An Important Announcement from the California Association of Mortgage Brokers

November 2, 2009

The August 26, 2009 Federal Reserve Proposed rule change could dramatically affect your business and business model.  Additionally, the Fed proposal will affect borrowers, possibly making it more expensive for homeowners with smaller loans to finance their mortgage.

What regulations does the proposal impact?
Federal Reserve Proposal includes many changes to Regulation Z.  In this email we will focus on compensation to mortgage brokers.

Why is the Fed trying to regulate compensation?
In response to excessive commissions paid to loan originators and brokers as a result of consumers being steered to loans with higher margins, higher interest rates, prepayment penalties, etc, the Federal Reserve has established this proposal to eliminate excessive commissions based on loan amount and the terms of the loan.

When could the rule be adopted or take effect?
Currently the proposal is in the congressionally mandated comment period that continues through December 24, 2009. The Federal Reserve can finalize and implement their rule anytime after the public comment period.

What you can do?
Pay close attention to communications from CAMB regarding this matter and communicate (in a professional manner) to the Federal Reserve during the comment period.

This email focuses on proposed changes to compensation for mortgage brokers:

The proposal seeks to eliminate the current ability of a broker to increase or decrease their lender paid compensation by increasing or decreasing a loan’s interest rate, changing the loan type or altering any other loan parameter.  For compensation purposes, rebate/YSP pricing would no longer be paid based on loan amount, interest rate, margin, pre-payment penalty or other terms associated with the terms of the loan.

Under the proposed rule, the lender can pay broker compensation through a flat fee instead of YSP/rebate, or the borrower can pay broker compensation through origination fees (up front points), but the two cannot be combined:

1.  A broker’s compensation (any fee not sent to a 3rd party) could be paid directly by the consumer in the form of broker origination (points), a charge to the borrower.  Funds generated through YSP could continue to be used to pay for the borrower’s third party fees (escrow, title, etc).  However, if (as in this example), broker compensation is paid by the borrower, no additional compensation can come from YSP.

OR

2.  A broker’s compensation could be paid by the lender in the form of a flat fee negotiated with the lender in a written contract. (For example, a flat fee commission could be set at $4,000 with the lender for all loans). The borrower would not be allowed to pay additional compensation (origination fee.)  The lender would afford to pay this by increasing the interest rate to compensate for the flat fee (similar to the concept of rebate pricing of higher yield (interest rate) results in a premium being paid for the loan).  The broker could not be paid more or less than set in the flat fee agreement with the lender.  If the rate was bumped past that required in the contract, any additional YSP funds generated could be used for 3rd party fees.

Examples:

Jane Doe, borrower, wants to refinance her home. John Smith broker offers the following options:

1. 5% 30 year fixed at a 1.25% origination fee (with no additional compensation paid by lender to broker). Borrower to pay all 3rd party fees.
2. 5.25% 30 year fixed with a 1.25% origination fee (with no additional compensation paid by lender to broker.)  The YSP generated by the extra .25% in rate would be used to pay some or all third party fees, with the borrower paying for those not covered.
3. 5.5% 30 year fixed at no points to the borrower, borrower to pay all third party fees.  John Smith, broker would be paid a flat fee by the lender for the loan based on the contract established between the lender and broker for all loans with flat fee option.
4. 5.75% 30 year fixed at no points to the borrower, borrower to use YSP to help pay some or all third party fees.  John Smith, broker would be paid a flat fee by the lender for the loan based on the contract established between the lender and broker for all loans with flat fee option. The additional funds generated through YSP (the increased .25% in rate) would be used to pay some or all of the 3rd party fees.

It is important to note, based on secondary market pricing, the increase to the interest rate will be different based on the loan amount.  If borrower Jane Doe borrows $500,000, the increase in rate to cover the $4,000 flat fee could be much less than .5% used in this example.  Similarly, if borrower Jane Doe borrows only $100,000, the increase in interest rate to pay for the flat fee could be much more than .5% resulting in the smaller loan costing the consumer a much greater interest rate.

There is much more to be said regarding this part of the proposed rule and other sections. This email is intended to highlight, as simply as possible, some of the changes related to compensation of mortgage brokers. Please watch for upcoming emails to further explain this rule to our members.

In times like these being a CAMB member is always important; having accurate and timely information can help you comply with changes to the laws and effectively plan for your continued success.

If you would like more information about this issue or about CAMB’s government affairs efforts, please contact the CAMB Government Affairs team at (916) 448-8236 or at governmentaffairs@cambweb.org.