New federal rules go into effect on April 1 that will change the way mortgage brokers across the country can make money. They will no longer be allowed to earn a bigger commission for giving a customer a loan with a higher interest rate.
Consumer groups are applauding the change, but the mortgage industry says the rules are unfair and could drive lots of smaller brokers out of business.
In the past, a broker arguably had an incentive to steer potential homebuyers or existing homeowners who want to refinance their house into a loan with a higher interest rate. Of course, many honest and reputable mortgage brokers would never mislead their clients.
"They've basically received a kickback from the lender," says Ira Rheingold, the executive director of the National Association of Consumer Advocates in Washington, D.C. He says mortgage brokers have "made more money when they were able to stick you with a loan that was worse than what you otherwise would have qualified for."
The Debate Over Yield Spread Premiums
The practice has been perfectly legal until now. Brokers get the extra money through what's called a "yield spread premium." And Rheingold is happy to see new rules from the Federal Reserve that will ban brokers from making extra money this way.
"It's about time," he says, adding that the new rule will begin to "create a place where consumers have a better chance of not being cheated in the marketplace when they're buying a mortgage."
Many mortgage brokers have a different perspective.
Robert Petrelli, the owner of Mount Vernon Mortgage Corp. in Weymouth, Mass., has been in the banking and mortgage business since 1971. And he's a former president of the state's mortgage broker trade group.
"Yield spread isn't a kickback," he says. At his desk, he pulls out a home loan rate sheet from a major bank and explains how mortgage brokers make their money.
Basically, he says, brokers get a wholesale price for a loan from a bank -- the same way retail shoe stores or supermarkets pay wholesale prices.
And just like a shoe store, to stay in business Petrelli has to charge something extra to cover his overhead and make a living. In the mortgage business, one of the central ways that's done is through yield spread premiums, which are targeted in the new rules.
Petrelli says there's nothing inherently wrong with receiving the premiums. He says the premiums are just a basic building block of how reputable, honest mortgage brokers make their money.
These new rules will change the way the industry gets paid. And many in the business say the new rules aren't fair.
A Bias Toward Big Banks?
If these rules go into effect on April 1, it will mean, "a tremendous amount of layoffs," says Mike Anderson, the chairman of the government affairs committee for the National Association of Mortgage Brokers. "We are hearing from mortgage brokers across the country that say they're going to let all their loan officers go and become one-man shops."
Anderson says the Fed's new rules favor big banks at the expense of small mortgage broker businesses. Big banks will have more flexibility in what they charge customers, while mortgage brokers will be locked into a set profit margin that will tie their hands and make it hard to compete, he says.
Anderson's trade group has filed a lawsuit in federal court against the Fed seeking an injunction to postpone the new rules.
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