SPRINGFIELD, Ill. (Legal Newsline)-Illinois Attorney General Lisa Madigan is among 15 state attorneys general asking the Federal Reserve to eliminate certain financial incentives for loan officers and mortgage brokers.

Madigan and the other Democratic attorneys general say loan officers and mortgage brokers are rewarded for putting homebuyers in more expensive, higher-risk loans. They say incentives to do so should be banned by the federal government.

Mortgage brokers and loan officers are able to receive compensation based on the type of loan they originate. For instance, a broker could receive extra compensation for originating an adjustable rate mortgage instead of fixed-rate mortgage.

Brokers also can 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.

"Eliminating these incentives for brokers would help to end the deceptive practices used to entrap unsuspecting borrowers in loans they couldn't afford," Madigan said. "I strongly support the Federal Reserve's suggested changes because they would afford consumers significantly stronger protection against the very actions that contributed to the collapse of the housing market."

In addition to Madigan, the attorneys general of Arizona, Connecticut, Iowa, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, North Carolina, Ohio, Rhode Island, Tennessee, Vermont and West Virginia officially commented to the Federal Reserve about changes to the federal Truth in Lending Act Regulation Z.

"We believe that this proposed change, more than the proposed new disclosures, will provide consumers with significant protections against the unfair and deceptive acts and practices that led to the collapse of the mortgage market and resulting foreclosure crisis," the AGs' Dec. 23 letter said.

The AGs' letter also said: "In our work on the front line of the foreclosure crisis, the states have seen many consumers who were steered into loans with exotic characteristics that they did not
understand, and which produced disastrous outcomes that they could not anticipate or control."

From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.