The Federal Reserve has announced new rules in an effort to protect consumers from abusive mortgage lending practices, which led to the real estate collapse. The regulations are part of the new financial reform legislation mandated by Congress.
The new rules apply to mortgage originators, brokers and companies, including banks and mortgage firms employing them. Under the new regulations loan originators may no longer be paid a higher commission for recommending one loan over another.
Loan agents were customarily paid higher fees for recommending a higher rate or more costly mortgage to loan purchasers during the real estate boom, which led to at least hundreds of thousands of foreclosures.
The rule change is intended to prevent loan originators from receiving higher compensation at the cost of damaging consumers. Lenders can still continue to receive fees that are based on a percentage of the loan amount, however, which is common in the mortgage business.
Loan originators will also be prohibited from receiving compensation from both the consumer and another party such as a bank or mortgage company. Consumers were typically not informed that loan originators and brokers often received payments for their work from both parties. The new rule seeks to protect consumers who agree to pay the loan agents through a higher interest rate or through fees such as points charged up front on a mortgage are not paying more as a result.
The Fed is also instituting a rule prohibiting loan originators from directing or “steering” a consumer to accept a mortgage that is not in the consumer’s best interest in order to increase the loan agents’ compensation. The rule preserves consumer choice by ensuring that consumers can choose from other loan options, including loans with the lowest interest rate and the least amount of closing costs rather than loans that pay the originator higher fees.
The new rules are set to go into affect April 1, 2011.