Monday, November 19, 2007

HR 3915 Passes House - Minus YSP Restriction

HR 3915 (input 3915 into search box), a proposal to modify the Truth in Lending Act, was easily passed by the U.S. House of Representatives. Among other things, HR 3915 would require:

Licensing or registration of mortgage originators.

Originators to give consumers a range of products that the consumer can qualify for based on their circumstances.

Originators to make full and timely disclosure to each consumer of costs and benefits of each product.

Originators to disclose the nature of their relationship with the consumer.

A reasonable and good faith determination that the consumer has the ability to repay the loan, taking into account any other loans on the property (In the case of adjustable rate mortgages, future adjustments must be taken into account as well).

Subpime loans to provide a net tangible benefit to the consumer (They must have either a fixed rate for the first 7 years or have a margin less than 3 percent over its index).

No subprime prepayment penalties and three year limits on conventional loans (or 3 months before reset on an adjustable rate loan).

However, one key component of HR 3915, the elimination of the YSP (yield spread), was dropped from the proposal. Eliminating the yield spread, a payment made to brokers for selling an interest rate ABOVE the the rate the consumer actually qualifies for, was a major concern for brokers who made much of their fee from selling loans at a higher rate. Although the National Association of Mortgage Brokers supported the bills passage after the YSP provision was dropped, is this really what's best for consumers? Some brokers insist that YSP has benefits to the consumer, such as using it to help pay closing costs. But does the average consumer understand the yield spread? Do they understand that they qualified for a lower rate than what they're actually getting?


Renee Kovacs, NSA/UNAA said...

If originators would have followed a policy of full disclosure to the consumer, I would have a hard time imagining YSP ever being considered such an issue. The fact is that it is NOT fully disclosed, and consumers don't have the opportunity to MAKE THEIR OWN, INFORMED CHOICE.

Taking a YSP of any amount without the consumer's CHOICE (to pay up-front and gain a lower interest rate, OR to essentially finance the broker's fee) is the real issue. Originators prefer to make the choices FOR the consumer - as an uninformed consumer is far less likely to complain about the 'cost of goods/service' when he is unaware that HE IS PAYING IT.

A.G.Y. said...

Agreed. At least in the initial wording, this seems to be covered under "originators to make full and timely disclosure to each consumer of costs and benefits." We'll see if that INCLUDES discussing YSP and what kind of teeth HR 3915 actually has.