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The Barney Frank-sponsored The Mortgage Reform and Anti-Predatory Lending Act of 2007 that would surely put a major dent in mortgage broker-originated lending passed the House of Representatives Financial Services Committee yesterday by a vote of 45 to 19. The bill now moves on to the House floor where it will be debated and voted on by the entire chamber. Pending a successful vote there it will go to the Senate and then to the President. Due to the fast-tracked nature of the bill it could be signed off by the President in a matter of weeks, not months.
While the bill passed some major changes were made to it to limit its scope in terms of new governance and regulation. Here is what did pass from the original proposal:
- National licensing for all mortgage brokers and bank loan officers
- National definition of what entails an ‘originator’ (who subsequently must be licensed)
What did not pass was the outlawing of yield spread premium. While this had a spin put on it that brokers didn’t want their paychecks taken away; it is clear with some simple math that by eliminating bank-paid compensation to mortgage brokers that the government would be mandating a reduction in home equity each time some chose to refinance. A stupid proposition if ever there was one.
Don’t get me wrong - I am for more transparency, more consumer advocacy, and an increased level of licensing and enforcement (of existing legislation); however, by mandating how consumers must conduct the transaction they were potentially making a limited set of options for folks that much more limiting.
So the YSP part stayed as the section relating to it Sec. 123 Anti-Steering was amended (h/t Raoul) to read:
Sec. 123. Anti-steering.
For loans that are not qualified mortgages (i.e., not prime loans), no mortgage originator can receive, and no person can pay, any incentive compensation (including yield spread premium) that is based on or varies with the terms of such loans (other than amount of principal). The Federal banking agencies, in consultation with HUD and FTC, will jointly prescribe regulations to prohibit (1) mortgage originators from steering any consumer to a residential mortgage loan that the consumer lacks a reasonable ability to repay, that does not provide net tangible benefit, or that has predatory characteristics, (2) mortgage originators from steering any consumer from a qualified mortgage (prime loan) to a loan that is not a qualified mortgage, and (3) abusive or unfair lending practices that promote disparities among consumers of equal credit (4) worthiness but of different race, ethnicity or age. However, nothing in this subsection should be construed as limiting the ability of a mortgage originator to sell residential mortgage loans to subsequent purchasers, restricting a consumer’s ability to finance origination fees if they were disclosed to the consumer and do not vary with the consumer’s decision to finance such fees, or prohibiting incentive payments to a mortgage originator based on the number of loans originated.
So that part of the legislation seems to be removed. However, there can be amendments and changes throughout the process; so we’ll keep a close eye on any future developments as this bill makes its way through Congress.
Thoughts?
i am for anti-steering also…but we dont want them to cut our YSP!
From Jack Guttentag’s website, a possible solution? It saves YSP, but puts the power in the hands of the borrower, our client, to whom we hold fiduciary responsibility!
“Lenders can simply credit YSPs to borrowers rather than to brokers. All payments to brokers would be made by borrowers, from their own funds or from YSP credits. Borrowers would then effectively control broker compensation, which is as it should be.
Since the borrower pays for a YSP in a higher interest rate, it makes no sense for the payment to be made to the broker. Brokers dealing with uninformed borrowers are incented to feed as little of it back as possible. The YSP should be credited directly to the borrower, who can then pay the broker as agreed to by the parties.”
guy - that is a pretty good thought. the borrower and broker would have to agree up front to the charges and then the YSP could be credited to the borrower, less the fees agreed to up front by the parties by escrow at the close.
That approach doesn’t work very well. I have tried it. The problem is that agreeing upon broker compensation DOES NOT result in the lowest interest rates which is all consumers care about.
It is entirely possible for a broker to agree to a 1% in compensation to have higher rates than a broker who is making 2% in compensation. Consumers don’t care about our compensation, they care about their final rate which is what they are ultimately paying. This approach might actually cost consumers money because they then focus on what they are paying, not what they are actually getting. My broker only charged me $500, but my rate is still .5% higher than competing offers. In other words, the rates offered are only as good as the broker’s selection of wholesale lenders.
Secondly, consumers are not forced to commit to a lender under the current system. I quote 6% and a consumer gets an offer for 5.875%, right or wrong, the consumer can then jump ship from me and go somewhere else. Under the UMB approach, I would want contracts enforceable. You are agreeing to pay me x % to deliver a mortgage loan on your behalf. I go out and deliver a mortgage loan charging you x%. However, as I pointed out above, the rate still may not be lowest offered through typical rate shopping. The consumer decides they want to go with a competitor offering a lower rate. Since I am not compensated unless the deal closes, I want the contract enforceable so I am not wasting my time with flaky rate shoppers.
