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Borrower Paid Comp
Does Tennessee cap borrower paid compensation at 2%? Never heard of a state allowing 2.75% Lender Paid comp at 2.75% but lower on borrower Paid yield spread premium.
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2 Replies
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In Tennessee, like in other states, compensation for mortgage brokers and lenders can be complex, and there are regulations governing both borrower-paid and lender-paid compensation. Here’s a breakdown of how these compensations typically work and any specific rules that may apply in Tennessee:
Borrower-Paid Compensation
Borrower-Paid Compensation (BPC): This is the fee paid directly by the borrower to the mortgage broker. It is often a fixed percentage of the loan amount and must be disclosed upfront.
Federal Regulations: According to the Dodd-Frank Act, mortgage broker compensation cannot vary based on loan terms other than the principal loan amount. This means the compensation must be based on a set percentage, not the interest rate or other loan features.
Tennessee-Specific Rules:
Cap on BPC: No explicit state law in Tennessee caps borrower-paid compensation at 2%. However, broker compensation is subject to federal regulations, which generally enforce a cap to ensure compensation structures do not create incentives for steering borrowers into less favorable loan terms.
Lender-Paid Compensation
Lender-Paid Compensation (LPC): This is paid by the lender to the broker and is included in the interest rate or fees charged to the borrower.
Common Practice: It is common for LPC to be capped at around 2.75% of the loan amount, but this can vary based on lender policies and market conditions.
Comparing BPC and LPC
Lender-Paid Compensation: Typically, lender-paid compensation can be higher (up to around 2.75%) because it is built into the interest rate, and the borrower indirectly pays for it over the life of the loan.
Borrower-Paid Compensation: This is often lower because it is a direct fee paid at closing, making it more transparent and immediate for the borrower.
Industry Practices
Common Percentages: In practice, many lenders and brokers may have a typical range for BPC and LPC. The exact percentages can depend on various factors, including market conditions, lender policies, and the specifics of the loan transaction.
Legal and Compliance Considerations
Truth in Lending Act (TILA): Under TILA and its implementing regulations (Regulation Z), both borrower-paid and lender-paid compensation must be disclosed to the borrower.
Anti-Steering Provisions: These provisions ensure that brokers cannot receive higher compensation for steering borrowers into higher-cost loans, thus protecting consumer interests. While Tennessee does not specifically cap borrower-paid compensation at 2%, federal regulations and market practices typically govern these compensations. Mortgage brokers and borrowers must understand these rules to ensure compliance and transparency. For the most accurate and detailed information, it is recommended that they consult with a mortgage compliance expert or legal advisor. You can check resources from the Consumer Financial Protection Bureau (CFPB) or the Tennessee Department of Financial Institutions for further reading and verification.
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Borrowers will get the par rate on borrowers paid compensation on mortgage loans. Borrower-paid compensation, commonly referred to as a “yield spread premium” or “rebate,” refers to a payment made by the lender to the mortgage broker or loan officer as compensation for originating a mortgage loan with an interest rate that is higher than the lender’s par rate.
Here are some key points about borrower-paid compensation:
It allows borrowers to offset some or all of their closing costs by taking a higher interest rate than the lender’s best pricing. The lender agrees to pay the broker/loan officer a premium to compensate for the higher interest rate charged to the borrower. This premium is calculated as a percentage of the loan amount, usually up to several percentage points. Borrowers can pay discount points upfront to lower their rate instead of using a yield spread premium. Federal laws require full disclosure of yield spread premiums as part of closing costs on the Loan Estimate and Closing Disclosure.
Regulations: The Dodd-Frank Act prohibited yield spread premiums from varying based solely on the loan terms or proxy for loan terms. Lenders must provide borrowers with a no-cost loan option with the best pricing. Some states impose additional restrictions or caps on allowable yield spread premiums. While pocketing unearned fees violates laws, borrowers’ paid compensation is still a legal and legitimate practice when properly disclosed as an option for borrowers to offset their out-of-pocket costs in exchange for a higher mortgage rate.
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Everything You Need To Know About the Loan Estimate
HUD's GFE, which was created in 2010, and replaced by CFPB's Loan Estimate. HUD Settlement Statement is replaced by the Closing Disclosure