Merkley-Klobuchar Amendment Creates Level Playing Field
The Senate has passed an amendment to the Wall Street Reform bill that would ban loan originators from accepting compensation based on placing a consumer in a higher interest rate loan or a loan with less favorable terms. The amendment also requires lenders to underwrite loans to assure a homeowner’s ability to repay the loan.
As you can imagine, loan originators everywhere are outraged.
Imagine not being able to earn extra compensation for selling a higher rate loan! Imagine making sure that homeowners can repay their loans!
Wait a minute. Isn’t that the world we currently live in right now?
The horror we’re leaving behind if this amendment becomes law was the predatory lending frat parties of 2006. From what I can tell, most (not all) of that is behind us. What are we really losing with the passage of the Merkley-Klobuchar Amendment?
Mortgage brokers have to disclose all yield spread premium earned as fee income on line 1 of the new Good Faith Estimate. They will not be losing anything new. It can be argued that mortgage brokers should have lost the ability to earn yield spread premium because it was horribly misused not by “an unsavory few” but by the vast majority of mortgage broker LOs all across the United States. For the few LOs who had no problems honestly explaining their full compensation, the change to the new GFE was not seamless but certainly not painful.
Brokers might be fearful that consumers will no longer be able to select a “no cost” refinance. First of all: THERE IS NO SUCH THING AS A NO COST REFI. There are costs. Instead, the homeowner is selecting to amortize the costs over the term of the loan instead of coming to the table with cash to pay for the cost to refinance into a lower interest rate loan. The way I interpret the spirt of the amendment, consumers can still elect to use yield spread premium (YSP) as a credit back from the lender, to cover their closing costs….but broker LOs are prohibited from helping themselves to any leftover YSP as compensation. This is true today and it would still be true under the amendment.
Mortgage loan originators who work under a consumer loan company license (They say, “I’m a mortgage banker, I’m a correspondent lender”) or LOs who work at a depository bank can still, at least today, earn hidden compensation called “overage” by selling a higher interest rate than what the homeowner could have received. Think of it as a retail markup. These LOs may or may not choose to show the consumer the wholesale rate sheet. This is just the same as yield spread premium but consumer loan company and bank LOs do not have to disclose their overage to the consumer.
The Merkley Klo-bu amendment aims right at the practice of earning “overage” and scores a bullseye.
Someone has been educating the Senators about how to create a level playing field and it’s not me. I’m too busy trying to recover from this delightful carpal tunnel surgery on my right wrist. I wish you could see me try to eat a bowl of Cracklin’ Oat Bran with my left hand. As it is, I shouldn’t be typing this but don’t tell Dr. McCallister. For me this short blog post IS taking it easy.
Brokers have been asking for a level playing field. Well the Merkley-Klobuchar amendment creates just that. Instead of hidden compensation, the way loan originators are paid will transform. We will most likely revert back to a 1 percent loan origination fee.
Here are some new ideas.
How about we pay loan originators based on customer satisfaction surveys. We’ll call it the Redfin model. After the transaction is complete, clients would rate a loan originator based on how well they explained the loan program choices and how close the HUD 1 fees matched the initial GFE. How about we pay loan originators based on the number of hours spent doing origination functions on each loan, and the hourly wage would be set by the employer based on a loan originator’s experience, education, and….loan performance.
That’s another idea. Why not base LO compensation on low default rates?
Take a look at the national default rate of FHA loans. You can sort by state, county, company name and so forth. What the hell is going on at these companies with high FHA default rates? I’ll bet any of us can find out by simply having a casual water cooler conversation with loan originators at any firm in your city. Everyone knows which loan originators are scamming the FHA system. Can we please get rid of these LOs? The only reason they still have a job is because it takes FHA 4 years to hunt them down and between now and then, their bosses can make hundreds of thousands of dollars sending FHA these dog loans and then simply close up shop, pay the fine and move on to another firm.
The Merkley-can-we-just-drop-the-second-name amendment might just do us all a favor and make it a good business decision for firms to get rid of the people who are sending fradulent, high default loans to FHA.
Now I know we’re going to get some clever LOs to point out that it’s not their fault that a homeowner got laid off or a homeowner decides to walk away from the loan when their 3.5% FHA loan goes negative equity this fall. Okay fine. I see you two whiny shoulder shrugs and raise you two underwriting screw tightens. After this amendment passes, underwriting guidelines are going to tighten up fast and lenders will definitely want homebuyers to put more money down. Both will not give 100 percent assurance that a homebuyer will not default, however, it will be better than the loans we’re currently making. I’m hearing lenders are still making FHA loans where the back end ratio can be 50%. Today’s FHA loans will not end well.
Loan originators, the best way to assure the future of your industry is to fully disclose ALL compensation to your clients, no matter where you work, and if you can’t justify your compensation, it’s too high so you’d better start re-learning how to create value for your clients or pretty soon you won’t be needed.
A client just called me this week and said a lender called American Interbanc is telling consumers they don’t charge a loan origination fee because they don’t have any loan originators. I sent then an email requesting to interview someone from American Interbanc but so far they’re being shy. Well I hope any regulator reading this schedules them for an audit real soon because someone is doing the job described in the SAFE Act as “loan origination” and if they want to slough off the work to their unlicensed processors, well then this is one company to watch. We should watch to see if this is a business model for the future or if it’s a business model that we’ll be reading about in a State Consent Order or HUD Audit.
I happen to believe loan originators are valuable. The most valuable LOs I meet today are the ones who have already learned how to clearly communicate their value to their clients. The Merkley amendment has a good chance at passing. LOs: Imagine a world where your compensation is much lower than it is today. Many will leave the industry. Many will stay and do more loans for the other’s clients. You will have to work harder for your compensation but the ones who will choose to stay already love the industry so much it doesn’t feel like work.
