The Federal Reserve on Monday approved a rule banning lenders from paying bonuses to mortgage brokers and loan officers who get borrowers to agree to a higher interest rate than they need to pay.
The Fed also proposed requiring clearer disclosures about how payments on adjustable-rate loans can change over time.
The changes were among several announced Monday by the Fed, which has been criticized for doing little to rein in high-risk lending during the housing boom.
One of the proposed rules is designed to give consumers more time to review lenders’ disclosures on the costs of their home loans. Lenders would be required to refund any loan fees collected if the prospective borrower withdraws the mortgage application within three days of receiving the disclosures. That proposal is open for public comment.
The change in required disclosures for adjustable-rate loans is set to take effect at the end of January as an interim rule. Lenders must show the maximum interest rate and monthly payment that can occur during the first five years, a “worst case” example showing the maximum rate and payment possible over the life of the loan. The disclosures must also include a statement that consumers might not be able to avoid rate and payment increases by refinancing their loans.
The ban on lenders’ paying bonuses to brokers and loan officers for higher-interest loans takes effect in April. The Fed said that its consumer tests found that borrowers generally were unaware of the payments and how they could affect the total cost of a loan.
Critics have called the bonuses little more than kickbacks that encouraged mortgage brokers and lender salespeople to steer borrowers into costlier loans.
Brokers have argued that they can use the payments, also known as rebates or yield spread premiums, to cover borrowers’ closing costs, so a homeowner wanting to refinance a mortgage with no upfront costs might accept a higher interest rate to accomplish that.
In making the rule final, the Fed said a loan originator “may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs.”
Loan originators would still be able to receive compensation calculated as a percentage of the loan amount.
Another rule finalized Monday would require borrowers to be notified when their mortgage has been sold or transferred.
The Fed also proposed a rule to make it easier for consumers to learn who owns their loans. Under the provision, once a mortgage servicer is asked by a borrower for that information, the loan servicer would have to provide it within a reasonable time, which generally would be 10 business days.