Ohio AG Cordray joins other state AGs in asking Fed's Bernanke to ban mortgage incentives

COLUMBUS, Ohio — On Christmas Eve, Ohio Attorney General Richard Cordray announced that he joined 14 other state attorneys general in asking the Federal Reserve, and by extension its chairman Ben Bernanke, to support elimination of incentives paid to loan officers and mortgage brokers that result in borrowers being placed in loans that are riskier and more expensive than they need to be.

Cordray, who will run next year for a full four-year term as Ohio's top cop, said he strongly supports changing the law to end predatory practices like these that fueled the foreclosure crisis and the collapse of the mortgage market.

"Paying incentives to place customers in riskier loans is rewarding the behavior that is ruining so many communities," he said in prepared remarks, adding, "What's even more tragic is that without this type of steering, some consumers may have been able to get more affordable loans and avoid foreclosure entirely."

Information supplied by Cordray's communication staff said mortgage brokers and loan officers currently can receive additional compensation based on the type of loan they originate. Examples given included that of a broker who could receive extra compensation for originating an adjustable rate mortgage (ARM) instead of fixed-rate mortgage, or a broker who could receive an incentive called a yield spread premium, or YSP, for placing consumers into loans with higher rates than the consumer could otherwise have qualified for. Cordray said these types of compensation give brokers and loan officers financial incentives to originate loans that consumers cannot afford.

Cordray joined the attorneys general of Arizona, Connecticut, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, North Carolina, Rhode Island, Tennessee, Vermont and West Virginia in commenting to the Federal Reserve about changes to the federal Truth in Lending Act (TILA)'s Regulation Z. The media announcement noted that the comment period closed today.

Cordray noted in his statement that while the proposed changes would eliminate certain types of compensation, brokers and loan officers could still receive compensation based on other factors, such as by a flat fee, by the volume of loans originated or by the time spent originating the loan. The state treasurer elected in 2006 who became attorney general this year recommended that the Federal Reserve encourage compensation based on long-term loan performance.

"Right now, brokers and lenders often stand to profit from originating high-cost loans that consumers can't actually afford," Cordray said. "Ultimately, we want to provide incentives for originating loans that perform well in the long run. These proposed changes are an important step toward that goal."

The Ohio AG's office said the Federal Reserve must now determine whether to move ahead with the changes. It offered this Web site for anyone who wanted to read the comments.

http://www.ohioattorneygeneral.gov/RegulationZCommentLetter

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