Yield-Spread Premiums Prohibited Under New Loan Origination Compensation and Steering Rules

Under Loan Originator Compensation and Steering rules issued by the Federal Reserve, new restrictions on loan originator compensation and steering practices will go into effect on April 1, 2011.  The new rules amend Regulation Z, Federal Reserve rules for implementing provisions of the Truth in Lending Act (TILA), and are consistent with the § 129 TILA provisions in the Dodd-Frank Act (15 U.S.C. 1639(l)(2)).  In particular, the new rules have three major prohibitions:

  • Loan originators compensation must be based on the principal loan amount and cannot be based on any other loan terms or condition, such APR or interest rate.  These new restrictions effectively end the practice of loan originators receiving yield-spread premium compensation from lenders.
  • Loan originators cannot receive compensation from any other party if it receives compensation from either a lender or consumer (buyer).
  • Loan originators cannot steer consumers toward loans that result in greater compensation for the loan originator unless the loan is in the consumer’s interest.  The rule also provides a safe harbor provision to loan originators if consumers are presented with loan offers for each type of transaction for which a consumer expresses interest.

Some have already speculated that the new rules would result in borrowers paying less for broker services.  Additional discussion and analysis of the new rule can be found here and here.


Mortgage Bankers have filed suit

    against the Federal Reserve claiming that the rule creates “catastrophic” and “devastating” harm and that the Fed overstepped its authority.

James Nguyen, Yield-Spread Premiums Prohibited Under New Loan Origination Compensation and Steering Rules, Berkeley Bus. L.J. Network (March 7, 2011), http://thenetwork.berkeleylawblogs.org/2011/03/07/yield-spread-premiums-prohibited-under-new-loan-origination-compensation-and-steering-rules/.