The US Federal Reserve announced a new rule yesterday, aimed at banning premium payments, which allowed mortgage brokers and lenders to collect more gains by charging mortgage borrowers with interest rates higher than the benchmark.
Reaction to the new rule was muted, but some said the ban should have been implemented long ago, when it could have affected loan quality in the US.
Michael D. Calhoun, President for the Center for Responsible Lending, described the changes as “a real milestone”. However, he noted that he had been trying to tell regulators that yield spread premiums were illegal. Borrowers, on the other hand, had less knowledge on what a yield spread premium was.
Traditionally, mortgage borrowers pay directly to mortgage brokers. The increase in premium payments allowed mortgage brokers, who brought lenders with higher interest loans, to receive huge compensations from the lenders through bonuses.
Some brokers bring unsuspecting buyers into this kind of loans, and convince them that it is the best mortgage package being offered.
“People didn’t just happen to end up in risky loans,” said Mr. Calhoun. “Mortgage brokers and other people on the frontlines were getting two to three times as much money to push buyers into those loans than they were into 30-year fixed-rate loans. So what do you think happened?”
While the new rule prohibits payments that are based on interest rates, compensation is allowed based on a fixed-rate loan amount.
To help buyers prevent from picking up loans that offer less favorable terms, the new rule orders lenders to provide borrowers with competing options, such as lowest points and origination fees, lowest qualifying interest rate and lowest qualifying rate.