- The Washington Times - Thursday, February 24, 2011

April 1 marks a deadline for mortgage lenders and brokers. As of that date, lenders and brokers will be required to comply with the Federal Reserve’s new rule on loan originator compensation. My inquiries into the details of the rule in hopes of clarification so far have left me with the opposite feeling. So far, the rule is about as clear as mud.

As April approaches, I’ll be keeping readers apprised as to how the mortgage industry will interpret the rule, as it could greatly affect a consumer’s choice when determining the most appropriate mortgage.

The purpose of the rule is to protect consumers from unfair or abusive lending practices that can arise from certain loan originator compensation practices.

My understanding of the specifics is incredibly murky. The only part of the rule I am clear on relates to compensation received by the loan officer from the lender and the borrower.

Loan originators, regardless of whether they are employed by a federally chartered bank or licensed mortgage broker, may not receive compensation from the lender and the borrower at the same time.

This would mean, in my mind, that an originator will not be able to offer consumers the array of interest rates that normally would be available.

For example, a loan officer would be able to offer his customer a rate of 5 percent with no points because the lender compensates him a 1 percent fee. At 4.75 percent, the loan officer might charge the borrower a 1 percent origination fee because the lender won’t pay the fee at the lower rate.

But at 4.875 percent, for example, the loan officer normally would receive a 0.5 percent fee from the lender and then would charge his customer a 0.5 percent origination fee. This form of compensation, under the ruling, is prohibited because the loan officer would receive compensation from both the borrower and the lender, even though his compensation is the same under each rate. So under the ruling, the customer would not be able to have the choice of the 4.875 percent rate with only 0.5 percent origination fee.

There are many other provisions in the ruling that I cannot yet write about. My inquiries to various professionals around the country have had one common theme: No one in the business knows exactly how the ruling will specifically affect the consumer and the cost of obtaining a mortgage, or the affect it will have on the industry.

Some professionals who have studied the ruling have told me they think it ultimately will have little effect on the consumer or the industry and it is akin to digging a hole and filling it back up. Other professionals have expressed their concern that the new ruling will eliminate the ability of a mortgage broker to use lender-paid compensation to pay the borrower’s closing costs. This effectively would eliminate the very popular “zero cost” refinance program and force all consumers to choose an interest rate that would carry thousands of dollars in nonrefundable fees. That would be an economic disaster.

This is just the tip of the iceberg, folks. Stay tuned.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.

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