Dodd-Frank Wall St Reform Act Will Limit Loan Originator Compensation
The Merkley Amendment to the Wall Street Financial Reform legislation limits loan originator compensation to no more than 3 percent 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 compensation would be limited under the new Dodd-Frank Wall Street Reform Act HR4173
Prohibition on Steering/Loan Originator Compensation – Establishes new anti-steering restrictions for all mortgage loans that prohibit yield spread premiums and other compensation to a mortgage originator that varies based on the rate or terms of the loan. Would allow compensation to originator (1) based on principal amount of loan, (2) to be financed through the loan’s rate as long as it is not based
on the loan’s rate and terms and the originator does not receive any other compensation such as discount points, or origination points, or fees however denominated, other than third-party charges, from the consumer (or anyone else), and (3) in the form of incentive payments based on the number of loans originated within a specified period of time. Expressly permits compensation to be received by a creditor upon the sale of a consummated loan to a subsequent purchaser, i.e. compensation to a lender from the secondary market for the sale of a consummated loan but creditors in table funded transactions are subject to compensation restrictions.
All fees that enure to the benefit of the lender (the entity funding the loan) as well as any third party mortgage broker, now appear in box 1 of the Good Faith Estimate. The loan originator rarely if ever is earning the total dollar amount in that box. Instead, the loan origination fee is divided up between different people. If the massive Wall Street Reform law passes, loan origination fees would be capped at 3 percent of the loan amount, with some exceptions:
3 Percent Limit – Definition in TILA with the following exclusions (1) bona fide third-party charges retained by an affiliate (2) up to and including 2 bona fide discount points depending on interest rate. Also, excludes any government insurance premium and any private insurance premium up to the amount of the FHA insurance premium, provided the PMI premium is refundable on a pro rata basis,
and any premium paid by the consumer after closing
Consumers have ample opportunity to shop for mortgage rates on the Internet and hear radio advertisements all day long for refinance “rates as low as….” however low they might be that day. We would all hope that consumers are much more savy mortgage shoppers when compared with the peak of the real estate bubble.
Some loan originators believe consumers do not care what their loan originator is paid as long as the consumer receives the lowest possible rate and fees available on that particular day for his/her particular loan needs. I happen to believe the opposite is true, with one twist. Consumers do care what loan originators are paid, when they are educated as to how to understand LO compensation.
Some loan originators hold an irrational belief that consumers couldn’t possibly care about their compensation…that consumers ONLY care about getting the lowest rate because their note rate is the single most important thing affecting the monthly payment and their monthly payment is typically a homeowner’s biggest check he/she writes every month. However, it’s important for LOs to understand that they have a vested interest in keeping consumers in the dark about how and how much LOs are compensated. If consumers were to fully understand LO compensation, consumers would have the ability to better negotiate a lower fee. Since many consumers roll their closing costs into a refinanced loan, this *does* affect a person’s monthly payment because the consumer is amortizing the loan originator’s fee and paying a little part of it each month.
If consumers were forced to pay their closing costs in cash up front at the close of escrow on a refinance, consumers might suddenly become much more interested in understanding how to shop for all the settlement costs.
The mortgage industry trained Americans to serial refinance with very little out of pocket expense and to purchase a home using 80/20 loans with sellers paying all their costs. We’re now requiring more money up front on a purchase money loan but many buyers are still in the driver’s seat asking and getting seller concessions and many consumers still refinance by rolling all their closing costs into the new loan.
There are many different ways loan originators are compensated. Here are a few:
Percentage of the loan amount
If the loan amount is $350,000 and the loan origination fee quoted is 1.75 percent, your loan originator is likely not going to take home a $6,125 paycheck. Typically a loan originator is going to split that $6125 with his or her company in some way. It might be a 50/50 split or perhaps some loan originators will get a better split if they are bringing in their own clients.
On that same transaction, a loan originator may have been able to sell you a slightly higher rate than what you could have received had you known a better rate was available that day. When a loan originator works for a bank OR non-depository lender such as a mortgage bank (no checking and savings) this is called earning “overage.” This LO is going to earn an additional .50 percent of the loan amount in extra compensation that he/she does not have to disclose to the consumer. On our sample transaction, that comes out to be an extra $1750. This may or may not have to be split with the loan originator’s company.
When a loan originator works for a mortgage broker, all compensation, including any “overage” which is also called “yield” or “yield spread premium” is disclosed to the borrower on line one of the good faith estimate and the consumer is shown, on the GFE that the consumer is choosing a slightly higher rate in order to pay his/her loan originator this extra compensation.
