which long has been a legitimate part
of conventional and government mortgage markets. Loss of that income will
have negative impacts on consumer
choice; small, independent brokers;
and competitive mortgage rates.
« MAZE continued from page 18
rate loan) in which the consumer expressed an interest.” In order to comply
under this safe harbor, brokers “must
obtain loan options from a significant
number of creditors with which the originator regularly does business.”
The three options must include the
the lowest rate; •
the second-lowest rate; • and
the lowest total dollar amount • for
origination points or fees and dis-
In other words, if a broker offers three
options meeting these criteria, and the
consumer chooses the loan in which
the broker receives the most creditor-paid compensation on the consumer’s
own accord, that’s acceptable.
This is an area in which the Federal
Reserve seeks specific comments.
With regard to steering and lender-paid
compensation to brokers, the Federal
Reserve’s provision that loans must
be in consumers’ best interests leaves
much to be defined, which the Fed itself acknowledges.
The proposed rule allows for compliance if brokers and originators provide
at least three loan options “for each type
of transaction (fixed-rate or adjustable-
Proposed changes to Regulation Z also
look at APR and finance-charge calculations and attempt to make them
more comprehensive. Federal Reserve
consumer testing revealed much consumer confusion about APR and finance charges. One of the new rules’
goals is improving comprehension of
the cost of credit.
Despite inherent problems explaining APR, the proposed rule intends to
retain APR as the benchmark for loan
comparisons. As many see it, the problem with APR is that it’s an artificial
number. It’s not used in the calculation
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of the monthly payment, and it varies
with loan size and loan term. In essence, APR can’t accomplish the purpose for which it’s intended. At best,
it’s a distraction.
What the Federal Reserve intends
as a helpful one-number benchmark
instead often adds to consumer confusion. Increasing the font type for APR,
as the proposed rule intends to do, will
not make the number any clearer to
The biggest proposed change to
APR is the expansion of the charges
to be included in the calculation. The
proposed rule intends to include third-party charges in the broad category of
“finance charges.” The implication is
that there is room for lenders to omit
fees in order to lowball APR.
In practice, the present calculation
enables consumers to compare accurately loan charges between different
lenders. There’s little to no confusion
about which charges to include, much
as there’s little to no chance to hide a
charge in a non-APR line. If the purpose
of APR is to enable consumers to select
between loans, then including third-party charges that will be the same regardless of lender or loan dilutes the
comparison and defeats the purpose.
The Fed also has asked specifically
for comment on the unintended consequences of this change.
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Finally, proposed Regulation Z changes
affecting closed-end credit transactions aim to include an early TILA disclosure and a final TILA disclosure. The
final disclosure must come at least
three days before consummation of
the loan. The proposal also includes
provisions for “post-consummation
The Fed’s consumer testing revealed
that much of the information presented
in current TILA disclosures was of secondary importance to consumers when
considering a loan. Of primary importance are the contract interest rate,
monthly payments and closing costs.
One of the disclosures’ main purposes
is to allow consumers to compare credit
terms easily to make the best decision.
The new disclosures should do that. Consumers have the right to expect that their
broker is acting in their best interests.
The new requirement that initial estimates be accurate also will help all mortgage brokers and increase their level of
It’s not in consumers’ best interests,
however, to lose loan-pricing flexibility or
competitive choices because of unfair advantages provided to funding lenders.
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Federal regulators and Congress appear
intent on making changes to the mortgage industry. In many cases, these
changes may not be practical or helpful
for consumers or brokers.
Because of this, brokers should stay
up-to-date with new and proposed rules
and voice their opposition when necessary. As you speak up, make sure you’re
also aware of comment-period time-lines, starting with the Dec. 24 deadline
for Regulation Z comments. •