The new order:
- Prohibits lenders from paying originators added compensation when borrowers agree to accept higher interest rates or other loan terms than they might otherwise qualify for (the yield spread premium or "YSP").
- Disallows originators receiving compensation from lenders or other third parties if the borrower pays them too, and
- Mandates that originators not "steer" consumers to loans that increase originator compensation but that are not in the consumer's best interest.
Consumers have long been at risk when dealing with loan originators who are compensated based on the terms of the loans offered. Loan officers, having superior knowledge about various loan programs were often offered very lucrative inPublish Postcentives (i.e. more money) if they could convince (or mislead) borrowers to take higher-cost loans. The Fed's action will now require lenders to at least show borrowers the cheapest costing loans and lowest interest rates available to them.
The new rule does not go into effect until April, 2011