subject: Ban On Incentives Paid For Mortgage Officers And Brokers [print this page] Richard Cordray, the Attorney General of Ohio has teamed up with attorney generals of 14 other states to back a measure banning incentives being given to loan officers and brokers in the mortgage industry. It is they who have peddled risky and expensive loans and triggered off this crisis. Cordray said, I strongly support changing the law to end predatory practices like these that fueled the foreclosure crisis and the collapse of the mortgage market. Paying incentives to place customers in riskier loans is rewarding the behavior that is ruining so many communities. Whats even more tragic is that without this type of steering, some consumers may have been able to get more affordable loans and avoid foreclosure entirely.
Till now the practice has been to give extra remuneration to the brokers and officers calculating on the kind of loans they had originated. For example a broker could get extra dollars for having sold an ARM instead of a prime mortgage. Brokers could also be monetarily encouraged for YSP (yield-spread-premium) that would place the borrower on a higher niche than he or she could afford. These incentives fueled their activities in distributing willy-nilly the wrong loans to the wrong people.
The attorney general of Arizona, Connecticut, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, North Carolina, Rhode Island, Tennessee, Vermont and West Virginia in telling the Federal Reserve regarding changes to the Federal Truth in Lending Act Regulation Z.
Cordray observed that the suggested changes would set aside certain kinds of compensation but even then the officers and brokers would continue to receive incentives based on different factors like flat-fee, volume of loans they originate of the time taken in pushing through the loan. His recommendation was that the Federal Reserve should encourage the compensations to be based on the performance of the loan for the long term. He said, Right now, brokers and lenders often stand to profit from originating high-cost loans that consumers cant actually afford. Ultimately, we want to provide incentives for originating loans that perform well in the long run. These proposed changes are an important step toward that goal.
The discussion about the suggested changes started last August. It is now up to the Federal Reserve to decide whether to proceed with the alterations or not. The decision is pivotal to the future of the mortgage industry and the avoiding of a rerun of the present crisis.