Before the 2010 changes in how compensation was disclosed to consumers on the good faith estimate, loan originators might have earned even more compensation through processing, underwriting, and administration fees. There’s nothing wrong with these fees, provided there was actually an underwriter, processor, and administrator doing work for that fee. With the new 2010 good faith estimate, all these fees are now disclosed on line one of the GFE.
Besides receiving a split of the origination fee, other ways of LO compensation might be paying LOs based on the total volume of loans and/or total loan amount each month, an hourly wage with a bonus, a salary, or a combination of different methods.
What’s a fair way for consumers to negotiate loan originator compensation?
Fair can be defined in may different ways. Some LOs prefer to always charge the same percentage of the loan amount: 1 percent, 1.5 percent, 2 percent, and so forth, for all their clients. Yet some LOs believe that’s not fair.
Why should one customer who’s loan amount is $350,000 pay $6125 (1.75%) and another customer whose loan amount is $600,000 pay $10,500 (1.75%) and another customer with a $100,000 loan pay $1,750 (1.75%)
Suppose the person’s loan who paid only 1,750 took more time and effort than the person who paid 10,500.
Why should the consumer paying $10,500 help subsidize the price of the loan for the guy who needs constant handholding?
If a loan originator works hard trying to find the best loan program or the absolute lowest rate (so the consumer does not have to spend time shopping) and she put in all kinds of time and effort, this LO is arguably worth more to the consumer. This is the broker model of originating loans. The mortgage broker LO acts as a third party middleman, an “agent” for the borrower, and helps the consumer select the best fit from lots of different mortgage money choices.
Conversely, some consumers are anal retentive (nothing wrong with that. Takes one to know one) and like to do all kinds of research, spreadsheets, analysis, interviewing, reading and experimenting on their own, sometimes for many weeks or months. By the time this person is ready to select a mortgage, the AR borrower has already selected the mortgage product, rate, and company. This obsessive compulsive has even run a background check on the firm and its history of consumer complaints, knows the name of the CEO, where her kids go to school, what type of loan she currently has on her own home, and what paperwork will be asked of him at application. Arguably this customer has already done most of the loan originator’s job (in his opinion), so why should he have to pay a heft LO fee if he’s just going to fill out an online Internet application, send in a package of paperwork, and close “in as little as 2 weeks?”
Well, anyone in the mortgage lending industry knows that the borrower in the mortgage broker scenario could end up being a bunny file, where the broker/LO only spends 5 hours max on that file whereas mister anal retentive’s file ends up being the nightmare scenario from hell and the low-fee company ends up losing money on that transaction.
I take these two polar opposites as examples because a loan originator’s real life is some of the above but mostly everything in between. A loan originator never really knows for sure how much time he/she will spend on a particular file. This is one of the reasons (I’m sure there are others) why LOs simply revert to a percentage of the loan amount: Because everything washes out in the end.
Today’s consumers are left wondering what the hell happened during the meltdown and really don’t buy any of the crap the industry tries to use to brainwash the world into thinking it wasn’t the industry’s fault. “It was the rating agencies,” or “those greedy Wall Street investment bankers are to blame,” or “It’s the big banks: They are the ones who told us to sell the toxic mortgages.” Somebody needs to tell the industry that the more the industry tries to shirk all responsibility, the more guilty the industry looks. The more the industry points outward at everyone but itself, the more the politicians and regulators will pass laws and rules like what we haven’t seen since the 1970s which gave us RESPA, TILA, ECOA and FCRA.
There is no doubt in my mind that the mortgage lending industry will find creative ways of compensating those that can bring the business in the door.
Here is an idea: Why not pay loan originators by the hour? Consumers can pay their loan originator the way we pay for an accountant, a lawyer, an engineer, a paralegal, and other traditional professionals.
In the above example of a $350,000 loan with a 1.75% loan origination fee of $6125, if we estimate that the average number of hours spent with the loan originator was 5 hours, that’s like paying an originator $1225 per hour. There is no LO on this planet worth over a thousand dollars an hour. But this isn’t an accurate figure if indeed the $6125 fee is split 50/50 with the originator’s company So $3063 would be the originator’s compensation….divided by 5 hours means this LO is charging $613 per hour.
That’s a VERY hefty hourly fee for a person who doesn’t even have to hold a high school diploma to become a loan originator. In fact I have personally now met 5 people who have only finished 8th grade that are originating mortgage loans. Even a 20 hour education requirement and a national exam will not keep predatory lenders away from the industry.
