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Tuesday, November 13, 2007

House Bill 3915 Could Kill Rebates and Eliminate Brokers

Sweeping Changes Proposed
HR 3915 The Mortgage Reform and Anti-Predatory Lending Act of 2007 was recently introduced by House Financial Services Committee Chairman Barney Frank (D-MA), along with Representatives Miller (D-NC) and Watt (D-NC) and proposes sweeping changes that would drastically change the face of the mortgage industry. Many believe it would practically eliminate mortgage brokers from the industry by raising capital requirements and reducing income streams. By enforcing a mandatory $100,000 bond for all originators, as well as outlawing ysp, aka rebates, the law would hinder many brokerages ability to open up shop and make money. Rebates are paid to brokers and in exchange for selling a higher rate to borrowers that may not have the ability to pay out of pocket to pay brokers commissions. This part of the bill, would not only cut broker's income, but would also automatically shut down the ability for many to refinance and purchase homes. Basically if you don't have the money to pay your brokers commission you would not be able to obtain financing.

Other aspects of the bill that I find to be more positive to the market include stricter requirements on disclosure of compensation, stricter education requirements for originators, and the elimination of higher compensation for risky loans like option arms. Parts of the bill are necessary to clean up the mess that has been created in the past few years, and if the correct steps are taken we can prevent future blow ups in the industry. on the flip side, if legislators go too far with bills such as this, they will ruin the free market for loans, and remove much of the options borrower's need to purchase or refinance their current residences.

Key points of the bill and their possible effects on the market:

Improve Quality of Originators
-Criminal background checks
-Increased continuing education requirements,
-Tests for originators to prove basic knowledge of loan products.
-National Registry of Originators

Improve Transaction Transparency
-Simple disclosure of broker role and compensation being received
-Increased continuing education requirements,
-Tests for originators to prove basic knowledge of loan products.
-Brokers would no longer receive monetary compensation for pushing risky variable loans such as Option Arms.

Reduce Borrower's Options and Ability to Finance
-Elimination of rebates, forces borrowers to pay closing costs out of pocket
-Elimination of rebates, causes the number of originators to drastically decrease, reducing the number of options for borrowers to obtain financing through
-$100,000 Net Worth or Bond requirement, reduces the number of brokers, further reducing borrower's options
-Federally mandated underwriting standards, remove the free market for loans, would further reduce borrower options in the market
-Large Banks would inevitably monopolize the market and borrower's would have less choices for good customer service and speed of transaction

Summary of the Bill outlined Here.

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