The Federal Reserve recently passed new regulations regarding lending practices, but according to many, those regulations did not correct a key problem: mortgage brokers/loan officers receiving money from lenders to trap borrowers into costly loans. Based on data compiled by the Dept of Housing and Urban Development, borrowers were out $16 billion in 2007 due to these occurrences.

How do they make the loan more expensive? It deals with the yield spread premium, which is the difference from the lowest interest rate that the borrower could qualify for and the rate that the lender ends up charging them. If the yield spread is high, the person supplying the loan gains more, which makes it to their advantage to have borrowers with more costly loans.

Many borrowers are unaware that loan originators gain somewhere around 1% of a loan´s value for every additional quarter interest point that they charge the borrowers, and would not question the loan rates they are put into.

A professor at Havard Law School, Howell Jackson, has previously testified with Congress about these lending practices. He remarks that, "In subprime loans, brokers could easily make an extra 2 percentage points,...On $500,000 loans, that's well in excess of $10,000, as much as a 10-fold increase over what most people would consider fair compensation."

When the Reserve first started creating the new lending rules, there was a proposal to limit lenders paying off brokers, named the Yield Spread Premium rule, but it was later cut as the Reserve reported that it confused the general public. Also, many mortgage brokers were against it as they and not the lenders, would have to disclose all profit gained in a written agreement before their fees were added into the loan amount. At the moment, the fees gained are not reported until the closing of the loan. Marc Savitt, the president of the Nat. Association of Mortgage Brokers, also says that the payoff abuse angle is no longer a current concern/practice as due to increased competition in the troubled times of the market, brokers are slashing fees and making great loan terms to gain more clientèle.

The Fed has said that they will try to address the problem, by making clearer fee disclosures so that the borrowers will be more aware of what they are signing up for.