The Federal Reserve Board’s proposed changes to Regulation Z/the Truth in Lending Act (TILA) contained in docket No. R-1366 could harm the mortgage-brokerage business as we know it. The Fed will accept comments on the proposed change through Dec. 24, 2009.
Brokers have weathered ill-advised change after ill-advised change during recent times, and now face the wrath of further harm at the hands of the Fed. The loss of yield-spread premiums would create many issues.
Lets begin here; if brokers can’t be paid based on the terms of deals they deliver to lenders, how are they going to be compensated? In many cases, brokers will have to charge borrowers greater fees. Many brokers make successful transactions for clients in need, and many of those are extremely difficult ones. Those deals can take months to close, and brokers must make a certain percentage per deal to stay in business.
In addition, the elimination of YSP would further tilt the playing field toward bankers, who could still receive premiums and income from marked-up rates sold to borrowers.
The loss of brokers ultimately will harm consumers, who will be faced with fewer loan options in a less-competitive mortgage market. In addition, the proposed rule could decimate the broker industry and render brokers unable to pay their loan officers. Thus, thousands of people could be out of work, with some signs pointing to Regulation Z changes as a factor. In this economic climate, does this make any sense??
When mortgage brokers complete a loan for a client, they buy the money at wholesale — at the par rate — and sell it to their clients at retail, thereby earning YSP. This keeps brokers from having to charge more money upfront, which borrowers often wouldn’t be able to afford. The payment of YSP allows:
- Brokers to make a fair amount for their efforts; and
- Borrowers to complete a transaction that fits their needs.
If clients aren’t satisfied with what a broker offers them, it’s their option and responsibility to seek a better deal elsewhere. None of this changes brokers’ need to pay for office space, insurance, audits, licensing and bond fees, etc.
Moreover, brokers who fully and clearly disclose their firm’s compensation to clients must discuss with and disclose to borrowers their collection of YSP on multiple occasions, including on the:
- Current good-faith estimate (GFE);
- New GFE, which takes effect this coming Jan. 1;
- Mortgage loan origination agreement;
- Brokerage business contract;
- U.S. Department of Housing and Urban Development (HUD)-1 settlement statement;
- Attorney closing instructions that borrowers normally have to acknowledge; and
- Regulation Z/TILA disclosures that lenders send to borrowers after application.
Brokers could say directly to clients: “I get paid by banks to place your loans with them. Many lenders compete over my business as a broker, and in some cases, they pay me to place your loan with them.” By and large, clients don’t care and won’t care.
Time to act
Now is the time for everyone in the mortgage industry to fight the Fed’s attempt to eliminate YSP. The Fed already more or less owns our banks and financial markets. Are we going to stand by and let them own us, too?
First, consider joining the National Association of Mortgage Brokers (NAMB). NAMB volunteers often are small-business owners, and they want our industry to thrive. The dues members pay to NAMB help fight for our interests in Washington, D.C.
Second, you must personally speak up. Comment on the proposed rule. When you do comment, make sure to explain the destructive impact the rule would have not only on the brokerage industry but also on consumers.
Third, educate your peers, business partners and clients about how the proposed rule will harm small businesses and consumer lending activity, and about how it will increase costs for consumers. Ask your partners and clients — past and current — to comment on the proposed rule. Note that without their help, your business and the opportunities offered by mortgage brokers could disappear.