Charging by the hour for an LOs time would serve two purposes: 1) it would motivate people to be more efficient with their time when working with a loan originator; and, 2) it would separate the men from the boys and the women from the girls. By this I mean loan originators with over 25 years of experience would be worth more because of their vast amount of knowledge: These LOs would theoretically be more efficient and competent and since they’d spend less time per file, they would be worth more. On the other hand, a baby loan originator who just received the license is going to be in training mode for a while and would arguably be worth less per hour.
Imagine an LO saying to his or her client, “Mr. AR, based on our initial consult, I estimate that it will take me and my team X number of hours to originate your file. It could be more or less, I’ll give you a weekly or monthly fee sheet as we go along. You can pay me by the hour…my hourly fee is X, or you can pay me no more than 3% total. Which would you prefer? It might be less if you select the hourly rate but it will never be more than 3%.” I will bet you 100% of the time the client chooses the hourly rate for the chance that their fee might be lower in the end.
But will things change all that much if LOs were paid by the hour? Maybe not. The baby LOs will still end up working for the depository banks and the experienced pros will still end up at the non-depository mortgage banks and mortgage brokerage firms. When the Dodd-Frank Bill passes, our lives will all change once again but it’s still a great way of making a living and I know the majority of us will still be here doing just that.
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Comment by Angel Pedro on 17 July 2010:
I have NEVER been so lucky to see a loan that took only 5 hours to originate..nowadays we have to process as well, putting the average (at least mine) time spent on a loan at around 15 hours…..
Our work is ridiculously harder than a realtor, who gets as much as 6% for driving a buyer around in a car for an hour! I don’t hear Washington trying to limit their fees!
Comment by Angel Pedro on 17 July 2010:
Oh, and, even with the points I don’t agree with, that was great post Jillayne!
Comment by Phil H. on 18 July 2010:
Yeah, 5 hours would be nice. I’m averaging well over double that now. It’s funny that none of these articles ever mention how much the big depository institutions are making. Their FHA/VA pricing is well over a 103.5 and has been for months. I’m sure this is a result of the additional costs in processing a file since all of the new regulations took effect (no one mentions the extra .25% in rate consumers are paying because of that either); still, the originators that work for those companies get paid a percentage of 1 point (overage is largely a legend in those companies now) and generally have no idea that they themselves are getting hosed. Just like anything else that comes out of Washington, those companies with the money to pay for campaigns suffer far less than those without.
Comment by Phil H. on 18 July 2010:
Oh…and charging by the hour? Who the individual originator or the company? Even if the originator only spent 5 hours on a file (yeah right), what about the processor, underwriter, closer, funder, shipper, insurer, secondary marketer, and auditor?
The bottom line is that borrower should not care how much the originator makes. If they do their own homework and shop for 1) an honest, experienced originator and 2) the best pricing, they will get a good deal. This is not to say that a borrower should not understand how an originator/company gets paid. They have to know that to shop around, but how much the originator/company makes is none of their business as long as they are satisfied with the transaction. If you ask me, too many people relied on “government protections” and got screwed. People would be better served to realize that they have to do their own homework and protect themselves than they are by a government constantly trying to protect them.
Comment by Jeremy C on 23 July 2010:
This article makes no sense. As with any sales profession loan originators are compensated based on their skill and knowledge. 99% of America could never make it as a loan officer living strictly on commission, and having to constantly generate your own business and earn a living. America was built on capitalism, and this Wall Street Bill is against everything capitalism stands for. The government should never be involved in any compensation of any employee in the private sector. Loan originator compensation did not cause the mortgage meltdown. This is truly not about compensation, this is more about over regulation, and an over reaction by the federal government. It is very easy to become a loan officer, but to survive and thrive in this field requires 70 hr weeks, the mastery of guidelines and regulations of a lawyer, and the personality that can let you be everyone’s best friend. Loan officers are entreprenuers creating there own markets and either thriving or suffering with the business they create. Loan officers don’t go to work play solitare on their computers for 2 hours and then ask for a paycheck at the end of the month. Hard work should be rewarded, and there is no person or entity that should ever limit the amount of wealth any profession can earn. That would be socialism, and that is the direction we are headed. Unfortunately I campaigned for the wrong political party 2 years ago, I will definitely be voting for capitalism next election
Comment by mf on 23 July 2010:
Hi Jeremy,
There were many reasons for the meltdown. So then why is the federal government targeting loan originator compensation if there were absolutely *no* loan originator compensation issues?
Not sure where you’ve been for the past 10 years but there definitely were problems with LO compensation. Maybe the government is over-reaching with the compensation limits.
