By Alyssa Abkowitz
Federal regulators are considering new mortgage-lending rules aimed at protect homebuyers. But some experts say the rules could end up backfiring on borrowers.
The Consumer Financial Protection Bureau on Wednesday said it may float new regulations this summer that would require mortgage brokers and lenders to charge a flat fee for originating a loan — instead of a charge based on the size of the loan — and limit how much borrowers can reduce their interest rate through “discount points.”
If approved, experts say the rules could diminish lenders’ incentives to steer borrowers into less-favorable loans. In the process, however, they also may make it harder for some borrowers to get a mortgage, says Greg McBride, a senior financial analyst at Bankrate.com. “There could be unintended consequences.”
Mortgage brokers came under heavy fire during the housing boom for encouraging borrowers to use adjustable-rate mortgages, which came with a 3% commission, over a 30-year fixed rate one that paid just 1%, says Jack McCabe, a real estate consultant in Deerfield Beach, Fla. Many borrowers had no idea what their mortgages really cost or how they worked. Five years later, regulators are still cleaning up the mess.
McCabe says the proposed flat fee might now encourage lenders to only originate loans that are in the best interest of the borrower. Those in the market for larger loans would benefit the most from flat fees; right now, fees are based on the loan amount, meaning jumbo mortgages – those over $417,000 — rack up higher origination fees.
But critics of flat fees say they could hurt borrowers with smaller loans, as lenders may be reluctant to process them – especially if they work for a small shop instead of a large bank. Don Frommeyer, president of the National Association of Mortgage Brokers, says it’s unclear how the flat fee would work in different markets. “Would the fee be the same in California and New York as it would be Indiana?” he asks, referencing the fact that loan fees do vary based on markets and home prices. “Are we going to have to say I can’t process loans under $200,000 because we can’t afford it?”
Another rule under consideration aims to simplify how lenders handle so-called discount points — money paid upfront to lower payments and interest rates. The proposal would require lenders to give borrowers a minimum reduction for paying upfront. It would also require them to offer no-point loans, making it easier for borrowers to compare one lender’s quote to another. While it’s too early to tell what will happen, proponents of discount points worry the measure could lead to their elimination. That would be hurt buyers, McBride says because points are “a clear advantage for people who expect to be in their homes for the long haul.”