The last rule on loan originator compensation was published on August 16, 2010 by the Federal Reserve Board that amends Regulation Z. The rule is effective for applications received on or after April 1, 2011. The foundation of this rule is to prevent loan originators, such as retail loan officers and mortgage brokers, from bearing any monetary interest in the terms of the loan or an aspect that is a substitute for a transaction’s terms.
The rule, in fact, separates the mortgage lender’s payment agreement with the loan originator from the conditions with the transaction of customer or terms of the lender’s negotiation. The loan originator can assist and smooth the progress of this negotiation, but can no longer have any financial incentive founded on a condition of the loan or substitute. In other words, the lender’s compensation of the loan originator must be preset and determined for any specific loan, although the lender’s negotiation with the customer about the terms can differ as the lender estimates necessary considering market conditions.
Here are the last rule’s most important points:
1. Mortgage lenders should not pay compensation to a loan originator founded on the terms of the credit deal, other than the credit amount extended. The only exclusion to this rule is for payments that customers make straight to a loan originator.
• A “term or condition” includes APR, rate of interest, loan-to-value ratio or if there’s a forestallment penalty.
• A “term or condition” doesn’t contain mortgage amount. Given that the percentage is set and doesn’t differ with the loan amount, the loan originator can be compensated based on the loan size. Moreover, if it is based on total volume, long-standing performance, hourly pay based on actual hours worked, client status, or some other items, compensation is not measured a “term or condition”.
Click Here to View All Carmel CA homes for sale!
2. Forbids compensation rooted in a feature that is a substitute for a transaction’s terms. While the Board considers credit scores or similar indications of credit risk, such as DTI, are not terms, the Fed also says that the Board identifies that they (credit scores and warnings of credit risk) can serve as substitutes for a transaction’s terms. The Fed offered a model of such a situation which is rephrased below:
• Customer A with a credit score of 650 acquires a 7% interest rate and customer B having a credit score of 800 acquires a 6.5% interest rate. If the loan originator compensation differed partly or entirely derived from credit score (let’s say, the originator received $1,500 in customer A’s transaction and $1,000 in customer B’s), the originator’s compensation would be rooted in a transaction’s terms.
3. Loan originators are not allowed to “steer” borrowers to goods that are not in their concentration. The steering prohibition affects to dealings in which retail originators “broker out” loans.
While the Federal Reserve’s last rule on loan originator compensation makes extensive changes to the way loan officers and mortgage brokers can be compensated, it is significant to make a note of the following:
• The rule doesn’t set a limit on the compensation amount that a loan originator may get.
• The rule doesn’t limit the rate of interest or discount points that a creditor can charge the borrower.
• The rule doesn’t affect to payments received by the creditor when selling the loan in the secondary market (servicing release premiums).
• The rule is valid to all loan originators.
To sum up, the last rule corresponds to an example alter in how loan originators will be paid. It is also more preventive than the proposed rule. With the introduction of the substitute concept in the last rule, the Fed explains that the use of substitute factors for loan terms to avoid the aim of the rule is not allowed.