In conjunction with the Obama administration, key Democratic party leaders on Capitol Hill are looking to remove consumer-protection authority from the Federal Reserve and delegate it to a new regulatory agency, yet to be created. In addition, plans are in motion for new rules concerning an overhaul to the timing and content of disclosures for borrowers of first and second mortgages.
These comprehensive changes are geared towards helping homeowners to clearly understand the disclosures associated with their mortgage loans so they can make more informed decisions. Having the consumer-protection authority since 1994, the Federal Reserve has been targeted for unsuccessfully acting on its authority until 2008. By then, it was too late and the housing crisis had its teeth firmly embedded into the American landscape.
The new disclosure proposal would provide borrowers with a simplified document outlining the costs associated with a mortgage loan, along with an unambiguous annual percentage rate (APR). Additionally, borrowers would be provided with a one-page question-and-answer document warning of loan features that may cause risks, such as balloon loans, mortgages with negative amortization and in some instances, adjustable-rate mortgages (ARMs).
Mortgage brokers typically earn their commission on what is called a yield spread premium (YSP). Essentially, the amount of YSP a mortgage broker earns depends on how high or how low of a mortgage rate they sell to a borrower. The new proposal would effectively eliminate yield spread premiums, thus preventing borrowers from being guided toward risky loans that would potentially increase commissions.
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