practices and adopt the new laws.

Under the new regulations, 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 consumer’s loan costs, such as by increasing the interest rate or points.” They will however be able to receive compensation based on a percentage of the overall loan amount, which is common practice.

The new rules protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.

The new rules apply to all persons who originate loans, including mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.

The new rules, which apply to closed-end loans secured by a consumer’s dwelling, will:

• Prohibit payments to the loan originator that are based on the loan’s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted.
• Prohibit a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.
• Prohibit a mortgage broker or loan officer from “steering” a consumer to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation.

Provide a safe harbor to facilitate compliance with the anti-steering rule. The safe harbor is met if:

• The consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and
• The loan options presented to the consumer include the following:

1. The lowest interest rate for which the consumer qualifies;
2. The lowest points and origination fees, and
3. The lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.

While there are many changes and new rules to address I have included an example that explains them in an easy to read view.

A loan amount of $300,000.00 with an interest rate of 5% vs. 5.25%

Old Scenario:
Interest Rate 5%                                                       Interest Rate  5.25%
Loan Officers Commission is = $1,500.00    Loan Officers Commission is = $2,500.00
Borrowers closing cost credit = zero               Borrowers closing cost credit = zero

New Scenario:
Interest Rate 5%                                                       Interest Rate  5.25%
Loan Officers Commission is = $1,500.00   Loan Officers Commission is = $1,500.00
Borrowers closing cost credit = zero              Borrowers closing cost credit = $1,000.00

Basically, under the new rules any excess “overage” or “service release premium” should be credited back to the borrower as a closing cost credit.  It should not be going to the loan officer as extra commission. These new laws should help the consumer understand the mortgage process easier and should regulate the way mortgage originators are compensated on a whole.

Budd Moore is the Market Manger for Bank of America Home Loans covering Manatee, Sarasota, and Charlotte Counties. He is a lifelong Sarasota resident with over 20 years of experience in Mortgage lending. He has a B.A. degree from University of Florida and was a member of Florida Blue Key. Budd is a past president of the Gulf Coast Mortgage Bankers Association and is currently a board member with Mote Marine Laboratories and the Riverview High School Foundation. Budd may be reached at (941) 952.2888 or budd.moore@bankofamerica.com.

Budd Moore NMLS ID # 432212

Copyright © 2011 REAL Magazine

Links to this article are encouraged