Fed proposes ban on payments for steering customers to higher-cost loans

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In attempt to put on a more consumer-friendly face, the Federal Reserve proposes a ban on side payments to mortgage brokers that encourage them to steer customers to higher-cost mortgage loans.

Consumer groups have been fighting these payments, known as yield spread premiums, for years. It's these payments that likely helped to drive so many people to the subprime loans that caused much of the mortgage mess today.

Most people didn't even know that these payments were being made to brokers because disclosure in some cases was not required and in other cases not easily seen because they were hidden on closing documents.

The payments were never part of the closing costs that buyers or sellers paid. They were payments made on the side when a mortgage broker steered a person to a higher-cost loan.
The Fed likely is putting on this consumer-friendly face in a effort to kill the consumer financial protection agency being proposed by President Obama and Congress. They want to show that they too care about consumers.

The problem is that they've had the responsibility to protect consumers taking out mortgages since 1994 and didn't do anything to rein in abuses until 2008. By then the housing bubbled burst and many subprime loans were already in default.

In addition to killing the yield spread premium, the new rules will:

  • Require more streamlined cost disclosures to people after they apply for a mortgage.
  • Require a one-page document warning about risky loan features, such as negative amortization and balloon payments.
  • Require clearer information about how payments may change with an ARM.
  • Require more disclosure about the routine costs associated with a mortgage.

Changes will also be made to the disclosures for home equity loans to clearly spell out the risks of taking such loans.

Within three days of getting an application lenders must furnish consumers with tailored cost information that will enable them to shop for and compare mortgage deals. Right now equity line shoppers don't receive information about the APR or the credit amount of the loan until after the account is open, making it impossible for them to compare offers.

The Federal Reserve will take public comments on this proposal for 120 days before the rules are finalized. Let's hope they stick to their guns and don't cave in to what will likely be negative comments from brokers on the yield spread premium ban.

Lita Epstein has written 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."
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