As it currently stands, the YSP issue in this bill will wind up hurting the very borrowers it is aiming to protect.
Yes one particular lender practiced giving the YSP to the borrower and then the borrowing paying the broker. It was incredibly confusing for everyone.
I think the goal of legislation should be to simplify the process.
I still don’t understand why its only YSP thats being discussed. Doesn’t this clearly allow the banks to still raise interest rates and make money by doing so? The average customer is going to think that brokers are making money that banks aren’t. It will reinforce the idea that brokers are middlemen. We are not middlemen. We are on the front lines spending our valuable resources originating loans.
I agree with Russ…all borrowers care about are the rates, fees and terms of the loan. Don’t confuse them with how much brokers make in YSP. Let them shop whats really important.
Mike…I don’t know about this..now biting the hand that feeds…..
Christopher Rakel, 29, St. Louis County, Missouri, was charged in a two-count indictment alleging a far-ranging scheme to defraud banks and other mortgage lenders and money laundering.
According to the indictment, Rakel, a mortgage broker with Tri-State Mortgage, facilitated the purchase of dozens of fraudulent real estate transactions, primarily in South St. Louis, Missouri, during 2005 and 2006. Rakel would prepare fraudulent loan applications and other documents to assist buyers in obtaining millions of dollars in financing they could not otherwise obtain. The indictment alleges the mortgage fraud scheme involved dozens of properties, and a number of co-conspirators, including investors, mortgage brokers and appraisers.
When will someone require uniformity. Why should banks not have to disclose gross profits and brokers do? Level the playing field….please get your congressman to understand.
Also, want to put an end to brokers who charge egregious fees….cap it at 2% for all origination AND ysp.
Morgan,
It looks to me like there is some ambiguity in the bill with regards to YSP.
“No provision of this subsection shall be construed as…restricting a consumer’s ability to finance origination fees to the extent that such fees were fully disclosed to the consumer earlier in the application process and do not vary based on the terms of the loan…”
I believe the statement above would prohibit YSP, which is at odds with the following:
“No mortgage originator may receive from any person, and no person may pay to any mortgage originator, directly or indirectly, any incentive compensation (including yield spread premium) that is based on, or varies with, the terms (other than the amount of principal) of any loan that is not a qualified mortgage (as defined in section 129B(c)(3)).”
The intent was to allow YSP for ‘qualified mortgages’ or what would be prime-type mortgages, but this would be overridden by the first citation in the same bill.
Both of the above are in the managers amendment and seem to be fighting with each other. You can find the link on NAMB’s site.
http://tinyurl.com/2tzrcy
Morgan,
There’s still some ambiguity with reagrds to YSP.
“No provision of this subsection shall be construed as…restricting a consumer’s ability to finance origination fees to the extent that such fees were fully disclosed to the consumer earlier in the application process and do not vary based on the terms of the loan…”
I believe the statement above would prohibit YSP, which seems to be at odds with the following:
“No mortgage originator may receive from any person, and no person may pay to any mortgage originator, directly or indirectly, any incentive compensation (including yield spread premium) that is based on, or varies with, the terms (other than the amount of principal) of any loan that is not a qualified mortgage (as defined in section 129B(c)(3)).”
The intent was to allow YSP for ‘qualified mortgages’ or what would be prime-type mortgages, but this would be overridden by the first citation in the same bill.
Keep in mind Barney Frank is trying to simplify the process on YSP with no mortgage knowledge at all. This bill is a band-aide fix because the financial market has no end in sight. If you disclose your YSP on the MLDS (CA) or Good Faith Estimate borrower(s) usually miss this when reviewing their loan disclosures anyway. I do not mind borrowers paying the broker but the borrower needs to sign off after or before the 3 day right allowing escrow to secure the broker commission when funds are dispursed on refinances! In regards to purchase this rule would apply also.
If all loan officers are to be license the banks will be scrambling to employ license loan officers in the end! During this process fraud will be high because banks will probably elect a license loan officer for employees to use as they keep originating until banks can figure out a fix.
Congress should just stick to the one page document explaining in detail the following: Loan amount, terms of the note, prepay (if applicable), and points paid or YSP.
