In an effort to protect consumers in the mortgage market from unfair practices involving the compensation of loan originators, the Federal Reserve has issued a new rule amending Regulation Z, which implements the Truth in Lending Act. The new rule, which will take effect on April 1, 2011, prohibits lenders from compensating mortgage brokers or other loan originators based on a mortgage transaction's terms and conditions, such as its interest rate, annual-percentage rate and loan-to-value ratio. The amendment purports to address concerns that the interests of brokers, because of the ways they are compensated, often are not aligned with borrowers' interests. For example, lenders may pay rebates to mortgage brokers who find borrowers to pay higher interest rates than those for which they qualified. The rule allows lenders to compensate brokers only based on a fixed hourly rate, the amount of credit they extend, and the number of loans they originate. The rule also prohibits brokers from attempting to increase their personal compensation by steering consumers to unfavorable transactions. A transaction is unfavorable if it is not on similar terms to other loans that creditors are extending to borrowers with similar credit ratings. Finally, the rule forbids mortgage brokers from receiving transaction-specific compensation from both the borrower and the lender in a single transaction. For example, a broker may not receive commission from a bank while charging a processing fee to the borrower. Image by Flickr user MoneyBlogNewz, and used under a Creative Commons license.
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