New Federal Reserve Regulations Set to Reform Broker Industry April 1st

By Kyle Chezum Updated on 3/22/2011

The recent collapse of the housing sector came as a result of many things.  The Federal Reserve believes one of the primary factors that contributed to the mess was a practice among mortgage brokers to talk borrowers into loans that were larger and more expensive than necessary.  To combat this perceived fault with the broker arm of the industry, the Federal Reserve will implement new regulations governing the compensation of mortgage brokers.  These rules will take effect on April 1st.

Mortgage brokers have staunchly resisted this turn of events.  The National Association of Mortgage Brokers sued the Federal Reserve Board in an attempt to stall the process, to no avail.  The group claims the new regulations will be the death of an entire trade.  According to the NAMB, the rules will cause "immediate, devastating, and irrevocable harm."

Consumer groups, on the other hand, applaud the new regulations as a step forward in an industry that has needed significant change for some time.  A lending industry in which brokers aren't compensated based on the interest rate of loans may lead to an industry in which lower interest rate loans are given just as much, if not more, preference than others.

But many mortgage brokerages have already closed up shop, and the regulations, which will likely impact cash flows at many such companies, may force others to do the same.  Power in the lending industry may shift to just a handful of large banks.  Time will tell how the new rules will affect homebuyers.