The one page explanation letter with the loan details keeps the consumer safe.
Ken, I like your way of thinking and agree with banks disclosing their YSP! You must have worked both retail and wholesale in the past. I worked retail at CW and know what CW pays the branch on loan products. Besides, what does this have to do with borrower(s) not being able to pay their current mortgage notes or not being able to refinance! Congress always looks for a fall guy and it happen to be brokers, etc.
Why should someone with no idea of how the mortgage industry works be trying to regulate it? It’s nuts! I find nothing admirable about it. Barney Frank and his crew need to become more educated before developing these bills; perhaps they should study and take some of the LO exams all ready in place in states, such as Washington.
Eyeswideopen, licensing should be across the board to any LO who originates a residential mortgage. Why should banks be excluded? So you say they’d have to scramble? Too bad. Many brokers all ready have had to do so. An LO scrambling at a bank is no different than a LO scrambling at a broker.
It will also be a benefit to the consumer to have the same standards and licensing across the board to all LOs regardless of the institution type. (I work for a Correspondent Lender BTW).
Currently, if they have a complaint not being resolved by the LO or management, they really don’t know where to turn.
The change in wording simply says that you can SELL a loan AFTER it closes. In other words, it allows for SRP (service release premium) for licensed mortgage BANKERS who lend on their own line of credit and sell it after the fact to a bigger bank or direct to fannie/freddie. Brokers CANNOT do this. It still eliminates YSP for brokers…
A good thing. Bankers are lenders and take more of the risk.
Kingcalvin (interesting name you chose for yourself),
You are repeating the same tired line that banks have been using for a long time to confuse regulators. Its really quite simple…If banks can determine YSP when pricing a loan to a broker then they can also determine YSP when they originate it themselves. Either the bank will make a lot of money to hold onto the loan or they will make sell it and make money. If they sell the loan (even after it is closed) I think that is about the same as selling it before it closes.
I still just dont really understand how eliminating YSP would help the consumer.
I also don’t understand how disclosing YSP would help the consumer.
What does YSP have to do with the borrower shopping and getting the best rate, terms and fees?
Ann…whats your point? I understand that this broker was apparently involved in fraudlent activity. What does that have to do with this topic? I assume banks arent involved in fraud. I suggest you ask NY State Attorney General what he thinks about WaMu insisting on not using appraisers that didn’t give them the values they wanted. Thats inflatiing appraisals and thats fraud on a GRAND scale. I believe in a period of months WaMu orded 260,000 appraisals from this firm.
Congress needs to understand that the whole industry needs to be treated the same. How easy they forget that it was the banks and s&ls that created a bigger mess in housing and loans in the 80s. That was a mess the taxpayers had to bail out.
Russ, the only problem I have with that argument is that currently brokers are not required to deliver on their agreed upon rate, program or compensation. Good faith doesn’t require a locked in offer - so requiring the borrowers to do one thing with out requiring the broker do perform in the same manner seems rather one-sided and not in the consumer’s best interest. Wouldn’t the consumer like the original terms quoted by brokers to be “enforced” too?
It would simply be impossible to require disclosure by mortgage banking firms of any profit they might make from the sale of a closed loan. A brokered loan has to “balance” (be fully reconciled) at the instant the loan disburses. For that reason any/all fees being paid by or to the broker or lender are known & can be disclosed on the HUD. In contrast, a loan closed by a mortgage banking firm could have been targeted to investor “A” with a price of 101.00, but if after closing the loan is deemed unsaleable to investor A (according to A’s underwriting standards) and is sold to investor “B” at a price of 97.00, that’s too bad for the mortgage banker, but doesn’t affect the borrower at all. Similarly, if the mortgage banker funds the loan & doesn’t commit it to an investor until after the loan is closed & disbursed, they might find that, as luck would have it, they were able to get 102.00 when they’d only expected 101.00. Again, that change in the value of the closed loan doesn’t affect the borrower at all and would not (could not) be referenced on any of the closing docs (without the use of a time machine).
I agree with Russ that consumers should be looking for the best deal to them, not the least profit to the broker. What they SHOULD do & what they WILL do are likely to be different, however. This could spell the downfall of the good broker & the rise of the “I’ll do your loan for $799 & work out of my house” idiot broker - who will only have access to limited lenders & limited products. It could be a race to the bottom. “$799? Do I hear $699?”… It’ll be the equivalent of picking a lawyer by calling around to see who charges the lowest hourly rate.