Category: Current Issues, Merkley Amendment to Wall St Reform, Uncategorized
[...] The Merkley Klo-bu amendment aims right at the practice of earning “overage” and scores a bullseye. [...]
Jillayne, do you think this will prevent a mortgage originator from pricing a mortgage at 0 points meaning they’re being paid 1 point “on the back” in the form of rebate pricing? Most times, especially with a refinance, paying a point does not make sense for the consumer.
It looks like this amemdment also addresses stated income or no doc loans–which you would be hard pressed to find today. I was never a fan of this product, especially when it became a tool for LOs to do lazy documentation (those who cannot read tax returns) and for consumers to buy more than they could afford because they “really really wanted that house”… however there are times when that product made sense. I think I did 1 or 2 stated income loans in 7 years…the last one I did, my client could afford to pay cash for her million dollar home and she had perfect credit.
More Socialism. I’m moving to Mexico.
Customer Service Surveys?!? What about the consumer taking some responsibility for what they are buying? Everyone seems to gloss over the fact that the borrower is consumer buying a product.
When I buy a used car who’s responsibility is it to compare mileage, engines, interiors, and lick the tires? I’m sorry but if you can’t add up up lender fees and points and compare your fees and rates with multiple lenders, maybe you should live with your parents.
A home mortgage is not a commodity like oil or electricity, and is definetly not essential to one’s liberty and pursuit of happiness. Hmmm, I guess I’m ok with this if we decide to start regulating everyones sales margins. How much do a pair of Nike’s cost to produce? 5 bucks? The American people have been being ripped off by $100 Air Jordan’s for the last two decades…we better limit Big 5 to what they sell them for…because we all have the right to where them, it’s the American Dream!
Oh, and next time you go to the DMV, and the customer service sucks…let’s pay those guys a little less, then you can lower my VLF fee.
I guess I missed the memo that we were abandoning capitalism and competition in order to maintain serfdom…awesome.
Gotta go pack.
Amen, CK!
while I don’t for a minute advocate charging a borrower 3 points on a mortgage and am all for clearly disclosing fees to the consumer and letting them choose the best option available to them (just as we all have to do with any product or service), I cannot believe you would actually advocate regulating how much a company can charge for a given service or product- CK’s poor spelling aside, he’s got a point- finally, if current disclosure laws require us to disclose YSP and we credit all YSP back to the borrower as current RESPA laws require, how can any originator take additional YSP as compensation? Why is this such a big deal if we are still allowed to credit YSP to the borrower? While you are correct about the frat boy mentality that existed back in 2006, 99% of those idividuals are out of the business given the tighter regulation and licensing requirements, but you still seem to have this palpable disdain for originator compensation that I don’t understand-
Rhonda, no, instead I think that all LOs will be required to disclose back end compensation.
Hi CK,
yes there will always be a sort of dynamic tension between personal responsibility of a consumer and the responsibility of a salesman.
But….LOs are transforming from being less like a salesman of retail goods and more like a professional with higher duties owed to the client. The government is chosing to put higher duties of disclosure on the loan originator and higher responsibility on the LO to make sure his/her client understands the loan they’re agreeing to pay back.
If you want to put the total burden on the consumer to read the GFE and TILA and “figure it out for yourself” then the value of a loan originator will plumet. If you want to put more responsibility to make sure the client understands the federally required disclosure documents, then the value of an LO will grow.
Purchasing a piece of real property is radically different than purchasing a pair of Nikes.
Hi RP,
I don’t have any disdain for LO compensation provided that the work performed matches the compensation earned.
Padding compensation when no work has been performed and then hiding that compensation from the consumer is problematic. The compensation would be subject to challenge under several state and federal laws.
The problem lies in hiding an LO’s FULL compensation or not clearly and honestly explaining compensation or explaining LO compensation using half-truths and shell games so that the consumer is made to believe the LO is making far, far less than what is actually happening. YSP was misused for years during the bubble run up and that’s why I believe compensation via YSP and overage will dissapear.
LOs will go back to earning a flat fee or be compensated differently in the future.
I’ve worked in this industry for 20 years and love the idea of a level playing field, however the problem really stems from percentage compensation vs. dollars. If this bill makes it through to law, what of the rural and semi-rural areas out here in Arizona where so many loans are in the 60-90K range. I sit on the Housing Finance Authority Board here and these are the people we are trying to help. Fact is, big banks have a broader business model than a mortgage banker or broker and these are the mortgage professionals servicing those areas. Maybe check Provident Funding’s rate sheet? #1 wholesaler in the US and a broker could charge 1 point and make 1.5 in ysp there and still save the consumer a lot of money over the FDIC big banks. Also, everyone should consider why brokers took hold of so much business in the first place? The big banks have big budgets so why didn’t they hold market share – because the compensation model drove bank LO’s to do the easiest loans to get done. Anyway, not against the idea in conception but this is going to backfire in a big way.
As an 11-year veteran of the mortgage profession I feel I must respond to this article. Predatory lending frat parties of 2006? Only a “few” loan officers are honest? Really? The collapse of the real estate market was not the result of originators making undisclosed yield spread premiums. It is a complicated and many-faceted issue, and choosing to focus only on loan loan originators as your whipping boy is disingenuous. Loan officers did sell products that placed their borrowers in a bad financial position, yes. But our entire economy was predicated on irresponsible home equity borrowing, so the fault lies with the banks, the regulators, the investors, ratings agencies, the media, and the borrowers as well.
Greenspan publicly encouraged borrowers to take out adjustable-rate loans to be able to afford more house. This while he depressed mortgage rates to historical lows and spurred the competition that drove up housing prices.
I work for a bank and was held to production standards for loans to “emerging markets”, to low- to moderate-income borrowers as a means of meeting our regulatory responsibility. These included the Fannie Mae My Community Mortgage which would offer 100% financing to borrowers whose credit would not even qualify them for a sub-prime loan, and these were supposed to be prime first mortgages. This regulatory pressure to create the home ownership society also added fuel to competition for housing and fueled the bubble.
