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Federal Reserve Adopts New Rules To End Harmful Mortgage Loan Kickbacks

Posted By admin || 28-Aug-2010

Federal Reserve Adopts New Rules To End Harmful Mortgage Loan KickbacksThe Federal Reserve has adopted new rules banning what is called "yield spread premiums," a practice which allowed mortgage brokers and lenders to earn extra profits every time a borrower was placed in a mortgage that had higher-than-market interest rates.   What are yield spread premiums?  Before the mortgage bubble, mortgage brokers were traditionally paid directly from the home buyer.  But with yield spread premiums, mortgage brokers were allowed to receive compensation from both the buyer and lender.  Lenders offered an incentive to brokers who placed borrowers in high interest toxic loans by paying bonuses on those loans.   Many critics of yield spread premiums argue that this type of kick-back compensation fueled the foreclosure crisis by creating an environment where mortgage brokers were rewarded for placing unsuspecting borrowers in expensive and toxic loans that made them more vulnerable to foreclosure. 

The new rules now prohibit bonuses based on a loan's interest rate; but does allow compensation based on a fixed percentage of the actual loan amount.  Also, the new rules state that the mortgage broker must provide the borrower with several mortgage options, including mortgages that have the lowest qualifying interest rate, the lowest points and origination fees and the lowest qualifying rate.

While it is good news that the Federal Reserve has finally stepped forward to stop these unethical business practices, it is unfortunate that they waited until the foreclosure crisis did major damage to those who fell prey to toxic mortgages.   The Federal Reserve also needs to include some penalties for those who violate the new rules and remain vigilant for any signs that the mortgage industry may be discovering and exploiting loopholes in the new laws.

Categories: Loans / Mortgages
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