Following the Federal Reserve Board's ruling to prohibit
mortgage brokers from receiving a commission based on interest
rates of loans, the National Association of Mortgage Brokers has
filed a request for emergency relief to prevent enforcement of the
In response to a volatile real estate market and a pool of
insecure borrowers, the Federal Reserve sought to further regulate
lenders. In what appears to be an action intended to instill
confidence in future borrowers, regulators sought to prohibit
commission-based payments to loan officers. The new regulations
provide that mortgage brokerage companies are both prohibited from
charging yield-spread premiums and also forbidden from paying their
individual employees or loan officers commissions based on
transactions in which the consumer pays the origination
A yield-spread premium occurs when a borrower accepts a higher
interest on a loan in lieu of paying upfront costs at closing. The
loan officer is then indirectly compensated for the borrower's
electing that higher interest rate.
For example, rather than electing a 4 percent interest rate on a
$200,000 loan and paying 2 percent of the principal at closing, the
borrower could elect a 4.5 percent interest rate and bring only 1
percent to closing. Typically, 1 to 2 percent of the principal is
charged as an 'origination fee' at closing. Because the loan
officer would lose that one percent, if the borrower elects the
higher interest rate, the plan officer would be indirectly
Though this is an elementary explanation of how such closing costs
are calculated, as many factors will affect the final costs (i.e.
credit score, available discounts, appraisal value, etc.), it
elucidates the concern.
The Federal Reserve argues that such premiums and commissions
provide a perverse incentive for loan officers to either induce
borrowers to borrow more money than is truly necessary, or to elect
a higher interest rate with the outcome that the loan officer
receives greater compensation. The board cites the Home Ownership
and Equity Protection Act (HOEPA) as its authority to act, which
allows the board to regulate or prohibit acts or practices found to
be unfair, deceptive or to evade the provisions under the
Citing the reasons aforesaid, the board believes such regulations
fall under its purview. The board is proposing a flat fee for loan
officers to ensure the decisions made are in the borrowers' best
The National Association of Mortgage Brokers has quite a different
view on the matter. According to NAMB, the yield-spread premium
exists as a viable option to borrowers who either do not want to
pay upfront costs at closing or simply cannot afford to do so.
Additionally, such premiums must be disclosed on the Good Faith
Estimate furnished to the borrower within three days of the initial
application. By the NAMB's calculations, this is an option that
exists at the election of the borrower and is never
Additionally, the NAMB argues, such regulation will virtually end
the business of the small mortgage broker. According to the NAMB,
more than 50 percent of mortgage brokers are big banks who can make
up for such legislation in other departments.3 The
regulation provides that mortgage brokerage companies are the only
one mentioned, so the rule will not apply to lenders or creditors.
Smaller businesses would not be able to compete. The NAMB believes
that this new rule will cause small mortgage brokerage houses to
close their businesses for good. Accordingly, the NAMB argues, loan
officers for these smaller brokerage houses will leave for bigger
banks and creditors wherein the rule will not
The U.S. Court of Appeals for the District of Columbia has yet to
rule on NAMB's request for emergency relief.
Anne Best Bennette graduated from Northeastern University
with an undergraduate degree in political science and French. She
obtained her juris doctorate from Suffolk University Law School and
has worked as a real estate attorney for Sharaf & Maloney PC
112 C.F.R. § 226.36 (d) & (e) (2011).
215 U.S.C § 1693 (1)(2) (2011).
3Nat'l Assc. of Mortgage Brokers v. Bd. of Governors of
the Fed. Reserve System, Case No. 11-5078 (2011).
4Id. at 6-7.