Not being an originator, but an attorney, gives me a different concern with this bill.
They are throwing in “rent control lite” here, but no one - no one - has even bothered to pick up on it. Everyone’s too busy jawing about YSP and other things in this bill.
Someone (MBA? USFN? Bueller?) had better wake up and realize this bill will require foreclosing lenders to become involuntary landlords on a great many properties that have the misfortune of becoming REO.
I can already see the $100/year leases for a 100 year term, backdated sweatheart deals, or outright forgeries. You think it won’t happen? It already does (in cities with rent control). You think the bank can just ignore the law, as the lease is clearly a farce? Go ahead, and wait for the contingency fee tenants’ rights bar to sue the lender, salivating over its deep pockets. You think the bank can just sue to have to lease invalidated, right? Sure, but someone’s got to pay those legal fees (and eat the carry cost).
This provision carries far more potential harm than toying with the YSP. The YSP is more about how and how much originators/brokers get paid, and is less a consideration in how a bank actually sets its rates. This involuntary landlord stuff will directly impact rates - as banks have to adjust to compensate for the random, and uncontrollable, risk that they’ll get stuck being a landlord.
If this passes, I’m thinking of switching to the dark side. You will be able to make a literal fortune suing the foreclosing lenders for habitability issues once a foreclosure becomes REO. A virtual gold mine.
And, the banks will include that risk when setting their rate sheets. This is a really, really dumb idea. Give tenants a federally mandated 90 day notice, fine. Or, even better yet, create a federal law that requires landlords to notify their tenants in writing when they’ve missed a house payment - and allow tenants stop paying rent when that happens (and strip the defaulting landlord from standing to evict). But, for all that is green and purple in this universes, don’t make foreclosing lenders involuntary landlords.
Hey, great post and great comments.
Just a few words, It seems easy for me to understand why lenders don’t have the same disclosures as brokers. It’s the banks $. It seems logical a company structured as a pure middleman would suffer more regulation.
Not that I am for eliminating YSP for brokers, obviously not wise. If Congress eliminates YSP and brokers suffer, the whole industry and the customer suffers. Everyone has their place in the market!
http://www.activerain.com/jeffselan
Fielding, I understand what you are saying. However I refuse to believe that the banks can not come up with a way of at least estimating how much money they will make on a loan.
I honestly think that disclosing YSP is simply confusing to the borrowers. It takes their eyes off of what they should be shopping which is the best terms for the borrower.
Can anyone explain how disclosing YSP for only one class of originators makes any sense? How is this going to help the consumer? Or is it designed to help the bankers?
When I buy stocks, cars, insurance, furnature, groceries, gas, oil, pictures, flowers, cards, pencils or just about anything I never know what the business is making.
My Reply about the concerns of NAMB Email about HR3915 as follow:
1. I am a Mortgage Professional.
If you are Mortgage Professionals, then why do take advantage of consumers by charging excessive Fees and not providing the proper disclosures to your clients?
2. House Bill 3915 passed committe 45 -19 on the morning of Tuesday, November 6th.
The House Bill 3915 did pass, do you wonder why? Have you looked in the mirror lately or turned on the TV and asked why the consumer may need action taken on their behalf? To top it that off you can’t even spell Committee correctly. I see the English language was secondary only to your greed.
3. We support licensing and improved standards for all originators.
What a concept! Now all of a sudden Brokers and Loan Officers want to jump on the band wagon to support education and licensing! Don’t you think this would have helped the consumer prior to handling their mortgage transaction?
4. We oppose outlawing the way we earn our living, and urge that indirect compensation be allowed as part of the interest rate. Consumers should be able to finance fees and costs and creditors or investors should be able to pay such fees and costs to mortgage brokers as is industry practice today.
I do not have a problem with this, as long as the consumer has been given full disclosure and has been fully explained the benefit or detriment of the Yield Spread Premium or Broker/Lender fees. Give them the choice, not you.
5. We do not support Title III. The standards are so strict and the liability so great that it will prohibit loans being made in the subprime market. It will act as a federal usury statute denying access to credit for deserving borrowers.
Why worry about the subprime market, what’s left of it I mean? Seems we are having a bit of a problem with this one right now. You know what? What does sub-prime really mean? Could it possibly mean “Not Really Credit Worthy” borrowers? DUH! It’s been a long time in coming; it’s too bad we had to have the Politicians point that out to us.