Before anyone in congress will even entertain overturning the compensation portion of the bill, the industry will have to put their own rules in place to self-monitor ethical conduct of its members.
Some LOs are entrepreneurs….and some are W-2 employees sitting by a telephone waiting for it to ring or waiting for customers to walk through a bank lobby. All will be able to make it just fine with these new compensation limits.
Unofficial surveys during my classes tell me nobody’s making more than 3 percent right now anyways.
Comment by Rod Beddia on 12 August 2010:
Lady you have no idea in what’s involved in putting a loan together. 5 hours can be spent just getting some one pre-approved, then come’s the whole application process. The government has no idea how much they have screwed the consumer and the entire mortgage industry. While I agree that some changes needed to be made, like 100% financing and the no doc loans, everything that has been done to this point has been done by people in the government who have NO CLUE!! The first bright idea was HVCC, wow first let’s screw all the apprasiers by requiring a third party to order the apprasial and take half their pay, and better yet let’s have the lowest and least experienced apprasier from 75 miles away come to my county and not have acess to the property do a half ass job. Better yet was the RESPA requirement to hold and delay closing for a borrower when their APR is .125% LOWER than what was disclosed!!! That makes sence. The guidelines have become so combersome that it takes some one with experience and knowlege just to navigate thru the process. Who are you or the government to tell me how much I can make, that’s complete BS! I take calls all day long, late into the evening, weekends and holidays, It seems as though I never get a vacation. It’s funny that the biggest lenders in the country Wells Fargo and B of A are pushing for these changes, why not they own the biggest AMC in the country, and by limiting LO pay they make more money. Sounds like letting the fox in the hen house. What’s going to end up happening is the people that will be needed (experinced loan officers)to help consumers get through all this government BS will be in other carrer fileds!
Comment by mf on 12 August 2010:
Hi Rod,
Thanks for stopping by NAMF.
Question.
How many points per transaction are you making right now?
Thanks,
Jillayne
Comment by Rod Beddia on 13 August 2010:
How much are you paid??
Comment by Jillayne Schlicke on 13 August 2010:
It’s fairly easy to see what course providers are paid. Our per-student rates are published on our websites. Students have a wide variety of course providers to choose from: live, in-person classes, online, web cam, etc. Go to my “schedule” page to see my rates. But course provdider services aren’t what we’re talking about on this blog post.
Most LOs I interact with on a daily basis are telling me that it’s rare to be able to earn 3% compensation on a deal today.
So attempts by the government to limit LO compensation are behind the free market curve anyways.
Comment by An ACTUAL Orignator on 14 August 2010:
Another worthless article written by someone who has never spent a minute actually originating a loan, never spent money advertising, never dealt with actual customers, never fixing someones credit, never paid thousands of dollars a month in credit report bills just to find out the customer has a 450 credit score, never dealt with AR underwiters, assinine conditions, know it all Realtors, idiot regulations from Washington, and post closing conditions where the end investor refuses to buy the loan you closed last month.
Your article is also biased and twisted. Wal-Mart doesn’t put a sticker on everything they sell telling you what they paid for the item. Even it they did, their “cost” of the item doesn’t tell the whole picture. They have overhead. This is the same for us. Maybe I make $3000 on a transaction, but I too have overhead. Advertising, rent, staff, E&O insurance, paper, telephones, credit reports, social security taxes, health insurance (don’t get me started on that one). Furthermore, maybe I work 50-hours a week, but only close 5 loans a month. Your article would lead people to believe we are making a killing. Trust me lady, we are not.
Your article is again biased and twisted in that customers DON’T actually care what I make. The really only care what their deal is. If I was their ONLY CHOICE, like my local electric company, that would be one thing. But I am NOT their only choice.
EVERY SINGLE DAY, I beat the big bank with the wagon in their commercials by AT LEAST .25% in interest rate for the exact same closing costs. Their Loan Officers have no individual license and are really just glorified application takers. What is your name, what is your address, would you like that super sized? Their Loan Officers make 35bps.
I have mandatory education, continuing education, state and federal testing, background check, and more. Yes, I am paid more – and I should.
I have more knowledge, provide better and faster service, and I beat the banks everyday with lower rates. The customer has shopped, done their homework, and selected my services. They DONT care what I make – only that they have found the best deal in the market.
Comment by Jillayne Schlicke on 14 August 2010:
Hi AO,
I have originated, processed, and underwritten residential mortgage loans for many years.
Selecting a mortgage loan is radically different than purchasing an item from WalMart.