The investment community continued to risk-pool loans and sell them to investors who had no idea what they were buying, but it was collateralized by the US housing market, so it had to be as safe as mother’s milk. All of this flood of capital created tons of competition for housing, which again fueled the real estate bubble.
We became convinced that our real estate markets were on a perpetual appreciation rocket and that home prices would never come down again.
There were books I have read from respected authors who encouraged people to buy housing on any terms they could get because it was appreciating, and historically always did. What was lost in the shuffle is that THIS appreciation was not something normal, it was being artificially fueled by a perfect storm of influences.
When the bubble burst it did so because it had to. People were hurt because the home they bought for $500k wasn’t really worth that much in a market free of unnatural influence. They did not get hurt because their originator made 3 points on the sale.
I am not saying that there were not abuses among originators – I am a realist and I agree that there were deceptive practices. But payment of YSP is not and was not the problem – it is just a convenient way to demonize those professionals who have chosen to remain in what is left of the industry.
Clarity of loan terms is what would have saved many home owners from their fate. There is no difference to a borrower who gets two loan quotes for a 30-year FRM at 5.25% with the same or similar costs at closing if one of the brokers is getting paid and extra $500 by the bank to which he is selling the loan. That borrower will still pay just as much over the life of the loan regardless which proposal they accept.
What DOES make a difference is if there are terms of repayment that are not clear or deceptive, and the borrower is ruined financially as a result.
Intervention by the Federal Reserve Bank and by Federal regulatory agencies are not solely to blame for this mess because it was a societal problem, and we ALL share in the blame. But those bodies played a role in creating conditions under which the mess could happen because they could not see their own unintended consequences. Those same bodies are now going to further complicate the mess by over-correcting and destroying an industry with a maze of incomprehensible regulation.
It will, as always, be the borrower/consumer who suffers. Limit fees and points to 3%, including up to 1% of the FHA Up Front Mortgage Insurance Premium. Great idea. Try to finance a $35,000 home purchase in McKeesport, PA in two years. No one is going to touch it because no one wants to work for free. This will only serve to cause further ruin in smaller markets and places suffering economic blight.
“I don’t have any disdain for LO compensation provided that the work performed matches the compensation earned.” I am glad that you have accepted the mantle of responsibility for making that determination of what fair compensation is.
Until banks, lenders, are required to follow the same guidlines they continue to impose on brokers, there will never be a level playing feild.
Banks are not required to disclose YSP,(yeild spread premium) or SRP (service release premium)
Can you say unfair practice’s
I would like to see the what contributions theese courrupt senators are recieving from the banking industry.
Where can we get access to this bill and read the fine print?
The left wing liberals must be stopped. Bring on the November elections. Way to go Arizona! I thought communism died in the 90′s.
Posts like this from people who themselves are not in the industry but are instead a kind of self-appointed consumer watchdog are all over the net today, clouding key issues with uninformed personal bias and political agendas. She makes so many downright ludicrous claims about the status quo (especially regarding FHA loans) that I think alcohol or drugs played a part in this.
The author here is a cymbal banger for socialist reform, just riding the coattails of the likes of Dodd, Frank, and Markley via a personal blog. SHE says the broker industry is engaging in “shell games” and deceit despite the new GFE, HDMA, HVCC, and compensation caps already required in place, but doesn’t really offer any evidence of abuse, does she? Does she spend hours of her day in broker offices, observing the unethical behavior she alleges? Does she cite settled lawsuits won by plaintiffs against brokers for failure to properly explain the same GFE that she and the government rallied for and got? Does she even cite her own personal experience dealing with a broker that forced her into a non-performing loan?
No to all of those. Nothing but heresay.
The crowd she runs with believes in the principal of a fall guy, and in this case no amount of disclosures, cooling-off periods, HVCC, YSP caps, or any consolation will be good enough but to see mortgage brokers eliminated from the marketplace, or at the very least relegated to non-primary residential or commercial transactions.
Her’s and her constituent’s goal is to see a Federalized banking system in this country, and that’s simply not possible in a free market where competition and consumer choice are present. These people aren’t even idealists — they’re as heavy-handed as they come, as evidenced by the recent passage of so-called healthcare reform despite the fact that more Americans don’t want it than do.
They think that the problem of mismanagement can actually be solved with more taxation and oversight by the one entity that continues to write the book on fiscal abuse and criminal negligence. They are so blind they’ve become retarded as well, but they still think they know what’s best for the rest of us.
It helps to really think their agenda through when reading stuff like this. Federalize everything you can, while you can. If they RUIN or BREAK the system we have now, they think they’re in a better position to socialize it as a remedy. This is WHY they managed to vote for healthcare despite not getting what they wanted in it from the beginning. They’re going to BREAK the backs of small business, cause an avalanche of layoffs and business closures, higher consumer prices, and even more foreclosures and short sales as the result of their “healthcare reform” program, but from their perspective they’ll then be in position to make the government an INSURER. That’s how they’ll ultimately get what they couldn’t the first time — assuming enough of them survive the 2010 election to see it through.
This is the path they’re on now with the Financial Reform Act. Eliminating competition in the mortgage marketplace is just the first weapon they’ll use to persuade the American public that the government would be a better banker than any independent bank can.
Those of us with some sensibility already know that eliminating YSP will impart a crushing blow on any economic housing recovery. Folks like Ms. Schlicke and her cohorts in the government will just have to have it blow up in their face to get it, at the expense of homeowners (voters) across the country. With any luck we’ll be able to vote the majority of these lunatics in congress out this November. SOMEONE has to stand for a free market and consumer choice, and since that’s ACTUALLY the brokers in this country we’ll need to be brought to the brink of extinction, then back, for these people to get the role we play.
Hi John H,
It’s interesting to read comments from people who refer to me in the third person. I’m right here. You can go ahead and talk directly to me.
