Federal Reserve Board Issues Final Rule Implementing MLO Compensation and Anti-Steering Provisions of the Dodd-Frank Act

**BREAKING NEWS**  **BREAKING NEWS**

EFFECTIVE DATE:
4/1/2011

On Monday afternoon, the Federal Reserve Board issued a final rule effectively implementing the sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act dealing with loan originator compensation and the prohibition against loan steering.  The word “effectively” is used because essentially, this is a modified version of a proposed rule issued last August 26th (which is well before the Dodd-Frank Bill was even debated on Capitol Hill).

The new rules will become mandatory on APRIL 1, 2011, although if past rulemaking is any indication, many banks/investors will begin to implement changes sooner to ensure that loans made under the existing rules are closed before the deadline.

Here are some key details:

  • All loan originators will no longer be permitted to receive compensation based on the loan terms (interest rate, etc.), but will be allowed to be compensated based on a fixed percentage of the loan amount.  Based on the language in the Act and in the rule, it would appear that YSP is effectively eliminated as of April 1st.
  • On a given transaction, loan originator compensation may come from the consumer OR a third party (i.e. a bank in a brokered transaction), but NOT BOTH.
  • Loan originators will be explicitly prohibited from steering borrowers to loans that are “not in their interest” in order to receive more compensation.
  • It establishes a “safe harbor” tolerance for the steering prohibition, saying that no steering is deemed to have occurred if:
    • The Loan Originator presents the Consumer with loan offers for each product in which the consumer states they have an interest AND
    • The loan options that are presented include the lowest rate that the consumer is qualified for on a loan with no high-risk features like a prepayment penalty or negative amortization as well as the lowest origination fees and points that the consumer is qualified for on that loan.

The text of the final rule, which contains all of the provisions and requirements including in-depth detail on safe harbor, can be found at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816d1.pdf

In the actual text of the rule, the Federal Reserve Board gives some very specific examples of compensation that would and would not be permitted under the new rule.  A thorough reading of pages 100 – 107 of the rule may prove helpful to loan originators, managers and company owners alike.

2 Responses to Federal Reserve Board Issues Final Rule Implementing MLO Compensation and Anti-Steering Provisions of the Dodd-Frank Act

  1. Yong Il Lee says:

    In my opinion, the new law will hurt the consumers more than it benefits. Brokers in the past, despite the fact that there were some bad people who deceived consumers, generally, were able to give lower interest rates and expenses than the large lenders.

    Part of the reason was that the brokers were able to work on low operating cost than the large lenders.
    The new law does not recognize the fact the prohibition will deter the honest competition between loan officers. If the new law is implemented, the loan officers are effectively barred to lower the interest to steer customers. Therefore, it will hinder competition and therefore it would hurt the consumers.

    Also, there have been a situation that the consumers are better off with a little higher interest without paying any closing expenses. The brokers were able to credit entire closing costs by offering a little higher interest rate. For some consumers who know that they would not keep the loan more than two or three years, definitely benefited these options. Now, under the new law, those options will be eliminated and therefore would hurt the consumers.

    • Tony Agosto says:

      Kudos to Mr. Lee! As a Mortgage banker who has been in the profession for more than 11 years, it seems that someone is DEFINITELY playing patty-fingers with the banks (READ big banks). you would think that,
      in this time of deep recession bordering on a genuine depression; people truly fearful of job retention;
      and the the housing industry, mortgage lending in particular, mired in the financial depths of despair, one
      would think that the government – such as it is these days- would focus on trying to stimulate home purchases and not attempting to stifle the legitimate mortgaging entities still attempting to remain viable
      and legitimate. But I guess that’s to much to ask from an administration that thought it a fiscally sound gesture to give billions of tax dollars to banks whose only budget crises were whether they could pay those extravagant bonuses that were indeed given when their bottom lines were well padded.

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