Dodd-Frank Act: New Limitations on Mortgage Originator Compensation
In an attempt to prevent lenders from inducing borrowers to take on residential mortgage loans with rates, fees and other terms that are excessive or abusive, Congress recently imposed new limitations on mortgage originator’s compensation and prohibited the steering of consumers to unsuitable mortgage loans.
Specifically, Section 1403 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), amended the Truth in Lending Act by adding a new provision prohibiting an originator from receiving, “directly or indirectly, compensation that varies based on the terms of the loan” (other than the amount of the principal). In addition, Section 1403 specifically prohibits “any yield spread premium, or other similar compensation that would, for any mortgage loan, permit the total amount of direct and indirect compensation from all sources permitted to a mortgage originator to vary based on the terms of the loan (other than the amount of the principal).” Yield spread premium is, in essence, a form of compensation to an originator for a higher interest rate on a loan in exchange for lower up-front costs. Thus, any compensation to a mortgage originator that is affected by the terms of the loan is prohibited.
Additionally, the Act requires the Board to adopt regulations which would prohibit originators from steering borrowers from a qualified mortgage to a non-qualified mortgage. In other words, originators may not steer a consumer toward a loan that the consumer lacks the ability to repay or to a loan that has predatory characteristics such as excessive fees or other abusive terms.
The Act also empowers the Board to issue regulations to prohibit “abusive or unfair lending practices that promote disparities among consumers of equal creditworthiness but of different race, ethnicity, gender, or age.” These regulations are yet to be issued and, until such time, the full extent of the potential impact of this part of the Act cannot be predicted.