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Law Proposed by HUD Exposes Secret Loan Practices

Written by: Kristy Welsh

Phoenix, AZ - Collecting points on the backside is a mortgage industry term to describe yield-spread premiums paid to mortgage brokers for making loans at inflated interest rates may become outlawed should the office of Housing and Urban Development (HUD) be successful in getting new legislation passed. "Bumping up the interest rate even a quarter percent can result in a increased commission to the loan officer of a $1000 or more," says Kristy Welsh, author of Good Credit is Sexy. And the cost to the consumer? On a $100,000 loan, the difference in total costs for payments between a 7 percent interest rate and a 7.25 percent interest rate is $6,076.80 over 30 years.

Why would the consumer agree to a higher interest rate? Most of the time, Welsh says, they are told the rate is the best deal available, and are unaware of the additional yield-spread premium commissions the loan officer will receive. Yield-spread premiums are not revealed to the consumer until the signing of loan documents, the only time in the loan process where disclosure is required by law. "The consumer may notice the additional fees at closing, but often times his moving van, packed with all his worldly possessions, is parked outside. Negotiating the interest rate at this point may take several additional days," explains Welsh, a former loan officer herself. An unscrupulous loan officer is counting on this type of situation to get the consumer to sign, she adds.

Consumers are getting wise to these practices — an estimated 150 class action lawsuits are currently pending against mortgage lenders, states a recent article by the Washington Post. Housing Secretary Mel Martinez recently announced an initiative towards significant reform and simplification of the home buying process. Martinez is calling for full, upfront disclosure and explanation of all fees that buyers pay at settlement. The major points:

  • Full, upfront disclosure of all costs associated with obtaining a home loan in understandable terms prior to the payment of non-refundable fees.
  • Clarification of Yield Spread Premiums
  • Clarification of current HUD policy that states that consumer payments are not legal if they are overcharges, or if no service is provided.
  • Expansion of Real Estate Settlement Procedures Act (RESPA) enforcement.