The Federal Reserve’s proposed changes to Regulation Z (Truth in Lending)
Rhonda Porter on 07 23, 2009
If you’ve been following Ben Bernanke’s testimony on the Hill this week, you may have noticed him hinting about significant proposed changes to Reg Z and changes in how mortgage originators are compensated, leaving many of us in the industry wondering “what now”. Don’t get me wrong, Reg Z could use some tweeking…it’s just that the mortgage industry is in a state of constant change (evolution?) with a deluge of new forms and/or regulations including MDIA, HVCC and the new Good Faith Estimate which goes into effect on January 1, 2010.
From this morning’s Press Release:
“Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply,” said Governor Elizabeth A. Duke. “With this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization.”
Closed-end mortgage disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. The Board’s proposal would:
- Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers;
- Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit;
- Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and
- Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.
The Board will also work with the Department of Housing and Urban Development to make the disclosures mandated by TILA, and HUD’s disclosures, required by the Real Estate Settlement Procedures Act, complementary; potentially developing a single disclosure form that creditors could use to satisfy both laws.
In developing the proposed amendments, the Board recognized that disclosures alone may not always be sufficient to protect consumers from unfair practices. To prevent mortgage loan originators from “steering” consumers to more expensive loans, the Board’s proposal would:
- Prohibit payments to a mortgage broker or a loan officer that are based on the loan’s interest rate or other terms; and
- Prohibit a mortgage broker or loan officer from “steering” consumers to transactions that are not in their interest in order to increase the mortgage broker’s or loan officer’s compensation.
Clarity and transparency for consumers is a must with the mortgage process. I’m not sure what to make of this line: ”Prohibit payments to a mortgage broker or a loan officer that are based on the loan’s interest rate or other terms“. Mortgage rates are increased or decreased based off of paying points which includes the mortgage originators compensation. Perhaps the FOMC would like to see mortgage originators be paid hourly instead of based off of rate…I’m all for that! 
About the Author: Rhonda Porter
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13 Responses to “The Federal Reserve’s proposed changes to Regulation Z (Truth in Lending)”
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Another mess in the making, I’m afraid.
Mortgage Brokers already must clearly identify any indirect compensation coming from the lender (Yield Spread Premium or Rebate) in the GFE.
That should be adequate protection for the consumer.
The only protection created by the proposed change inures to the benefit of those lenders that are NOT required to disclose indirect compensation, such as banks, and bank-like lenders.
Nearly every piece of federal legislation enacted or proposed in the past 3 years has diminished the survival prospects of mortgage brokers and small businesses, for the purported benefit of the consumer, but the actual results have largely benefitted large corporations and banks.
That goes to show you that the vast millions spent by large corporations and banks to lobby the government have not been wasted.
There is small consolation in knowing that the system works, at least for some.
Roger, what do you think the Fed has up it’s sleeves for mortgage originator compensation?
They are bankers and think like bankers.
It doesn’t matter what they say the intent is, the actual intent is to lower compensation for ALL loan originators, whether they are employees of banks, mortgage brokers, or work for mortgage brokers, and eliminate or severely weaken competitors, with the ultimate goal of increasing the profitability of the banks that survive.
I think this further tilts the tables against brokers, since only banks can hide the SRP.
Brokers will probably have to work on a fee for service or hourly basis, which wouldn’t be so bad, except the banks will be able to hide their revenues, and squeeze down the disclosed fees, making it harder to show the consumer the benefit of working via a broker.
I imagine there are many forces that will work against this, but they will be vastly outspent by the forces that actually want this to happen (the folks that run the banks), even though they will weakly protest the imposition of more regulations.
The only regulations the banks will and have strongly protested is limitations on executive compensation.
Call me Mr. Cynical, but I have no confidence that the proposed changes will do anything to help consumers or workers in the lending business, since neither have the kind of resources to lobby the regulators that banks do.
Just see what HVCC did. Lowered compensation for workers (appraisers), increased costs for consumers, and enriched the banks and title companies that run the Appraisal Management Companies.
More of the same.
Hat tip to Penny Fagan… compensation is addressed on page 183 of the proposed draft… I only had time to read the press release and summary. (not the 500+ pages of the draft).
