Walk into a home-loan office and ask if "overages" are charged, and veteran officers will immediately begin coughing or winding their watches.
Younger representatives would have to be told that an overage is a creative manipulation of a loan’s yield-spread premium, or YSP.
Some lenders deliberately take advantage and charge significantly more for a loan than is necessary. The practice was commonly known in the industry as an "overage," yet that was only one of its definitions.
To managers, an overage had become a synonym for funds left over when the loan was sold for less to the secondary market than was charged the borrower. It was all about timing — selling the loan when the time was right. Now, help is on the way.
On Aug. 16, the Federal Reserve announced final rules regarding loan originator compensation practices. The stated goals of the new rules are to protect mortgage borrowers from unfair, abusive or deceptive lending practices, and to help ensure that consumers can choose loan options that include the lowest interest rate and least amount of points and origination fees.
The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders who originate mortgage loans covered by Regulation Z. The Federal Reserve’s "Reg Z" implements the consumer credit protections of the Truth in Lending Act of 1968.
Highlights of the final rules include:
- A loan originator may not receive compensation that is based on the interest rate or other loan terms (effectively putting an end to the use of yield spread premiums). However, loan originators can continue to receive compensation that is based on a percentage of the loan amount;
- A loan originator receiving compensation directly from the consumer may not receive additional compensation from the lender or another party; and
- Loan originators are prohibited from directing or "steering" a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the loan originator’s compensation.
For years, overages were a way of life in the mortgage industry, though there has been a push to dump the usage of the word altogether. Overages became a clandestine commission to the loan rep and a book-balancing tool for the branch office.
Overages are discovered less these days because of the variety of products and the complexity of their sales. The main solutions have been better loan-lock commitments, the enforced use of Good Faith Estimates, and the ability of the consumer to shop market rates quicker with more authority on the Internet.
The "market" is no longer just one benchmark rate, but the variety of rates from which consumers can choose. When the market changes and consumers need to pay more money for a home loan, it’s usually not the local bank setting the rules — it’s Wall Street saying it will not buy home loans unless the loans bring a higher return.
Overages have been charged in more subtle ways. One of them is yield-spread premiums. For example, a lender would quote, or advertise, an interest rate of 5.5 percent knowing full well the loan would be sold at 5 percent.
Three decades ago, when the home-loan market was set at the same price for months, local bankers took your mortgage and put it in their bank vault. They received the servicing fee and all the interest from the loan. They could adjust interest rates depending upon how much money they had to lend.
Now, most lenders sell the loans as securities in the complex secondary marketplace and sometimes retain only the servicing fee. With all the volatility brought by the international market and the various "buydown" options offered by lenders, it is virtually impossible to determine when the lender is charging an overage — especially on a "no-fee" loan.
That’s because unless you know a great deal about the secondary marketing side, it’s extremely difficult to tell if there is an overlap of funds in the transaction. Secondly, if you do not pay out of pocket for fees, the interest rate on the loan will probably be higher.
It’s difficult to ascertain how much of the increased rate will be earmarked to pay the extra fees and how much will remain with the lender as profit.
Let’s hope the new guidelines remove the uncertainty and put more "truth" into truth in lending.