As the year ends with a spotlight on pending health and financial reforms in Congress, the Federal Reserve closed its comment period for mortgage rules that could save families billions of dollars. In a detailed comment letter, the Center for Responsible Lending recommends that the Federal Reserve Board strengthen a proposal to ban routine kickbacks for steering borrowers into unnecessarily risky or expensive home loans. If finalized as proposed, the ban on kickbacks (often called "yield-spread premiums") would apply to mortgage brokers, loan officers, and any party that originates mortgages for lenders who fund the loans.
"The Federal Reserve has proposed to correct a direct conflict of interest between consumers and lenders, one that fueled the dangerous lending that triggered the housing crisis," said Kathleen Keest, senior policy counsel for CRL. "Many people are still wondering why so many bad loans were made. A big part of the answer is yield-spread premiums. These kickbacks are easy to hide from consumers, and they encourage brokers to aggressively market the worst kinds of loans—even when their customers qualify for better."
In research released in 2008, CRL analyzed nearly two million mortgages and found that people with weaker credit paid significantly more for mortgages originated by brokers rather than directly by lenders. On mortgages made between 2004 and 2006, we estimate that borrowers paid almost $20 billion in extra interest on loans they received from brokers. Much of that excessive cost is likely attributable to yield-spread premiums.
The Federal Reserve Board's current proposal related to yield-spread premiums includes broader amendments to the Truth in Lending Act (Regulation Z). With some strengthening provisions, CRL strongly supports the amendment that would prohibit lenders from tying bonuses to the terms and conditions of the loan. The deadline for submitting comments was December 24 at 5:00.
CRL's comment letter notes that nothing in the proposed rule would prevent lenders from offering appropriate compensation to brokers and other loan originators. The letter says, "There will still be room for creditors to offer incentives to originations to deliver quality loans. And originators can still be fairly compensated for their work."
Among the recommendations included in CRL's comments to strengthen the proposal:
- Do not permit lenders and brokers to split origination costs between up-front fees and higher interest rates.
- If a yield-spread premium is paid, the lender who pays it should accept legal accountability for any lending misconduct by the broker.
- The proposal on compensation should apply to the entire mortgage market, including home equity lines of credit.
- The final rule should encourage lenders to provide monetary incentives for loan originators to deliver high quality, sustainable loans.
For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.