As published in Scotsman Guide's Residential Edition, February 2011.
It's easy to get drawn in to the mayhem, paranoia and sensationalism of compensation reform. After all, following the Federal Reserve Board's issuance of loan-originator compensation and anti-steering rules as amendments to the Truth in Lending Act (TILA) last year, there has been a plethora of doomsday predictions related to mortgage-broker compensation.
While some claim hourly wage formulas and flat-fee schemes will become common, others urge an exodus from wholesale mortgage lending. Brokers beware: Reactionary responses to these forecasts and recommendations could result in costly decisions based on fear rather than knowledge.
Countless examinations of the latest regulation point out that beginning April 1:
Loan originators can't be compensated based on the terms of a borrower's financing;
Loan originators can't be compensated based on the loan-product type chosen; and
Yield-spread premiums (YSPs) paid to originators directly from lenders will become illegal.
At first glance, these three items may cause you to reconsider your career. The most important amendment to TILA, however, is often ignored: Brokers may still receive a variable fee calculated as a percentage of the borrower's loan amount as long as the broker's only compensation source is the borrower.
This oft-overlooked amendment announces some of the most crucial information: Broker compensation isn't changing, after all. YSPs may remain as a credit to borrowers, and brokers can still charge a variable fee as a percentage of the loan amount, converting the credit to revenue.
If you find this hard to believe, then read on.
Under the Federal Reserve rule, if a broker receives compensation directly from the borrower — and only from the borrower — then the prohibition of compensation based on loan terms doesn't apply.
Before we examine what happens when we combine this information with official Fed staff interpretations of the rule, it's important to understand how mortgage brokers presently receive compensation.
As of the beginning of last year, Real Estate Settlement Procedures Act (RESPA) regulations stated that any form of yield-spread compensation must be disclosed as a credit to borrowers — and not paid to the broker — in the form of a lender credit. Block No. 2 of the 2010 good-faith estimate (GFE) was created specifically to report YSP and to enforce the premium as a lender credit to the borrower.
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