Federal Reserve Announces Final Rules to Protect Mortgage Borrowers

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The Federal Reserve Board on Monday issued final rules for mortgage brokers and the companies that employ them, and mortgage loan officers employed by depository institutions and other lenders.  The rules, which go into effect April 1, 2011, are designed to protect mortgage borrowers from unfair, abusive, or deceptive lending practices.

Currently, lenders commonly pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (referred to as a “yield spread premium”).  The new rule reverses that practice.  Loan originators can continue to receive compensation based on a percentage of the loan amount.

The final rule also prohibits a loan originator who receives compensation directly from the consumer from also receiving compensation from the lender or another party.  The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate.

Additionally, the new rule prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation. The rule will preserve consumer choice by ensuring that consumers can choose from loan options that include loans with the lowest rate and loans with the least amount of points and origination fees, rather than loans that maximize the originator’s compensation.

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