I’m actually IN the mortgage lending industry and have been for 25 years. I have look at loan documents where broker LOs have engaged in bait and switch deceptive advertising, blatant violations of state and federal law, even cases where homeowners were never given the GFE or TILA.
I am not a consumer protection advocate. Instead, I believe in industry self-regulation, which would definitely get the government off the back of mortgage loan originators everywhere.
The single most common abuse was by LOs who worked for a broker and were deceptive about their compensation either not disclosing it at application and then surprise! There it is on the HUD 1, to putting their compensation on various lines on the GFE and HUD 1.
This amendment, if it passes within the Wall St Reform bill, will not limit compensation, though that’s the broker party line.
Broker numbers will surely continue to contract before they grow again with or without this amendment.
Hi Publius Deux,
“I am not saying that there were not abuses among originators – I am a realist and I agree that there were deceptive practices. But payment of YSP is not and was not the problem”
Thanks for the bubble history lesson for those that might not have been reading the newspapers for the past 2 years.
How many GFEs and their corresponding HUD 1s have you reviewed from broker originated loans over the past decade to come to the conclusion that YSP was not the problem?
Surely there were many reasons for the meltdown and when all is said and done, I predicted in 2007 that we’ll decide it was nobody’s fault.
http://raincityguide.com/2007/04/13/this-just-in-zero-interest-loans-at-a-cost-of-zero-with-a-monthly-payment-of-zero-apr-0/
Changes must/will occur at all levels such as the relationship between the LO and his/her client. This includes the duty to be fully transparent about fees earned.
Jillayne,
I’m not so sure that the amendment would not outlaw brokers from certain rate/YSP combinations, such as 4.625% with .5 point paid by the borrower (with the other .5 point coming INDIRECTLY from the YSP. Also, the total fee limit would throw out our ability to make smaller loans.
I ‘love’ when you so cavalierly state that maybe we should pay LO’s by the hour, or by a customer survey, etc. Just take legitimate earnings from us here in the trenches, and push more profit to those at the top. Are you sure you’re not a shill for the Big Bank/Washington cartel?
Hi Jim,
Thanks for your comments. I agree and am not so sure about the final rule either! We’ll all just have to first wait to see if it passes. I am definitely not a shill for the big banks. I am an independent educator who owns/operates two firms with a stake in the real estate and mortgage lending industries. If the number of LOs shrinks because of the passage of this bill, my potential earnings as a company owner would also shrink so arguing in favor of this bill is not self-serving.
I’d love to see the day when originators can charge by the hour for their services. Why should LOs spend hours with clients yet not be able to charge (except when a loan is made) and the folks who need a mortgage loan have to pay a higher originator fee in order to compensate the LOs for the time they spent with other people for free? This seems unfair.
It also seems unfair for people to work with an LO for hours and not have to pay them for their time. The vast majority of loan originators left today are highly competent and their time is valuable.
We are perhaps a decade away from being able to do this but I certainly would be in favor of paying LOs by the hour once the industry is functionally self-regulating ethical conduct. Today we are nowhere near self-regulation.
This is old, old, hash now — you’re only a few years late. If it’s any consequence, there are dozens of books written by REAL economic experts about whose to blame for the mess that can be found at Amazon.com. You’d be upset how few cite mortgage brokers as the culprit for today’s economic woes.
The 2010 GFE and HDMA Act resolve yours and our governments issues about transparency and disclosure, period. You’re not a loan originator, or you’d know that a broker can’t add to his compensation and have the loan close at a higher cost to the borrower in 2010. Many lenders require that THEY complete the broker’s GFE to be in compliance with their OWN internal interpretations of Reg. Z, TIL, etc, not to mention that we now have the HMDA and HOEPA acts in place, which you don’t mention.
Our industry IS NOW THE MOST REGULATED IN AMERICA.You want to see more, as evidenced by your support of the amendment eliminating YSP to brokers. This makes you “anti-broker”, even if you don’t see it that way. You don’t want to see brokers with a level playing field, because such a concept doesn’t exist (unlike that ridiculous allegation that there’s no such thing as a no cost loan — I’ve done several for my clients over the years). No broker can compete with a bank head-to-head when up-front fees are required because YSP isn’t.
The really telling thing here, though, is how tens of thousands of American consumers disagree with your assessment of our service by doing business with us every day. You fail to mention that hundreds if not thousands of banks buy brokered loans and continue to solicit broker business everywhere.
If brokers were the shady characters you believe we are, we just wouldn’t be in business today with all the regulations we have and what we’ve had to overcome since 2007.
Hi John H.
I’ve never called myself an economics expert (?)
I am definitely not anti-broker. I am against predatory lending and egregious fees charged for work that may or may not have been performed. But this can happen by any loan originator, no matter where they work.
There are always costs for a mortgage loan. Those costs can then be paid for by charging the consumer a higher interest rate.
To call that a “no cost loan” is deceptive.
Yes there are many brokers still in business but I am not so sure those numbers of “hundreds of thousands” are still acurate in 2010.
The majority of loan originators who engaged in predatory lending are no longer in the business.
Jillayne,
If you want to pay me by the hour for all the work I do providing GFEs, free (and excellent) information, ok–but I still want to be paid per loan. Everyone up the ladder gets reimbursed by the dollar amount of loans and to take us out of that loop is, frankly, anti-free market–and DOES benefit those bank executives. The money we’re not allowed to earn they’ll just pocket.
Hi Jim,
Yes I believe consumers should pay LOs, by the hour, for the work LOs do for consumers that does not result in a loan being made.
Yes, I also believe consumers should pay LOs when an LO does work resulting in the origination of a loan. Arguably, a consumer would only want to pay you for the time spent on his/her file and not for the time you spent helping other people for free.
I am not arguing to take brokers OR LOs out of that loop at all. Although one company in the original blog post is reporting that they’re using processors to originate (I highly doubt they’ll get away with that.)
