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History
- Referred to banks
Companion bill
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Prohibits compensation based on home loan terms by a mortgage broker or mortgage lender
In Assembly Committee · Banks · Sponsor Darryl Towns
Full text
The text isn't available here yet. Check nysenate.gov.
Sponsor's memo
Title of bill
An act to amend the banking law, in relation to prohibiting compensation based on the terms of a home loan by mortgage brokers and mortgage lenders
Purpose or general idea of bill
The purpose of this bill is to ban yield spread premiums which will help prevent the abuse of steering or directing a consumer to rates or payment terms that are more expensive than that for which the consumer qualifies.
Summary of specific provisions
Bans the use of yield spread premiums by prohibiting mortgage brokers or mortgage lenders from receiving compensation that is based on or varies with the terms of any home loan.
Justification
"Yield spread premium," or YSP's, is the fee paid by the lender to the mortgage broker in exchange for placing the borrower in a loan with a higher interest rate. Though the borrower may qualify for a loan with a lower rate, the broker can receive payment from the lender for giving the borrower a higher rate loan. This practice rewards brokers for acting against the interest of borrowers and provides a mechanism to steer potential homeowners into higher interest loans.
Financing costs or fees through the interest rate is very confusing for most consumers. Consumer testing by both HUD and the Federal Reserve Board shows that consumers have a great deal of trouble comparing deals that involve financing portions of costs/fees through the rate.
The traditional way mortgage brokers are compensated is through the direct payments of various fees from the customer, such as an origination fee of one percent of the loan amount. Yield spread premiums are paid from lending institutions to mortgage brokers thereby providing a financial incentive to the mortgage broker to act in the interest of the bank or lending institution instead of the borrower.
FDIC Chair Sheila Bair wrote in an April 7, 2008 letter to Federal Reserve Chairman Ben Bernake, "the FDIC recommends that the Federal Reserve Board prohibit the use of yield spread premiums to compensate mortgage brokers ... Disclosures alone will not address the fundamental problems with YSP's, which is that they provide an inappropriate financial incentive for mortgage brokers to steer consumers to unaffordable loans." As Bair adds in the same letter, "there are ample alternative means of compensation available, such as flat fees or fees based on the total principal amount of the mortgage, which would not present skewed incentives or increase borrower costs and which would be much more transparent and understandable to borrowers."
We heard ample evidence at the Senate's mortgage Fraud hearing that was conducted in October 2009 that lenders and brokers have steered numerous borrowers into higher cost loans. Banning yield spread premiums will help prevent the abuse of steering or directing a consumer to rates or payment terms that are more expensive than for which the consumer qualify.
Prior legislative history
New bill.
Fiscal implications
None to the state.
Effective date
This act shall take effect immediately.
Summaries, headlines and scores are AI-generated from the official bill text. How we score bills. Source: NYS Open Legislation.