We fielded many questions after our last update. Here are the answers to your FINANCIAL REFORM LEGISLATION – FREQUENTLY ASKED QUESTIONS.
Q: When do the provisions in the Mortgage Reform and Anti-Predatory Lending Act take effect?
A: The default effective date for any provisions in the Act that DO NOT REQUIRE RULEMAKING was the day after the President signed the bill. However, as the vast majority of the mortgage banking rules DO require rulemaking, we must wait for the new Consumer Financial Protection Bureau to be formed and for the regulations to be issued. We anticipate that the majority of the mortgage-related provisions will not take effect for at least 18 months. However, it is very possible that the provisions regarding Yield Spread Premiums and compensation will go into effect much sooner. We hope to have clarification from the Federal Reserve Board on effective dates soon so that the industry can create a plan to implement the changes. If and when that happens, we will share any information with you.
Q: What will my rate sheet look like after this goes into effect?
A: No one knows. The Act specifically prohibits compensation based on the terms of the loan (i.e., rate). However, there is a standalone exception that allows for the borrower to pay ALL of the broker’s compensation through a higher interest rate, provided that compensation is of a predetermined amount and is fixed. This would allow the industry to continue to offer no points or zero-cost loans. The thing to remember is that the originator’s compensation must be received ALL from the borrower OR ALL from the lender (for broker transactions). Until the effective date of the law is known, or a wholesale lender decides to test the waters, there is no way to know exactly what a rate sheet will look like.
Q: I work for a retail lender. Will I still be able to be paid based on the terms of the loan?
A: Any formula of mortgage loan originator compensation that is directly based on the interest rate would not be permitted. Note that retail lenders and mortgage banking companies who fund their own loans are still permitted to make Service Release Premium under the Act, even when the borrower is paying some fees directly to the originator. However, it must be true SRP – meaning that the compensation has to occur upon the sale of an already closed loan and not through a table-funded or brokered transaction where the compensation is paid at the closing. However, we do not read the Act as permitting the mortgage loan originator compensation to vary with the interest rate in any way, regardless of the way that the company’s fees are generated.