Hi All,
For those following this post, NAMB has a direct link to the amendment here:
http://www.namb.org/namb/Default.asp
Look for the pdf link. It’s only 11 pages long and will answer many of your questions.
Look for the link that says “threats LO compensation.”
I’m really distraught at your approach here Jillayne, you seem to be a proponent of the government being even more involved in running our business. They have not convinced me as of yet that they’ve been successful at the GOVERNMENT BUSINESS. I am a twenty five year veteran and have taken enormous pride in the fact that I have a loyal strong client base. You don’t get there by bait and switch and abusing the trust of consumers. Sadly, this will be another example of the small families not being able to get the help they need because big brother is setting caps on fees, etc…Not everyone lives in high end communities and many folks are so happy just to get a home. We all need to be writing our congressmen and telling them to not pass this act. The authors of the act need to focus on politics, there is certainly plenty of hide the peanut under the shell game there! This is the first blog I’ve ever done, but this act just has me outraged! It’s simply overkill and the ones who will suffer are the consumers who can’t afford to write the check for the difference. What a shame! What a shame!
Hi Jo Lynn,
thanks for stopping by the NAMF website. Actually, I am a STRONG advocate for LESS government intervention in the mortgage lending industry and have been for over a decade.
When the industry begins self-regulating, the government will get off our backs and stop passing new laws at the state and federal levels.
There’s nothing in the amendment, as written, that leads me to believe a consumer will not be able to obtain a loan by which they select a higher rate in order to amortize their closing costs over the term of the loan. The amendment will just not allow an LO to earn higher compensation because of the consumer selected that type of loan.
jillayne,
The new GFE already makes it impossible for the LO (or the lender/broker, for that matter) to make more because of the amount of rebate. Everything is perfectly transparent already. Have you seen the revised GFE? Lender/broker fees are exact, and have to remain exact, or we owe the borrower the difference. It’s not an ‘estimate–it’s a unilateral contract. Also, the YSP is shown exactly, and it’s a credit to the borrower! We’re also responsible for the title co and other costs, even the transfer tax. If we’re wrong, we pay.
I just got further emails about more regulations and now quarterly audits for us. I’m spending hours every day studying for the NMLS exams. I’ve been making thousands of loans over the last 32 years, with a perfect record, and if business wasn’t already bad enough, the regulations, testing, threats of lawsuits or legal acion, are finishing me. I’m about ready to waive the white flag.
Somehow, Jillayne, I don’t think you see the whole picture. You don’t concede that the Big Banks and their cozy connections with Congress are behind all of this.
Hi Jim,
Exactly! The Merkley amendment will definitely impact loan originators who work for a bank or non-depository lender MORE than LOs who work for a broker.
Because banker/lender LOs can still earn overage by jacking up the interest rate and not disclose this to the consumer. Merkley amendment will eliminate this hidden fee income and force bank/lender LOs to put all compensation they’d like to earn on line 1.
In terms of having to spend time studying, this is the natural trajectory to expect. Loan originators are emerging as a group of professionals and transitioning away from being like retail salesmen and more like doctors, lawyers, accountants, paralegals, and so forth. This means more time spent studying for exams, more time spent in continuing education, more time spent paying for government audits and more responsibility/liability.
It’s okay to wave the white flag. Not everyone will chose to stay in the industry as it gets tougher to originate. That means the LOs who are willing to transform will earn fees off the deals you’re leaving on the table.
Regarding big banks….
OF COURSE we would expect the big banks to pull back from third party originations and take all the retail income for themselves.
banks are acting like a corporation is suppose to act. We shouldn’t expect them to act any other way.
Why should we be surprised when a killer whale kills?
Why should we be surprised when a big bank lobbys congress to enact more laws favoring them.
Dude, the Merkley amendment WILL ALSO AFFECT BANK LOAN OFFICERS.
So in a way, you are COMPLETELY correct for pointing that out.
The amendment will provide a beautiful avenue to limit LO compensation on the back end (overages) and this will definitely add to a bank’s profit.
To me, this is all the more reason why third party broker originators will never go away. Surely their numbers will continue to decrease before they grow again but a broker LO can typically beat a bank LO hands down.
Some will choose to ride out the storm. Others will not.
Wow, it’s fun talking with you, Jillayne. But, let’s look at what you’ve just stated…
Even if bank LO’s have to show what they’re earning, the banks themselves do not have to show their SRP’s, am I right? If I’m right, then all LO’s are being hurt by this amendment–and the Big Banks win again. I don’t want ANY LO’s to be treated unfairly.
And you must be joking when you say that “The amendment will provide a beautiful avenue to limit LO compensation on the back end (overages) and this will definitely add to a bank’s profit.” Beautiful to whom? The Big Banks, of course. And you’re for this?
And you are being very hypocritical when you give the ok for banks to be selfish and greedy, because ‘that’s what corporations do’, yet you attack LO’s for what you see as their lack of ethics.
Clearly you’re just concerned with what LO’s earn; the whole picture doesn’t seem to interest you.
The income that SOME LO’s USED to make seems to really irk you, more than how the Big Banks are ripping off LO’s–and consumers. Yes, on any day my rates will be .25 to .50 percent lower than, say, B of A’s (at the same fees). And my service will be much better than the banks’. Aren’t you overlooking these bottom-line facts?
No, LO’s cannot be paid like an accountant. When someone calls me up for info I’m not going to be able to say, “I charge $100 an hour, rounded up to the closest 1/4 hour, and I take Visa and MasterCharge.” They’ll hang up on me.
Or maybe I’ll agree–just pay me a flat salary per year, and I’ll dispense all the loans I can which the government or Big Banks send to me. I’ll just be another cog in the beauracacy.
