New Rules for Lenders and Mortgage Brokers

Effective April 2011, the Federal Reserve Board will require mortgage brokers and lenders to adhere to new rules meant to protect consumers:

1. Lenders may only compensate mortgage brokers based on a fixed percentage of the loan amount. After April 2011, lenders cannot pay mortgage brokers based on the yield spread — in other words, broker compensation cannot be based on the interest rate charged to the consumer. This is meant to discourage mortgage brokers from charging higher interest rates to their clients in exchange for greater compensation from lenders.

2. Homebuyers will have to be notified up front of any balloon payments due when the loan term expires.

3. If the loan is an adjustable rate loan, the lender must disclose what the buyer could end up owing after rate increases.

These new rules are meant to keep consumers from falling prey to unscrupulous lenders, and to give homebuyers more information about the loans they are signing up for. Since the rules do not kick in until April 2011, buyers should ask their lenders questions about these specific issues in the meantime.