The National Association of Mortgage Brokers is so concerned that recently proposed legislation would crush its revenue model that it scheduled national teleconferences and prepared sample letters for members to mail to their respective congressmen.
In an e-mail to all NAMB dated Nov. 1, Denise Leonard, the organization’s government affairs chairperson, wrote:
“Mortgage brokers are facing extinction. The U.S. House of Representatives is considering a bill that will fundamentally change the way we are paid, outlaw YSP, and legislate underwriting guidelines into law. Additionally, we fear that all subprime lending will cease to exist due to excessive lender liability. …”
NAMB members reported that 500 phone lines were made available for two teleconferences last week — and all lines were busy. An unknown number of brokers could not get through due to the volume of calls.
The bill, H.R. 3915, is known as the Mortgage Reform and Anti-Predatory Lending Act of 2007 and was recently introduced by House Financial Services Committee Chairman Barney Frank, D-Mass., along with Democratic North Carolina Reps. Brad Miller and Mel Watt.
A mortgage broker is often confused with a mortgage banker. A broker does not actually lend money. A broker acts as a liaison between a consumer who needs financing for a mortgage loan and a lender who has money available to finance the purchase. The broker brings the lender and borrower together.
Mortgage brokers receive a loan fee from either the borrower or the lender, or both. Borrowers may pay brokers an origination fee based on a percentage of the loan amount. In some cases, the broker receives a fee from the lender. Fees paid by the lender to the broker are known as yield spread premiums (YSPs). It is this fee that brokers are concerned about losing.
In a letter to NAMB members, NAMB President George Hanzimanolis voiced serious concern about the legislators’ decision to eliminate the originator’s ability to receive direct and indirect compensation.
“The indirect compensation mortgage brokers receive from lenders is a defendable fee that actually lowers closing costs to consumers,” Hanzimanolis wrote. “It is an imperative tool for first-time home buyers, and critical to enable so many people to own a home and manage their finances.”
While some analysts concur with NAMB that YSPs provide a useful avenue to cash-strapped borrowers, others say that many borrowers frequently do not understand that they are paying the YSP in the form of a higher interest rate, and that the exact amount of the fee is not known until the borrower is already committed to the transaction.
According to the House Financial Services Committee, the bill will prohibit the “steering” of borrowers to loans that are not in the consumers’ best interest and call for licensing and registration of mortgage originators, including brokers and bank loan officers. In addition, the new legislation will set a minimum standard for all mortgages, which states that borrowers must have a reasonable ability to repay.
A controversial section of the legislation attaches limited liability to secondary market securitizers who package and sell interest in home mortgage loans outside of these standards. However, individual investors in these securities would not be liable. While brokers and bankers have been accused of causing the current mortgage meltdown by granting loans to unqualified borrowers, the intense pressure to provide these mortgages to Wall Street in the form of mortgage-backed securities also has contributed to the problem.
The bill also expands and enhances consumer protections for “high-cost loans” under the Home Ownership and Equity Protection Act and includes important protections for renters of foreclosed homes.
The NAMB approves of language in the bill mandating strict national standards for all loan originators, regardless of where they work within the mortgage industry. The bill would require criminal background checks, testing to demonstrate basic knowledge of loan products, and continuing education and professional ethics training for all who originate mortgage loans.
“These provisions represent a huge victory for consumers and for NAMB, which has fought for years to make it easier for consumers to compare loan products offered in the different mortgage sources, such as banks, lenders and mortgage brokers,” Hanzimanolis said. “The mortgage industry has changed dramatically in recent years, but the laws and regulations designed to protect consumers have lagged behind. These reforms will help modernize the regulatory system and drive bad actors from our industry.”
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