BUT– then I’m going to insist, in this Brave New World, that EVERYONE gets paid the same way. Attorneys can’t make a third of their lawsuit settlement; the delaership’s profit on all cars sold, from 10 year-old clunkers to new Jaguars, are $300 each; Wall Street traders just get paid an hourly wage, and the Wall Street firms themselves just earn a salary of some type. And the banks don’t make earnings based on the dollar amount or interest rate on the loans they sell–just a flat fee. If it’s going to be socialism, then it’s gotta be for EVERYONE.
Hi Jim,
Servicing release premium is completely different than a bank loan officer’s overage which is more directly compared to a broker LO’s yield spread. Banks don’t know what their SRP is going to be on any one particular loan at the close of escrow. RESPA says secondary market transactions like SRP are exempt from disclosure requirements. The best we could do to change that would be to change that particular part of RESPA and I’m not sure how the banks could be forced to disclose profit that’s only a prediction at the time of escrow. we could try but the best we’d get is to force them to disclose a possible range. They’d all probably say the same thing, which would render the disclosed information mostly useless for a consumer.
Yes, the Merkley amendment would definitely add to a bank’s profits. Banks have always tried as best they can to hire green, new loan originators, train them, and pay them far less than a loan originator could make at a mortgage lender or mortgage brokerage firm.
Banks will simply continue to do what they’ve always done: Hire cheap and pay LOs less. The smart LOs will leave the banks and end up at the mortgage banks and brokerage firms where they can maximize profits and work with a company that understands mortgage lending (most all big banks fail miserably at mortgage lending.)
I have no problem at all with loan originator compensation. Earn as much as you want to!
Where I take issue is how compensation is explained to the consumer.
Go ahead and earn all you want on each loan. But give the consumer an honest explanation of your fee income.
The LOs with the biggest problem with being honest about their compensation are the LOs who can’t justify to a customer sitting in front of them compensation of, say $10,000 on that one file for doing 4 hours worth of work.
The vast majority of LOs I meet today have no problem at all explaining their full compensation to their clients. This is radically different than the bubble years.
Jim,
You’re right: Loan Originators cannot be paid by the hour.
This is huge flaw in the system.
LOs can only earn a fee when a loan is made. That prompted some LOs to make loans when it was not in the consumer’s best interest to buy or refinance.
LOs ought to be paid by the hour.
This will separate the men from the boys.
A brand new LO fresh from working at Taco Time is not going to be able to justify a $20,000 paycheck on one file for doing 4 hours worth of work.
Loan originators who are seasoned veterans will be able to charge a higher hourly rate and will be worth it, and brand new LOs will charge a lower hourly rate while they learn. This is similar to attorneys. Seasoned trial lawyers charge more per hour than recent law school graduates.
Before any state will allow an LO to charge by the hour, though, the industry must create a mandatory code of ethics to bring LOs into professional status much like CPAs and lawyers.
People want the best rates and lowest fees, combined with the best service. That’s how I compete. This is a service that we’re offering, true, but it’s also a product. The customer, unlike you, is most concerned about getting the best loan, not about how much we’re making.
Jim how about the next 10 customers you have, ask them if they care about your compensation.
Ask them if they’d like to know what your compensation is.
By the way, we’re very clear about what we’re earning–as we’ve all told you it’s a guaranteed figure right on the GFE. And the YSP is right there as well, as a credit to the borrower’s costs.
You also quoted the Bank’s pitch about their SRP’s–that they ‘don’t know what they are until they sell the loan’. Hmmm. They must know something fairly accurately, or they couldn’t be pricing loans daily to both the consumer on the retail side, and to the correspondent lenders on the wholesale side.
And your concern about LO’s pushing loans that are not good for the consumer–another moot point. We now have to justify the reason for any refinances in our loan package.
Jillayne, just got your ‘ask your next 10 borrowers if they care about your compensation’ comment. In fact, unlike the GFE, which lumps ALL of the lender fees together, I send a simple worksheet that spells out what my company is earning, usually around 1.25 points and $395 processing. And the customer is free, of course to compare. But when they see that my rate is at least .25% lower than the competition, including the Big Banks’ quotes, they’re more than happy. Especially because my service is so much better.
One last point, and I’m done. You bring up a LO making $10,000 for 4 hours work. I made 10K once–on a million dollar refi with a very knowledgeable borrower. He constantly looked for better deals, even after I had spent many hours on his very complicated loan package. Do I think that was a rip-off? Neither he nor I thought so.
ok i read both of your arguments and i have to say i agree with both but more with jillayne,, as the great mortgage lenders will be able to get around this new adendum ,, as my co. has already started to figure out how,, as for disclosures,, well untill we the mortgage industries are self governing not Federally regulated! the majority of LO’s will try to hide thier compensation,, just a thought. thanks
The Wall St Finance Reform bill passed the Senate today. Now it goes back to the house to be merged with another bill they passed last fall…..
[...] Also, the Senate passed the much-talked about Wall Street Reform bill today which includes the Merkley Amendment that will have an impact on loan originators. [...]
Call me dense but, please explain to me what other “professional” is required to disclose their compensation for a product or service? I know tax preparers that charge 300 for single W-2 wage earners whose only schedule A deduction is mortgage interest and only sole income is on the W-2.
They complete and file the return in 15 minutes. Should they disclose that they are making $1200 an hour?
The reason you are a socialist is because you differentiate a mortgage from pair of Nike’s. You do no justice to shoe salesman everywhere who pride themselves in disclosing what shoe is best from a price, comfort, and orthopedic perspective. Please explain to me why the concepts of compensation for these products should be different.
Home-ownership is not a right and Barney Frank has put millions of Americans behind the eight ball thinking it is.
Jim-
Thank you for more intelligently conveying my feelings concerning this..and the Huxley reference means you must be a Chico State Grad.
I guess we should unionize, demand a government pension, further drain our states revenues, and maybe close loans in 90 to 120 days. This will most likely add some fees for the borrower…
The margaritas are definitely better here…adios!
