Proposed changes to Regulation Z provide for
disclosures at various times in the loan process. What must be disclosed when:
at time of application:
“ • key Questions to ask about Your
“fixed vs. adjustable rate mortgages” •
pamphlet, which would replace the
“Consumer Handbook on Adjustable-Rate
revised arm-loan-program • disclosure
with terms in a question-and-answer
Within three days of application:
three days before consummation:
revised early truth in lending act (tila) •
disclosure, which also would be required
three days before charging any fees other
than those for credit reports
new calculations for annual percentage •
rate and finance charges to be more
inclusive of third-party charges
column comparison of interest rates • for
borrowers with varying credit grades
summary of key loan features • , total
settlement costs and potential changes
to interest rate and monthly payment
final tila disclosure •
procedures for disclosing loan changes •
after the final tila
After consummation, note that the time
period for notice of changes to ARMs is now
60 days, and more-detailed statements are
required for payment-option ARMs.
The government believes a lack of clarity surrounds YSP. This concern comes despite the fact
that mortgage brokers must disclose lender payments on good-faith estimates and U.S. Department of Housing and Urban Development (HUD)-1
settlement statements. Moreover, HUD-1 statements are closed by a third party — often an attorney — tasked with ensuring that consumers are
informed of all terms of the loan.
On the other hand, similar income that goes to
lenders isn’t disclosed to consumers. Further, new
Real Estate Settlement Procedures Act guidelines
make lender premiums paid to brokers more visible to consumers but keep similar income paid to
funding lenders hidden from consumers. Because
of this, transparency often lacks when brokers
aren’t part of the picture — not when they are.
As written, the new Regulation Z rule would prohibit lender payments to mortgage brokers and
loan officers based on a loan’s terms or conditions. It also would prohibit steering consumers to
transactions not in their best interests in order to
increase origination compensation.
(Editor’s note: This past October, U.S. Rep. Gary Miller
[R-Calif.] indicated Congress would address the YSP issue
by merging House Resolution No. 1728, which passed the
House, and House Resolution No. 3126, which passed the
House Financial Services Committee. At press time, the
Senate had yet to consider the bills.)
The proposed TILA change could impact mortgage lending drastically and greatly decrease the
viability of small independent mortgage brokers.
Consequently, the loss of wholesale brokers would
lessen competition, limit consumer choice, and increase costs for lenders and borrowers.
Problem with premise
Part of the problem with this proposed revision
is that it’s based on the premise that YSP, which
also can be thought of as lender-paid premium,
incentivizes brokers to act contrary to the best
interests of consumers — and that YSP alone
somehow creates a reason to steer consumers
into bad loans.
This understanding of YSP fails to recognize
that interest-rate-based premiums constitute a legitimate way to offset the cost of retail operations.
This can be demonstrated by comparing interest
rates offered by mortgage brokers who don’t fund
their own loans to interest rates offered by lenders
who do. The offered rates are similar. But brokers
generally receive a portion of the interest premium
from wholesale lenders.
While wholesale lenders retain the interest premium that covers the market risk associated with
servicing and selling loans, mortgage brokers receive the interest premium that covers the risk
associated with the cost of maintaining retail operations. On the other hand, lenders that fund their
own loans retain the full interest premium to offset
their market risk and the risk associated with their
retail operations. As written, the rule change would
not remove the interest premium but only would
change who retains the income.
The rule revision also doesn’t adequately address the nature of the mortgage bond market, in
which securities are priced at increments much
smaller than contracted interest rates for the individual loans. The market provides pricing options for consumers, which consumers might not
The interest rate is one of several loan features
that determine the price a mortgage investor will
pay to service a closed loan. The price becomes
the premium or discount paid when the closed loan
is sold to the final investor.
For example, one lender or investor might offer
an interest premium to a mortgage broker of 1 percent for a 4.75-percent loan. The next-lower rate
might cost a consumer a 0.5-percent discount.
The provisions of the pending TILA change to
restrict lender-paid premiums don’t provide adequately for these market variations and fluctuations. These premiums or discounts factor into the
determination of the total upfront, out-of-pocket
expenses borrowers will pay.
In comparison, another lender might offer a broker a lender-paid premium of 0.125 percent for the
same 4.75-percent loan, and the next-lower rate
On This Issue/In This Issue
The Federal Reserve Board is accepting public comments on proposed changes to Regulation Z/Truth in Lending Act until Dec. 24. E-mail
comments about changes pertaining to closed-end credit, identified by docket No. R–1366,
to email@example.com. Include the
docket number in the subject line of the message.
This month’s Scotsman Guide features additional articles on this topic:
“pending changes require attention,” • Page 23
“Ysp needs Your support,” • Page 26
would cost the consumer a 0.9-percent discount.
In this case, the lender decides to retain a larger
portion of the interest premium to offset its own
retail costs and profits.
In either case, the consumer has the same payment. In the second example, however, the broker
receives less of the premium, which must be made
up with upfront charges to offset normal expenses.
When the funding lender retains the premium, it
doesn’t change what the borrower pays; it only
changes who keeps the market premium.
Restricting lender payments to brokers could
create unfair advantages for lenders and force
brokers to increase upfront fees in an effort to
recover lost income. If implemented as written,
the rule will eliminate many brokers’ ability to
compete with lenders. Ultimately, the loss of
competition will increase the interest rates consumers pay.
Regulators, consumer advocates and legislators point to past examples of steering from a
low-rate loan to a much-higher-rate subprime
(aka, nonprime) loan. Some give extreme examples of rate increases of 2 percent or more. Such
steering, however, never made sense because
brokers could generally earn a higher interest
premium for selling lower-rate conventional or
Federal Housing Administration loans than they
could from selling subprime loans. Beyond this,
however, there is another point worth making:
The subprime loans in question are in large part
no longer available.
Opponents of YSP also like to note loan-officer
compensation abuses that occurred when originators increased adjustable-rate margins and prepayment penalties. Again, programs that once allowed
such things are all but extinct. If the market ever
does re-embrace negative amortization and pay-option ARMs, restrictions could be targeted to
those specific programs.
Regardless of how you look at it, neither argument has anything to do with income from YSP,
continued on page 22 »
Richard Smith is the retail manager with
American Acceptance Mortgage Inc. in
Chattanooga, Tenn. He has originated
government, conventional and jumbo
loans since the company opened in
1994. He supervises an origination
staff of more than 15 loan officers in
two offices. The company lends in Tennessee and Georgia.
Reach Smith at (423) 899-6898, (888) 474-9920 or rsmith@
aamonline.com. Visit www.RichardSmithHomeLoans.com
for more information.