From the Center for Responsible Lending:
In all the ongoing analysis of the foreclosure crisis, one point should not get lost: mortgage brokers played a key role in making the abusive subprime loans that continue to wreck the U.S. economy.
Today North Carolina became the first state to ban systematic overcharging by brokers. Governor Mike Easley signed into a law a number of new consumer protections, including a ban on subprime “yield-spread premiums” – essentially kickbacks that brokers routinely receive on subprime loans for steering a borrower into a higher interest rate than the lender has set for the loan.
In 2006, up to 81% of all subprime loans came from brokers, and the overwhelming majority of these came with prepayment penalties—the refinance “tax” that makes lenders willing to pay brokers yield-spread premiums. The results of these perverse incentives are clear: The Wall Street Journal has reported that six out of ten borrowers who got subprime loans could have qualified for better.
“By getting rid of yield-spread premiums on subprime loans, we are eliminating one of the root causes of the foreclosure crisis,” said Chris Kukla, Senior Counsel for Government Affairs at the Center for Responsible Lending. “This will go a long way in aligning the interest of lenders with the best interest of homeowners.”
To find out more about how families with subprime loans needlessly overpaid on brokered loans, see our report, “Steered Wrong: Brokers, Borrowers and Subprime Loans”
In addition to the ban on subprime yield-spread premiums, North Carolina passed two other important laws to provide badly needed protections to homeowners. The “Emergency Foreclosure Reduction Program” (House Bill 2623) requires mortgage servicers to give homeowners at least 45 days’ notice before beginning foreclosure proceedings and allows regulators to provide a 30-day extension if the lender and borrower are still working on a solution to foreclosure. “Regulate Mortgage Servicers” (House Bill 2463) provides stronger safeguards in North Carolina against loan servicing abuses that make foreclosure more likely.
North Carolina is joining a number of states that have taken action this year against lending abuses. For example, Massachusetts, Maryland, New York and Connecticut have moved to ban or largely restrict prepayment penalties. These same states were ahead of the Fed in requiring lenders to assess borrowers’ ability to repay. In Massachusetts, the Attorney General prohibits broker compensation (such as yield-spread premiums) when the financial interests of brokers and borrowers are in conflict, and the AG also established additional duties for brokers to work in the best interests of their clients.
From the Center for Responsible Lending
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