Hi CK,
Other professionals who are required todisclose their compensation for their services include doctors, lawyers, CPAs, engineers, paralegals, nurse practitioners, and so forth.
I did not vote for President Obama and I find it interesting that people think I have socialist tendencies because I hold a belief that this law will pass.
Purchasing a mortgage is different from purchasing a pair of running shoes because the consequences from purchasing a mortgage are far more grave than the wrong pair of running shoes.
I agree with you. Homeownership is not a right; it’s a privilege.
Jillayne, you keep ignoring the fact that along with being a service, a mortgage IS A PRODUCT. CK’s analogy about a pair of Nike’s is another way of pointing out that simple fact.
You never directly responded to my earlier point–that every entity up the mortgage secondary market place gets paid by the dollar amount and interest rate on their pooled mortgages. Your assertion that only the LO’s, who are the actual mortgage originators, should be paid by the hour IS socialism. What’s worse, you’re advocating socialism for us, and only for us, among all the entities involved in the mortgage-sales ladder. It’s very unfair, and not even a true type of socialism where EVERYONE would be paid by the hour–including executives with the Big Banks, Wall Street Traders, on and on.
The fact that brokers have to show their YSP but Banks do not show their SRP is misleading to the consumer, and actually makes it more difficult to compare mortgages correctly. I personally don’t mind having to explain and clarify this issue to my customers, because it gives me a chance to show just how much better my product is, in the final analysis. But these YSP disclosure rules are very biased against the broker. And your notion is wrong that because the Merkley amendment makes the banker/correspondent lenders have to show their ‘overages’, the playing field will now be leveled. The water is still muddy.
This is because all of these disclosures are just about LO earnings, NOT about the big picture. The big picture, and the one most important to the customer, is to compare the actual fees and interest rate on a loan. Although I personally don’t charge much for any loan, the fact that my 4.625% loan has the same fees to the borrower as B of A’s 4.875% loan, should be all that’s needed for the customer to compare. Let’s not miss the forest for the trees.
I am not asserting that LOs only get paid by the hour, just that this is one idea. Doctors are paid for their time. Lawyers, paralegals, CPAs all bill by the hour.
So then because these professional groups get paid by the hour, we must already be living in a socialist country?
YSP and SRP are two completely differen things. SRP is earned after the close of escrow on the secondary market, YSP is earned at the close of escrow and subject to disclosure under RESPA. Banks do not know what their SRP is going to be at application and therefore cannot be forced to it.
YSP disclosure rules are only biased against the broker if the broker is earning UNEARNED fee income….income he/she is not able to justify to the consumer.
The vast majority of brokers I know don’t have any problem explaining their YSP compensation (which is now all on line one of the GFE anyways as fee income.)
So dude, the Merkely amendment would force ALL LOAN ORIGINATORS to disclose overage (this is more like YSP than SRP) income. Banker, broker, mortgage banker, credit union. All hidden overage income would go away, forcing all LO fee income on line 1.
I fail to see how this is socialism.
Please dazzle me with your explanation.
Jim the reason LOs are being targeted with disclosing their income and shoe salesmen are not being targeted is because too many consumers were harmed by LOs during the bubble.
Shoe salesmen can’t send someone into a financial cliff dive.
If a broker can beat a banker with rate, then YOU WILL SURVIVE and all this fear about the Merkley amendment is a ruse!
The strong will survive Jim. The LOs who can figure out a way to make a profit despite this amendment will survive.
Now how could you going to call me a socialist when I am completely in favor of free market capitalist fundamentals? as I have said many times now, I did not vote for Obama!
Jillayne, it’s ridiculous to say that the Banks don’t know what their SRP will be at the close of a loan. What, every now and then they lose millions on some portfolio of loans? They say, “Darn! We really lost on that one?” Uhhuh. And so how are they making billions every quarter? How do they offer retail loans to borrowers every day with 60 day locks? How do they offer correspondents/bankers set rates & points every day? You’re buying the same BS that Washington seems to believe. But Washington is paid well by the banks and their lobbyists to go along with this lie. What’s your excuse?
Please respond to my point that you’re missing the forest for the trees. No, I’m not against disclosure and transparency, but how transparent is it that I have to carefully explain to a Borrower how to compare my GFE, with it’s YSP figure, to the Bank’s GFE, which has no such figure. It’s so absurd, in fact, that sometimes my clients get nervous about it all–they can’t understand why our GFE looks so different than the Bank’s. They can’t believe that the government would make things so hard to compare, which makes me (the small-time, local broker, who’s in a small, unassuming office), seem less trustworthy than a big, well-known Wells Fargo or B of A.
I understand that Merkley will have ALL LO’s disclose their ‘overages’. So what? More to the point, what’s the ‘overage’ that B of A is getting when they charge .25% more than my loan (at the same costs/points)? They’re making a fortune on these loans, and that hurts the consumer. Every time the consumer ends up paying .25% or more on their loan than what they could have received from me, they’re being gouged. And when you add up all the customers who are–and will be– gouged, now and especially in the future when we won’t be around to compete with them, it’s really a shame.
My primary wholesale lender sells most of their loans to B of A. So, I can undercut B of A retail by at least .25%, make a profit, and that loan will in turn be sold to B of A, where it’s still making a profit for B of A. Hmm.
By the way, lawyers and doctors do not always just get paid by the hour. When a doctor performs an operation, he gets paid for that ‘product’, NOT by the hour. When an attorney represents someone in certain types of litigation and lawsuits, she often gets one third of the settlement. So, these professionals get paid by the hour sometimes, and sometimes get paid a much larger amount, unrelated to the time spent, when they sell their ‘product’.
We LO’s cannot sell our ‘time’. We only make our earnings when we close the loan. The loan makes money for everyone up the mortgage food chain based on the rate and dollar amount. We LO’s need to be paid the same way. But you want to somehow pay us by the hour, and not based on the product. That’s why it’s socialism, whether you voted for Obama or not.
