Democratic AGs call for end to home lending incentives

By Chris Rizo | Dec 28, 2009

Richard Cordray (D)

WASHINGTON (Legal Newsline)-A group of 15 Democratic state attorneys general are asking the Federal Reserve to prohibit home loan officers and mortgage brokers from receiving incentives for steering borrowers into expensive loans.

The attorneys general say oftentimes the incentives result in borrowers being placed in loans with terms that are more expensive than they need to be.

"We believe that this proposed change, more than the proposed new disclosures, will provide consumers with significant protections against the unfair and deceptive acts and practices that led to the collapse of the mortgage market and resulting foreclosure crisis," the Dec. 23 letter said.

The AGs' letter also said: "In our work on the front line of the foreclosure crisis, the states have seen many consumers who were steered into loans with exotic characteristics that they did not
understand, and which produced disastrous outcomes that they could not anticipate or control."

Ohio Attorney General Richard Cordray was one of the letter's signatories. He said the proposed change would help curb predatory lending practices.

"Paying incentives to place customers in riskier loans is rewarding the behavior that is ruining so many communities," he said. "What's even more tragic is that without this type of steering, some consumers may have been able to get more affordable loans and avoid foreclosure entirely."

Mortgage brokers and loan officers are able to receive compensation based on the type of loan they originate. For instance, a broker could receive extra compensation for originating an adjustable rate mortgage instead of fixed-rate mortgage.

Brokers also can receive an incentive called a yield spread premium, or YSP, for placing consumers into loans with higher rates than the consumer could otherwise have qualified for.

"Right now, brokers and lenders often stand to profit from originating high-cost loans that consumers can't actually afford," Cordray said. "Ultimately, we want to provide incentives for originating loans that perform well in the long run. These proposed changes are an important step toward that goal."

In addition to Cordray, the attorneys general of Arizona, Connecticut, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, North Carolina, Rhode Island, Tennessee, Vermont and West Virginia officially commented to the Federal Reserve about changes to the federal Truth in Lending Act Regulation Z.

From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.

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