The Federal Reserve’s proposed changes to Regulation Z (Truth in Lending)


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!  🙂

This entry was posted in Mortgage/Lending, News by Rhonda Porter. Bookmark the permalink.

About Rhonda Porter

Rhonda Porter is an NMLS Licensed Mortgage Originator MLO121324 for homes located in Washington state. Her blog, The Mortgage Porter, is nationally recognized for sharing relevant information to consumers about mortgages. She has been originating mortgages since 2000 at Mortgage Master Service Corporation #40445 Consumer NMLS Website: NMLS ID 40445. Equal Housing Opportunity. You can follow Rhonda on @mortgageporter, Facebook and/or Google+

25 thoughts on “The Federal Reserve’s proposed changes to Regulation Z (Truth in Lending)

  1. 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.

      • 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.

    • 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.”

  2. 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?

  3. 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.

  4. 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.

  5. 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.

  6. I’m listening to a recent conference call on MMG right now regarding Loan Originator compensation…it’s really concerning. Proposed changes to RegZ will stop LO’s from being paid based on loan amount or any terms of the mortgage. According to the call, LO’s will have to state they will only make $X on a transaction and may not modify that amount up or down. It’s amazing.

    If you have access to MMG, you want to listen to this call.

  7. “LO’s will have to state they will only make $X on a transaction and may not modify that amount up or down. It’s amazing.”


    Imagine a world where customers know what their LO will make and that the LO is not allowed to modify that fee up or down.


    • Jillayne, according to the call, a LO will not be able to compete with another LO. We cannot adjust our compensation up or down based on the amount of work.

      Do you have flexibility with how your paid or does the goverment control your compensation?

      • Maybe I wasn’t clear. It would be as if a LO has to file their origination fee for a set amount and only make that amount for every loan regardless of loan amount or difficulty.

        Some transactions are a lot easier than others and if it’s a loan where they’re putting a signifcant amount of down payment with excellent credit or they’re returning clients and I have all their info, I tend to price that scenario accordingly. I’ve had the freedom, much like real estate agents, to decide my compensation–and the consumer has had that too…they decide to work with me or not. It is market driven.

  8. Yes.

    The problem lies with the ability for LOs to adjust their compensation.

    With what we’re currently living through, no one in the mortgage lending industry should be shocked that the Feds are proposing this rule.

    Go ahead and continue to ignore the glaring need for industry self regulation. Nambie and wambie could have done this; can STILL DO IT but they refuse to do it.

    NAMB and wambie members who are “shocked” at this new fed rule crack me up.

    Look at all their members who blatantly ripped people off year after year….and they did
    N O T H I N G
    to stop their members from engaging in all the blatant fee gouging.

    The industry gets what it deserves with this new rule.

    If the industry wants something different like “the ability to charge an hourly rate or a sliding scale rate” I can definitely get behind that but only if we put a system in place to help the industry understand what’s ethically justifiable and what’s not.

    Just the other day, I saw a GFE from 09 where an LO wanted to make 40,000 in fees. Please explain to me how this is ethically justified?

    …but it’s a jumbo loan.


    How much time and effort were put into that file? Is any LO worth 40 grand on one file?

    I definitely believe this new law will go through because the industry has put nothing in place to show the regulators that they are in any way at all interested in helping their LOs learn how to earn a good living without screwing the consumer with high fees.

    LOs want to keep the ability to earn as high a fee as they can get away with! No surprise! Manager/owners want the same thing because they get a piece of the pie but they want no responsibility to the consumer to justify their high fee.

    Not much has changed since the meltdown. We have fewer LOs and many of the really, really bad ones are gone…for now.

    Rhonda I know you don’t gouge the consumer but you are not the entire wide world of LOs. It was still going on out there in 09.

  9. That is absolutely absurd for them to even consider this. This means that construction lending will become a thing of the past. Nobody would even want to do them. If there are already so many good and qualified loan officers leaving the industry now imagine who would be left if this change took effect. With the new GFE in place I truly feel the client is more than aware of the conditions, terms and full costs of the service. It seems like the new regulations could make this industry the new dinosaur. Without mortgage originators there’s no home loans originated and without home loans our economy will never survive.

  10. OK, what happened? Jillayne Schlicke going off on the hands that feed her. These people need classes for gawd sakes!

    I was just kidding, but you really are on to some issues lately that are making the Real Estate Industry as a whole look bad. Loans, a perfect example have mystified me for the past ten years. You can go online, see a rate, or thirty rates from thirty lenders, and pick the one you want. The consumer can do that. It’s a money product, the same as AmeriTrade, ETrade, or Charles Schwab.

