Can anyone clarify if banks will still be allowed to recieve service release premiums along with orignination fees? I wasn't sure if SRP's are the same as YSP.

Yield spread premiums occur when the loan is made. (YSP is usually with a broker. If it is to a LO, it is usually referred to as an overage, and in most cases, there is a split between LO and bank.)

Service release premiums occur when the loan is subsequently sold on the secondary market (99.9% of the time as a separate and distinct transaction).

So a bank can earn SRPs but a bank cannot earn a YSP?

or it is that an individual loan originator (a person) cannot earn a YSP?

CC this is my question exactly. I got really confused on the definition of loan originator...I thought I read that the institution was included in that definition...maybe I misunderstood.

Yes, the BANK can earn SRPs. I think the BANK can even earn a higher price to par (the extra amount for a higher rate - i.e., "102.5"). However, the banker can't be compensated based on the higher price to par. There is also the whole steering thing and "safe harbor" so not sure where the higher price to par thing comes into that evaluation. Customer can be offered a higher rate to cover their closing costs, but that would tend to indicate that even then, the BANK can't earn more. Not sure how the investors are going to adjust their whole rate sheet structure.

Also, we don't compensate our bankers directly for their mortgage loans. However, their annual bonus calculation includes a component that is based on the overall profitability of all the transactions they originated and managed for the year (all lending, deposits, investments). Anyone else do that? What are you thinking you will need to do to adjust this? Pure x% of total loans originated?

Yes - I think that is exactly what that means!

Ok so let me get this right... the bank/mortgage division can earn YSP and SRP but the loan officer cannot be compensated by this?

In the definition of a loan originator it states that if the creditor (your institution) does not provide funds for the transaction at closing out of their own resources that the creditor is also included in the definition of "loan originator".

Sorry, we fund our own loans from our own resources, so that's why I responded as I did. Forgot about that wrinkle.

However, if the bank does allow for overages, the LO would be compensated for the higher rate on the loan.

I don't understand. Can you expand on that comment about compensating the originator (banker) for the higher rate?

Sorry, I am really confused now. SB can you explain?

Some banks pay originators (LO's) commission and "additions".

If the LO brings in a loan at a higher rate than the "chart/rate sheet, etc. it may be for extra work that needs to be done to qualify the applicant, Some banks will pay additional for a higher rate loan, knowing that they will get more money for the loan when they sell it in the secondary market (refer to SRP above).

Hypothetical example - the rate sheet says 4.0% for a 30 year fixed, $100,000 loan. The loan officer talks the customer into a loan for 4.25% Assume that the bank considers that .25% increase in the interest rate would equal 1% premium on the face amount of the loan if they sell it. Multiplying that out would be $1,000. In many cases, the compensation agreement would call for the bank and LO to split 50/50 with the LO receiving an additional $500 compensation and the bank receiving the same.

Clear as mud - right???

But it was my understanding that this type of activity that we can no longer do (in terms of steering the customer to the higher rate). In our world, we call that the price to par difference. The investor would pay us $X for 4% but they will pay us more than $X for 4.125%. They do it in increments over / under 100 (with 100 being "par"). If 4% is paying at 100.25, the bank makes 25 basis points. That same day, 4.125% might be paying 102.25, so we make 225 basis points. Same loan, 1/8% pricing difference to customer, 200 basis points more in bank revenue.

Am I wrong or wouldn't the above now be considered steering if we put them in the 4.125% loan?

No, I understand your example. So are you saying that as long as the loan officer does not recieve benefit from this arrangement its ok if banks continue the practice providing that of course they fund their own loans?

Just thinking out loud...its seems just as damaging for the bank to recieve it as it does for the loan officer to benefit. I know I must be missing something.

There may be extenuating circumstances why it is being done.

I've seen LO's buying up the rates and using the overage money to pay for an appraisal, or other loan charge that the borrower could not afford at the time of closing.

I have a question about the steering part of this rule. It says we should give the customer choices in order to fall under the safe harbor.

The closed-end products my bank offers is limited to 1st mortgages with terms of 3-15 yrs and 2nd mortgage loans. My bank, does, however, have a mortgage division that offers trational 10-30 yr loans that are subsequently sold on the secondary market.

My question is on the bank side, when I offer them 3 different loans, do I need to include those offered on the mortgage side? Or can I simply "tell" them the different terms of the 1st mortgage - either the 3,5,10 or 15 year that are available?

CC, what you say to the applicants should generally be dictated by internal policies, and because of the mortgage company and fair lending laws, in concurrence with guidance provided by your legal department.

IMHO, I would not consider it steering if the mortgage department's rates, terms and conditions were generally the same as what the bank offered. As a matter of fact, it might be a benefit. Usually, longer term loans have slightly higher rates (about .25% between a 15 and 30 year). However, the difference in payment because of a 30 year amortization however may allow someone in a home where they might be denied for debt-income. (This is easy to document for business purposes - the risk of default, changing economies, etc.)

Doing a review of declines in 1991, I noticed a lot of "lost opportunities" as people were being declined for dti, on bank 15 year products. We came up with the idea of the 2nd review and counteroffer to 30 year products through the mortgage company. Management's concurrence and adoption of the 2nd review with the 30 year term, the bank substantially increased loan production, (and the concept of the 2nd review helped clear the bank in a DOJ inquiry 2 years later).

Good luck

I have another question ...

The rules says the percentage paid cannot vary based on the loan amount. The examples given in the regulation are based on individual loan amounts. But can I pay different percentages based on total volume? For example, 1% if your total loan volume for a time period is $1,000 - $500,000, 2% if the total volume is $500,001 - $1,000,000 and so on and so on?

I don't think I can, but I want other's opinions.

On a side note, I fear many banks are not paying attention to these rules as they are not effeective until April 2011 - but isn't this usually when banks start working on budgets for next year! That is why I am trying to get a good understanding of this so I can inform the proper parties.

I would love input/opinions on whether YSP (based on loan amount) is considered to be CREDITOR-paid compensation? The rule and commentary clearly say YSP is not CONSUMER-paid compensation. But does this mean that YSP is then compensation paid by the CREDITOR to the loan originator (precluding the ability of CONSUMER to compensate the loan originator on a loan with YSP)? OR is YSP merely a "credit" to the consumer, allowing both YSP and CONSUMER-paid compensation in the same loan? Thanks in advance for any insights.

PS - Is this the only active topic on TILA compensation or are there others I should watch?

I have a very similar situation in my bank, except branches offer 15-year fixed rate loans and the residential department of the same bank also offers 15-year fixed rate loans. The rates and fees and documentation standards are significantly different depending on whether an application is received by a branch or the mortgage department.

I'm also concerned whether an "originator" from the branch must show the applicant loans fromt the mortgage department and vice versa to be in compliance.

Has anyone read/hear anything about that?

Has anyone researched if you can include loan originators in year end discretionary bonus's at the department or bank level, which are often decided by the board at year end if adequate profitability exists?

I can't see where that would enter into any problems as it is not based on rate.