Coruscation

STARTING April 1, under a new compensation rule from the Federal Reserve, borrowers who get their mortgages through brokers will most likely pay less for their services and must be offered the lowest possible interest rate and fees for which they qualify.

The new rule also affects those dealing with small banks and credit unions, which typically do not fund loans from their own resources. But most banks and other direct lenders, including the few mortgage companies that function like banks, are exempt.

The new rule is known as the Loan Originator Compensation amendment to Regulation Z, part of a strengthened Truth in Lending Act passed by Congress in 2008. Designed to prevent consumers from being steered into high-cost, risky loans, it covers how a loan originator -- or any person or company that arranges, obtains and/or negotiates a mortgage for a client -- is paid.

Under the new rule, a lender can no longer pay a loan originator a lucrative rebate known as a yield-spread premium, which is tied to the rate or terms of the mortgage. Banks and other lenders can continue to pay commissions to brokers, but these payments must now be based solely on the loan amount.

In the past, the higher the interest rate and points, the more money a broker stood to earn.

Brokerage firms typically earn a yield-spread premium of 1.5 to 2.5 percent of the loan amount, with higher-rate loans paying closer to 2.5 percent. The brokerage and its broker, or loan officer, typically split the rebate. On a $400,000 loan at 5.25 percent, that might total $8,000, based on two points paid, with a point being 1 percent of the loan amount.

In the new system, the brokerage can earn a fixed commission from the lender, but the amount is not tied to the loan terms. Also, the brokerage cannot pass on a part of the commission to the broker, who must now be paid an hourly wage or salary. The exception is for loans where the lender pays the borrower's points to the brokerage, typically for higher-rate loans. (The commission range is expected to be 1.5 to 2.5 points.)

It is also forbidden for a loan originator to collect payments from both the consumer and the lender in a single transaction. If a broker is paid a commission by a lender (based on the loan amount), he or she cannot also charge the consumer points, or fees for application or processing. The consumer will still, however, need to pay the broker for third-party services like appraisals.