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This may seem perplexing if you've been receiving checks from title that contain YSP. Those YSP payments, however, existed because with 2010 RESPA reform brokers were still permitted to capture all or part of YSP credits to borrowers as non-annual-percentage-rate (APR) finance charges in Block No. 1 of the GFE.
Beginning April 1, brokers can follow the present framework and stay within the restrictions imposed by the Fed's new rule.
Under the Fed's compensation rule — and in accordance with the official staff interpretations — lenders can continue to provide a credit to borrowers through YSP or via lender credits based on the financing terms. In other words, wholesale rate sheets will continue to exist in the same format with different products, interest rates and YSPs as borrower closing-cost credits.
Section 226.36(d)(1)(ii) of the rule makes it clear that a broker may charge an origination fee in any amount as a percent of the loan balance. In addition, brokers don't need to charge consistent fees to all borrowers. Instead, as long as the only entity paying the broker is the borrower, the fee as a percent of the loan balance can vary based on the terms of the transaction.
Combining the above amendments with the existing compensation framework not only should ease compensation fears for brokers, but it should eliminate them completely.
Despite what many people continue to say, brokers can retain control of choosing rates and products without steering consumers illegally. Steering requires the broker to be compensated by the lender. Brokers can, however, select the product and rate that provide the appropriate YSP closing-cost credit for borrowers.
Only one question remains: How can brokers convert closing-cost credits to borrowers into revenue for themselves?
This is where origination fees come into play.
A broker can charge an origination fee directly to a borrower that is paid for by closing-cost credits from the lender and doesn't result in an out-of-pocket expense for the borrower. The origination fee the broker charges directly to the borrower doesn't have to match the credit to the borrower from the lender.
In fact, the real difference between broker compensation before and after April 1 will appear in APR calculations. Presently, the captured YSP isn't an APR finance charge. After April 1, however, because brokers won't capture YSP but instead will charge an origination fee directly to borrowers — considered a prepaid finance charge — APR calculations will reflect all broker compensation.
At this point, you might be wondering why new compensation rules created so much press. The short answer is that mortgage bankers — and originators employed by lenders or federally regulated banks — must overhaul their existing compensation structure if they want to receive payments based on the financing terms.
The rule change takes the transparency mortgage brokers have had to conform with and imposes it on retail lenders that have been allowed to hide the details of their transactions from borrowers. Formerly, RESPA didn't require disclosing fees paid based upon valid secondary-market transactions. Because mortgage banks resold mortgages in valid secondary-market transactions, yield-spread and service-release premiums were paid to originators in faux-YSP sometimes referred to as "overage" or "gain on sale."
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