The final rules protect mortgage borrowers from unfair or deceptive lending practices that can arise from loan originator compensation practices.   The rules apply to all persons who originate loans, including mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by banks, credit unions and other lenders.  The rules will:

1. Prohibit payments to the loan originator that are based on the loan’s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted.
2. Prohibit a mortgage broker or loan originator from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.
3. Prohibit a mortgage broker or loan originator from “steering” a consumer to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation.  

The consumer must be presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and the loan options presented to the consumer include the following:

(1) the lowest interest rate for which the consumer qualifies;

(2) the lowest points and origination fees, and

(3) the lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.

So what do these new rules mean for the general consumer who is looking at options for a mortgage?  First off there should be more transparency now in the amount of compensation the originator is receiving than there was in the past several years.  Mortgage brokers have been required to disclose their exact compensation for several years now while other lenders have not.  That should change with the new rules and should be a good thing for consumers. 

While these new rules seem like they should only benefit consumers it will need to be seen if they do or not.  The primary reasons why they might do as much harm as good is that they will decrease competition in the mortgage sector, unfairly favor large banking institutions and increase consumer costs for mortgages while also decreasing consumer choice.  The new rules require that originator compensation can only be derived directly from the borrower (origination fees/points) or directly from the lending institution (rebate, yield spread) but not a mix of both.   For example, instead of having 8 different rate and fee structures to present to a client a loan originator may now be limted to only four , depending upon whether they are tied to a wholesale brokerage, bank or credit union and have multiple lending sources to quote from or not.    As we pass April 1st be prepared for new disclosures, new ways of mortgages being quoted and presented and possibly less choice than you were used to in the past.





The first and most noticeable changes are in the standard paperwork for any mortgage loan, specifically the Good Faith Estimate that is provided to any borrower as part of a loan application after January 1st.  A Good Faith Estimate must be provided to any borrower within 3 days of making a loan application.  What used to be 2 pages with line item detail has been expanded to 3 pages in an effort to more specifically identify loan related costs and compensation.    It offers “tradeoffs” on page 3 which the loan originator/lender can choose to complete or not identifying loan options with less fees/higher rate or higher fees/lower rate.  It also offers a “shopping cart” for the borrower to fill in details from other lenders estimates to comparison shop.  These additions are nice benefits to the borrower if they take the time to review them and fill in the comparison section.

A difficulty that any borrower may run into is that any Good Faith Estimate is only binding for as long as identified by the loan originator or if the rate is already locked.   For example, if a borrower requests an estimate for a loan and receives it on a Tuesday but the rate has not yet been locked in (likely), comparison shops for several days and comes the loan originator to lock on Friday – it’s entirely possible that the rate/fee structure initially quoted would no longer be available.  Origination costs/lender compensation CAN NOT change between a rate lock/acceptance by the borrower and settlement so a new Good Faith Estimate would need to be issued if there were changes in either the rate or fees from the initial estimate provided.   This provides insurance to the borrower that there won’t be any suprises at closing with increased/undisclosed loan fees.

All loan originators/brokers/lenders/bankers are bound by HUD to use the new Good Faith Estimate for all new loan applications after January 1st.  While it is different than previous versions and may be confusing to some borrowers it’s intention is to make the loan details more specifically identified and not allow for hidden costs/fees.

As a borrower if you have any questions about the details on your Good Faith Estimate ask your loan originator directly. If you see unusual things on an estimate or areas that appear to be “missing” numbers or details it’s likely that the person issuing the GFE either improperly or incompletely filled it out.  Beware of those lenders who seem to be lacking in disclosure of loan details and terms of the loan they are offerring.  Feel free to share an estimate like that with another originator to verify it’s legitimacy.   I encourage all borrowers to shop around and get quotes from at least three lenders before doing a refinance or purchase.    More to follow this week in regards to current rates/mortgage market trends for 2010.

If you live in or are moving to the Seattle area please find more information about Seattle Home Loans.

In addition to being a Realtor, Michael Pollock is Licensed Loan Originator in the state of Washington (#510-LO-35045)