FireDream

Increased Rate Transparency through Reg. Z Amendment?

The Board of Governors of the Federal Reserve System Board propose to increase rate transparency to consumers by restricting creditor payments to mortgage brokers, in the form of yield spread premium, to an amount that is previously disclosed and agreed upon by the consumer. In layman’s terms, yield spread premium is the amount of money that a creditor pays to the loan originator for selling a rate that is higher than the best market rate available to a particular borrower. For example, if you qualify for a rate of 5.5% but I can sell you a 5.75% rate, the creditor will pay me a premium for selling you the higher rate. The amendment applies only to closed-end mortgage loans originated by a mortgage broker and secured by the consumer’s primary residence. In addition, the agreement must also disclose that the consumer will pay the entire compensation even if all or part is paid directly by the creditor, and that a creditor’s payment to a broker can influence the broker to offer the consumer loan terms or products that are not in the consumer’s interest or are not the most favorable the consumer could obtain. (Federal Register, January 9, 2008, Volume 73, Number 6).

This amendment comes on the heels of what FireDream has previously committed to do for its borrowers. Please refer to the True Costs of Mortgage Revealed article from October 18, 2007.

While this amendment is a step in the right direction, it doesn’t go far enough. The amendment appears to be a re-statement of several creditors and creditor trade associations. As such, it appears obvious that these creditors and their affiliated trade associations have their own best interest in mind and not you, the consumer, as they would have you believe. If the consumer’s best interest was truly the focus of this amendment, then the creditors, who also originate home loans in-house, would be expected to play by the same rules as the independent mortgage broker. I’m not trying to say that there aren’t unscrupulous mortgage brokers out there and that you don’t need to be careful about who you do business with. However, as one of my law professors once said, Corporations have no soul. The board readily admits that this amendment as presently structured could create an uneven playing field between brokers and creditors. (Federal Register, January 9, 2008, Volume 73, Number 6).

In the end, we’re still in a buyers beware environment. As a consumer, it is wise to shop around and get as much information upfront, in writing, as possible. You can never talk to too many people or ask too many questions when it comes to financing what may be your largest financial transaction ever. If you start down the road with a company or a broker and you get the feeling that they’re not being up-front or honest with you, take your business to someone else¦ even if you’re at the closing table.