    If the internet was going to do away with Real Estate agents it should have done away with mortgage brokers long ago.

  11. Jillayne, I think it’s sad that you reference WAMP and NAMB (it’s not wambie and nambie) and exclude mortgage originators who are not members. Must you be a WAMP/NAMB member to be a slimy LO? I don’t think so… as I have always said (and always will) it’s not the institution, it’s the individual.

    You will find slimeball LO’s at banks too.. your comment excludes them and I’m not sure why. You think there were no bad LO’s at Wachoiva? World Savings, Countrywide, WaMu, Chase or Wells or ??? None of this mess would have happened without the banks and their products.

    Give me a break!

  12. Last time I checked people a mortgage broker has been, for several years, disclosing more up front to the client than anyone else had to. Also, the mortgage brokers had harder requirements to be in this industry per licensing requirements than the bankers. Bad brokers got kicked out of brokeraging due to criminal records and just hopped on to a bank because they didn’t have the same stiff requirements. Rhonda is right it’s NOT a banker or broker where there’s the issue it’s the individual loan originator. My only banker/broker complaint is regulations should be just as stiff for ALL. There is section 32 to protect consumers against high cost loans so maybe this should be higher standards. 6% realtor fees don’t get questioned yet my 1.5% does, go figure?

  13. Sorry, their name is still coded into my long term memory as being pronounced with an ie at the end so that’s the way it comes out when I type.

    You’re deflecting the topic at hand over to shine a light onto bank LOs.

    At the height of the bubble, WAMB and NAMB were very proud to boast that over 51 percent of all mortgages were originated by a broker.

    I am definitely not shy about pointing out that the two biggest predatory lending settlements in the US were at Consumer Loan Companies: Ameriquest and Household Finance.

    Fifty one percent. That’s pretty high, Rhonda.

    This new federal law will also affect bank LOs too, correct? ( I did not hear the conference call)

    Then I think it’s highly likely the law will pass. Banks will jump at the chance to limit LO compensation. This will give them an excuse to hire only green, new LOs who would be happy to accept limited compensation in exchange for a job with benefits. This will greatly help the banks control one of their costs and make it more fixed than variable. They’ll get behind it.

    • Jillayne,
      I’m not “deflecting the topic” — your comment was a discriminating attack on WAMB members and left out every other type of mortgage originator. When I deal with consumers who need help or advice from their transactions–the LO’s they’re dealing with have been 50/50 bank or broker/correspondent. Bank LO’s a re harder for consumers to file compliants with than those who are regulated by DFI on the State level.

      Ameriqwest and Household finance are not true correspendent lenders–they are true consumer loan companies (the category DFI decided to put WA State correspondent lenders into). A company like Mortgage Master is not the same as these, Jillayne, and you know it.

      Of course banks will jump on this, Bank of America all ready has and is paying their LO’s based on volume produced (let’s churn those borrowers–move ’em fast and get on to the next…) instead of the individual transaction and the merits of that transaction. And you hit the nail on the head, this will reduce the quality of mortgage originator.

      Consumers can have an entry level “mortgage teller” help them finance the largest investment of their lifetimes.

      And when banks have sufficated most of their competition (brokers), I’m sure they’ll keep mortgage rates low because that’s what’s good for the consumer (yeah, sure they will).

      The mortgage industry did get bad during the subprime years. Everyone and their brother was becoming a mortgage originator–guess what, they worked at banks too…if they were a producer, the bank turned their head the other way.

      When I was in title/escrow BEFORE the subprime years (I entered the mortgage business in 2000); there were few mortgage originators that I had respect for…very few. I would say most of the ones I know now are of a higher quality and do view this profession as their career. Are they WAMB members? Some yes and some no–it has nothing to do with WAMB.

  14. And of course you may think my comment is a drive by, a Real Estate is owned free and clear. My mortgage banker, broker, or originator is something I tolerate in the transaction to control the property.

    Residential Real Estate is a family matter. There is no leverage, no fancy decision making, no guidance required. You buy the family home to pay it off as quickly as possible to give your family the security of a roof over their heads. The fact that banks have insinuated themselves into this matter should be a matter of criminal investigation.

    We should spend much more money regulating banks.

    As far as why home loans are not an internet based business is because any one can do it. There is no reason why a loan should cost more than $500. Whatever the banks do on the back end is their business, but the consumer should be making payments on a set priced mortgage.

    Residential Real Estate in the 1960s was an after thought to the commercial Real Estate business. Commercial Real Estate is where there are financing options, large dollar considerations. How Residential Real Estate with Mom, Dad, and the kids became this over blown process is just tragic.

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