Jim says “More to the point, what’s the ‘overage’ that B of A is getting when they charge .25% more than my loan (at the same costs/points)? They’re making a fortune on these loans, and that hurts the consumer.”
Jim you’re making your own point.
If indeed brokers and other mortgage bankers can beat the big banks by doing a BETTER job than the retail banks for less of an interest rate, then why should the consumer care how much money you make because the consumer WINS when the consumer choses you over a retail bank.
In fact, arguably, you’re services as an LO are worth more to the consumer if you were able to secure a better rate over the life of the loan.
THIS IS WHY I think all this fear and hate going on about this amendment is so interesting.
Loan originators will STILL be around after this amendment passes and surely some are already putting together a business plan on how to survive and thrive in this new environment.
Jim paying professionals by the hour has nothing to do with socialism. It is not “I” who “wants” LOs to be paid by the hour. It is the hundreds of LOs I meet who like this idea as AN IDEA whose time might be right around the corner.
Why should some consumers get to use LOs for advice and help and not have to pay you for that, and then LOs have to charge other consumers a higher fee in order to make up for the time you spent helping the other guy for nothing?
The system is broken when we only are allowed to pay LOs when a loan is made. This sets up a motivation for LOs to make loans when maybe people aren’t ready to become homeowners or really don’t need to refinance again just to churn someone for a fee.
A capitalist system works best when people can create new ways of providing service (or a product) for a market and creating value in exchange for a fee.
I see a loan originator’s time as valuable.
By saying that a loan originator is only selling a mortgage, we are turning LOs into “mortgage salesmen” and then that means they are more like the Nike shoe salesmen than a doctor or a lawyer.
There’s no reason why LOs must only be paid based on the rate and dollar amount. A capitalist system would allow for many different ways of paying loan originators and that is exactly what I am advocating.
Jillayne, you’ve certainly softened your view of Loan Officers through the course of these comments, so I guess I’m somewhat satisfied. It’s been a good discussion.
You now seem to understand that the bad LO’s are largely gone now, and that the new GFE, despite its many faults, has at least eliminated bait and switch, and has made our fees very transparent (more than any other business I can think of).
You wonder why we’re so unhappy with this amendment, though, and there are a number of reasons for our displeasure.
First of all, it demonstrates a severe lack of understanding about our business, and that’s infuriating. It doesn’t look like Merkley or Klobuchar researched the mortgage business at all–they just wanted to make a ‘popular’ political move in order to keep their jobs, like most politicians these days. They made rules before they understood the actual facts about our business. For example, ‘Liars loans’, which was not a loan program designed by LO’s, but by the greedy Wall Street and Big Bank schemers who needed more loans for their hugely profitable and hugely disastrous mortgage pools, designed these things, and then had their underwriters approve them. LO’s did not design these loans, nor did they approve any of them. But the amendment misses the most obvious fact–’Liars Loans have not been available for over 20 months now. Also the practice of ‘steering’ Borrowers into sub-prime loans, is a moot issue–there are no sub-prime loans any more to steer anyone into.
Merkley, klobuchar, and the rest of the Senate also do not seem to understand or even be aware of the new HUD GFE, which clearly delineates all lender fees, and broker YSP’s, and has already addressed the issues brought up in this amendment. Why not give the new GFE, which is an extemely forceful development towards complete lender transparency, a chance? Probably because these Senators don’t even understand the new GFE. Probably don’t even know about it.
And the wording of the amendment is vague–as you had agreed with me earlier, we do not even know if this amendment eliminates 1/2 point loans, and so on, where the YSP indirectly pays me the other 1/2 point. Is that going to now be illegal? We don’t even know. And the new 3 point max closing costs will make it difficult for us to make smaller loans, hurting just those lower income future homeowners they say they want to help. They’re stacking one new regulation on top of another, without even giving the earlier regulations a chance. It’s just too much. It’s overkill, uninformed, backed by the Big Banks, and completely anti-free market. It’s shutting the barn doors long after the livestock have left the barn.
And then you look at Wall Street and see that those high stake gamblers of the citizen’s money keep on making billions of dollars every quarter, and I can’t make enough to pay my mortgage. And you look at the Gulf Oil Spill and see how the government department that was supposed to oversee these greedy corporations was, instead, literally in bed with them. Yeah, I’m angry, and so are a lot of us.
Last of all, Jillayne, regarding our mutual concern for the consumer. Look, it’s just not that difficult to get a good idea of interest rates and lender fees. Just google Bank of America Mortgage rates, and see what their points and lender fees are for your loan size. Then call me, and I’ll give you a comparison. And then I’ll give you a unilateral contract stating exactly what my lender fees are on that loan. This is not brain surgery, and I don’t know how much more we can do to make this loan process more transparent, without being completely ridiculous.
Thanks for the discussion.
Education beats legislation every time. Some of the new regulations are haphazardly authored by people who have a gap in understanding of the mortgage (or any financial/economic) process and under pressure from massively funded special interest groups.
Whether hourly pay is right or not it’s likely on its way and many lenders are evaluating that process. There are some big negatives with paying by the hour but if you have the business acumen I believe you do you can self-enumerate those. Basic business economics will tell you hourly paid MLOs will result in a higher cost per loan – it’s simply math.
By the way, Jim, we don’t always know what our SRP will be at the close of a loan. Secondary marketing isn’t exactly that simple.
Hi Ken,
I checked out your blog; nice work! I believe that if the Merkely amendment becomes law, there will be several different ways created to pay loan originators. But we should wait for the final rule first.
[...] of the loan amount. If you want to debate the Merkley amendment, please visit this thread or this thread. From the Mortgage Banker’s Association, here is a summary of how loan originator [...]
[...] of the loan amount. If you want to debate the Merkley amendment, please visit this thread or this thread. From the Mortgage Banker’s Association, here is a summary of how loan originator [...]