LOL page 191 states that “creditors also may compensate their own loan officers differently than mortgage brokers. For instance, in light of the fact that mortgage brokers relieve creditors of certain overhead costs of loan originations, a creditor might pay brokers more than their own loan officers.”
What scares me is that so few of the people in charge actually understand what they are legislating or regulating. The fact that the Bernanke doesn’t understand the simple concept of:
Wholesale Rate + Yield Spread Premium = Retail Rate
is mind boggling to me. What’s worse though is that NAMB can’t seem to explain this simple concept on behalf of brokers either!
None of them seem to understand that YSP is why brokers can offer no closing costs loans and is what keeps borrowers from having to come to the closing table with thousands of dollars in fees to pay for the service.
At the end of the day, these numbnuts are trying to outlaw profit margins! WTF?
Russ, it’s upsetting to me as well to listen to Bernanke and Geithner talk about mortgages… I was also wondering why someone can’t sit down and try explaining this to them.
Just because bankers are not paid YSP, dosn’t mean they’re not making a little somethin’ somethin’ on the back end… it’s all rebate pricing.
Geithner talking about giving consumers choices so they can compare products…having a Congressman press him on it, he just kind of laughed nervously saying something along the lines of “I don’t think this will be an issue”…while I’m picturing clients who might be better off with a 30 year fixed yet once they see the 5/1 rate and the monthly savings, they make a bad decision. [Yes...it's the consumers choice, I know...]
Russ, how involved are you with NAMB and/or your local chapter of NAMB?
Russ:
Can you send me an email address?
roger@loandoctorsnw.com
Thanks!
As a real estate broker I am finding allot of good in the new disclosures that have just taken effect. Having a chance to review a GFE before paying application fees gives the consumer a fair chance to ask questions about actual costs.
Forcing re-disclosure to the consumer if their APR changes just prior to closing will eliminate the bait and switch to a higher rate at closing (happened all the time). The changes to the YSP compensation will require some adjustment but I believe we will adapt.
Russ your model missed something
Wholesale Rate + Yield Spread Premium + Loan Origination Fee + Costs = APR
Let’s not pretend that the YSP has been used exclusively for the offsetting of buyer costs. The YSP has truthfully represented one of the most profitable revenue streams in the lending business and has been a sore spot for consumer advocates for a long time.
I agree with you though that the regulations are written in favor of the banks rather than the brokers. A broker will have restrictions on the YSP compensation while the bankers, who are compensating their loan officers under a parallel compensation structure, will not.
Ken, I think that mortgage brokers are in huge trouble with the ruling this past week on YSP. It’s unfortunate that our legislatures don’t have a clue about how the mortgage industry works.
If you have the same rate, closing costs and rebate pricing/ysp…the mortgage broker had to disclose, banker does not…banker can be making just as much (or more) as the broker on the back end.
And now the mortgage broker is losing the ability to price mortgages at 0 points to the consumer. How will they compete? If a consumer wants a mortgage priced with no points, they’ll have to go to a correspondent lender or a bank.
All open end lending is affected, not just mortgages.
These regulations are created by people who have no clue what they are doing or asking for, not to mention the banker’s slid this change in July 09 to be effective in Aug 09. Give me a break. Is this what you call due diligence? Here is example of the impact, can you imagine the amount of paper required to meet this regulation for sending out periodic statements per open loan? What happened to going GREEN? The other option, change everyone’s open end loan due date. How does that affect the consumer? This is just another example of government and banker’s malicious shortsightedness and wrong doing.
This is absolutely ridiculous.
QUOTE “As a real estate broker I am finding allot of good in the new disclosures that have just taken effect.”
Oh yea……. lets put that 6% realtors charge under the microscope and see if you start singing a different tune. Bottom line is that brokers have been required to disclose YSP for some time now. In fact brokers are required to have a formed signed within 3 days of the applicatin date that spells out exactly what YSP is and how much is being generated within the transaction.
This will ultimately limit the options of the client and save them ZERO. Brokers are not going to work for free. So this means new fees will be added to the front end to make up the difference. How will this benefit the borrower that wants to reduce closing cost by not paying fees??
Not to mention that if this drives brokers or mortgage companies out of the industry, thus reducing competition, it will be bad for the consumer as well. Just picture having 3 banks to chose your mortgage from…do you think your rate will be low? No worries…maybe you’ll get a free toaster.