Mortgage Brokers and Borrowers: Congress Weighs Their Rights

Just because versions of financial reform have passed the House and Senate doesn't mean the mortgage lobbyists' job is over yet. The Senate bill put limits on how much money a mortgage broker or banker can make when they sell you a mortgage. Now mortgage industry associations are fighting to protect their right to profit without any restrictions.

Congress still has to work out the differences between the House and Senate bills before handing over to President Obama to sign. And while Wall Street is focusing its firepower to protect its lucrative business in derivatives – the explosive financial technology that brought down AIG -- the folks who make and sell mortgages have a different agenda.

Lenders would like to scratch an amendment to the financial regulation bill that tells mortgage retailers that they can't have their cake and eat it, too. The amendment would give lenders a choice of getting paid directly by the consumer through upfront fees, or by a higher interest rate for the customer -- getting what is essentially an advance from the lender against that extra future income from the loan.

They can't get both.

Oregon Sen. Jeff Merkley (D), pictured above, introduced the amendment, which passed the Senate on May 12 by a 63-36 vote. It strikes at the heart of how mortgage brokers and loan officers make a living by targeting the "yield spread premium," a form of compensation to mortgage brokers. Loan officers employed directly by lenders get similar compensation for pushing higher interest rates, called an "overage."

Yield spread premiums give mortgage brokers a powerful incentive to push borrowers into loans that are more expensive than they otherwise qualify for. Researchers analyzing subprime and other high-interest and high-risk loans made during the real estate bubble have found a lot of evidence that yield spread premiums led many borrowers to take out loans that would become difficult or impossible to pay, and pushed many who qualified for prime loans into taking out subprime mortgages instead.

The Merkley amendment keeps the one arguable benefit of yield spread premiums – they give consumers the ability to pay the broker's fees over time, instead of upfront – but makes it much more difficult for brokers to collect excessive payments from consumers. It also requires lenders to make sure borrowers have reasonable ability to pay back their loans.

Great and necessary steps, right? Not according to the Mortgage Bankers Association and National Association of Mortgage Brokers. The industry groups mobilized their members to fight the amendment and are still looking to get it pushed out of the bill. "I have serious concerns with the amendment and fear it will harm small business and consumers nationwide," reads the text of the sample letter for mortgage brokers to send to their senators. "I urge you to ask that the amendment be removed from the bill or fixed so that consumers will continue to have choices at the closing table."

Along the same lines, the Mortgage Bankers Association said in an analysis of the amendment: "MBA is extremely concerned that the YSP provisions will markedly lessen the range of mortgage financing options available to consumers." With a lot of chutzpah, the MBA also attacks the rule that says consumers must have the ability to pay their mortgage: "The new underwriting provisions will markedly tighten credit so that only the lowest risk borrowers will qualify, and they will increase the rate and costs to consumers of mortgage loans."

Given the strong majority vote in support of Merkley's amendment, it's unlikely to drop out of the final financial reform bill. But in Washington, you can never be too sure.

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