In the run-up to the Great Recession, consumer advocates complained that mortgage brokers were steering hapless homeowners into higher-risk mortgages so they could secure higher fees. Mortgage brokers, of course, disagree — but that’s not stopping Congress now from capping payouts on high-interest loans.
Here’s the deal. On May 12, the Senate approved an amendment to the financial reform bill (which passed May 20) that limited mortgage broker lending fees to just 3% (including points and fees). The amendment is limited to single-family loans.
Prior to the new rules being passed, mortgage lenders and loan originators could “steer” mortgage loan borrowers into high-cost and riskier loans, even when they qualify for affordable loans. Amendment proponents point to a 2009 Wall Street Journal study that shows 61% of the sub-prime loans that originated in 2006 went to families who qualified for prime loans. Many of those risky “no documentation, no down payment” loans helped fuel the foreclosure crisis that has plugged up the U.S housing market.
The 3% cap provision was brought to the Senate floor by Senators Jeff Merkley (D-Ore.) and Amy Klobuchar (D-Minn.). In addition to the cap on points and fees, the new rule requires lenders to confirm borrowers' actual financial income and to verify their ability to repay the mortgage loan. The amendment passed the Senate by a 63-36 vote.
"Deceptive mortgage practices like hidden steering payments directly led to the Wall Street meltdown and resulted in millions of families losing their homes,” Merkley said. “We took a huge stride forward today in the fight to restore fairness for homeowners and strengthen the financial foundations of our families. I look forward to seeing this amendment become law so that never again will hidden steering payments put millions of homeowners on the fast track to foreclosure.”
Mortgage brokers aren’t happy with the new fee caps. According to the National Association of Mortgage Brokers, the new law would “shut down” the mortgage broker business. “This amendment will take mortgage brokers completely out of the competitive landscape,” said the NAMB’s top lobbyist, Roy DeLoach.
But even with the 3% cap, it’s doubtful that mortgage brokers will go hungry. Even a $200,000 loan can still generate $6,000 in fees. And many brokers have already imposed fess caps on their own — some even less than the 3% mandated by the Merkley/Klobuchlar amendment.
The financial reform bill isn’t final yet — it still has to be reconciled by the U.S. House of Representatives. But there’s little doubt the fee cap will survive the House’s vetting and ultimately will become the law of the land — whether mortgage brokers like it or not.
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