The National Association of Mortgage Brokers (NAMB) yesterday filed a lawsuit against the Federal Reserve regarding its forthcoming ban of yield spread premiums.
Effective April 1, yield spread premiums paid to mortgage brokers, along with loan officers employed by depository institutions, will effectively be banned.
Yield spread premiums (YSP) are paid out to mortgage brokers and their loan officers by banks and lenders when they sell borrowers a mortgage rate that is higher than what may have actually been qualified for.
For example, a borrower could be eligible for a rate of 4.75 percent on a 30-year fixed mortgage, but the broker/loan officer may sell the borrower a higher rate, such as 5.25 percent.
The resulting commission for selling the higher rate is what the Federal Reserve has taken issue with – mortgage brokers argue that the YSP can also be used to cover upfront closing costs, making homeownership more attainable.
But some mortgage brokers and loan officers double-dip, meaning they take YSP on the back-end, while also charging a loan origination fee in the front.
This double commission also lands the borrower in a higher monthly mortgage payment, increasing their chance of default.
The Fed’s final rule says a loan originator may not receive compensation based on the interest rate or other loan terms, and prohibits those who receive compensation directly from the consumer to also receive compensation from the lender or another party.
Retail Lenders Could Gain Unfair Advantage
However, retail banks and mortgage lenders also make commissions on the front and back-end, with the latter referred to as service release premium (SRP), when they sell off their loans on the secondary market.
They aren’t subject to rules on this because their commission is unknown until the mortgage is actually sold, if it is indeed sold at all.
Brokers have long argued that a YSP ban would lead to an unfair advantage for retail banks and mortgage lenders, while minimizing competition and driving up borrowing rates.
NAMB has argued that the ruling prohibits mortgage brokers from paying their loan officers commissions based on fees paid by the consumer, and believes the Federal Reserve should withdraw the rule and instead let the Bureau of Consumer Financial Protection (CFPB) sort it out.