Loan origination is transforming from a retail sales-type of job to that of a professional. Once a person holds professional status they owe their clients way more information than a retail salesman. That includes honestly explaining all compensation. I have written about this extensively for a decade.
Comment by Professional status? on 18 August 2010:
Jillayne,
Regarding your last comment: “Once a person holds professional status they owe their clients way more information than a retail salesman. That includes honestly explaining all compensation.”
Would you not describe a medical doctor as one that “holds professional status”? Do you know exactly how all of your doctors are compensated? Have you ever once had a conversation with any of your own doctors on how exactly they are paid? Have you ever had a surgery? What about everyone in the operating room? Do you know exactly what they are being paid to be there? Did they “honestly explain all of their compensations”??
Next question, have you ever shopped your Dr(s) around for pricing?
Paraphrasing the last line of AO’s latest comment: “You have researched, done your homework, and selected that Dr’s services. You DONT care what they make, only that you are confident you are getting taken care of.”
I am not a loan officer, loan originator, or in the mortgage industry, but as a capitalist I have to agree with most of AO’s points.
For 95-99% of every mortgage transaction which we can call the “average consumer transaction” the free-market will sort compensation and pricing issues out.
LO compensation doesn’t need to be federally regulated. In the average consumer transaction, consumers will do their own research, shop, and make their own educated purchasing decisions.
We are regulating for the 1-5% that don’t do any research, don’t do any homework, and don’t do any comparison shopping. Why?
In addition, like you brilliantly pointed out in your earlier post, “this regulation is already behind the free market curve” already, I agree.
The LOs that are gouging the consumers are going to get weeded down by competition in the market. So we have the government regulating a minuscule population of gouging LOs for the benefit of a minuscule population of consumers that don’t do any homework, research, or competitive shopping.
Why?
Comment by Jillayne Schlicke on 19 August 2010:
Hi PS?
“Would you not describe a medical doctor as one that holds professional status?”
Yes.
“Do you know exactly how all of your doctors are compensated?”
Yes.
“Have you ever once had a conversation with any of your own doctors on how exactly they are paid?”
Yes.
“Have you ever had a surgery?”
Yes. Two invasive surgeries, a handful of minor ones, and another major surgery scheduled for next week.
“What about everyone in the operating room? Do you know exactly what they are being paid to be there?”
YES.
Before an invasive medical procedure, a patient has the opportunity to ask for and receive a cost breakdown of all services by the people providing that service. I have done that TWICE in 2010.
“Next question, have you ever shopped your Dr(s) around for pricing?”
YES. In fact, it’s a good idea to get a second opinion, especially for an invasive medical procedure. Doctors often give discounts for prompt cash payments.
“consumers will do their own research, shop, and make their own educated purchasing decisions.”
I DISAGREE. The average random consumer has no idea how to read the mandatory government disclosure forms. I implore you to ask 5 of your friends to explain to you APR (annual percentage rate) and why this is or is not a good way to shop for a mortgage loan, how to find their LO compensation on the disclosure forms. Most consumers blindly trust their loan originator. THIS IS A PROBLEM. This is one of many problems that lead to the mortgage industry meltdown and the explosion of predatory lending.
“We are regulating for the 1-5% that don’t do any research, don’t do any homework, and don’t do any comparison shopping. Why?”
We are not regulating for the 1 to 5 percent. We are regulating for the 75 to 85 percent of consumers who will not do any research or comparison shopping.
Government regulators are always at least 2+ years behind the trend. Yes, the market has weeded out the bad loan originators. HOWEVER we have a VERY HIGH percentage of homeowners in default, in foreclosure, or with a foreclosure, bankruptcy or short sale in their credit history. This is not a “miniscule” part of the population.
Selecting a mortgage loan is way more complicated than it was years ago. Loan originators are transforming from retail salesmen into that of professional and will eventually owe the same duties of full disclosure (of their compensation) to their clients similar to other professionals like CPAs and attorneys.
Comment by A REAL Doctor on 19 August 2010:
Jillayne,
I have been a physician for many years. My son is a loan originator for a local bank. I was doing some research for him and came across your site. I will rebut your statements with this. Being that I went to medical school and you have not, you speaking on how a Dr. chooses to run his business and what he charges his patients is a little off base. I may charge a patient $65 for an office visit but his insurance company gets charged 3 times that. So, your comment about what we as Dr’s get paid and disclose to our patients is false. Speaking about things you know nothing about is very unprofessional to say the least. As for how my son will be paid. If the rate that he gives his client is a fair market rate and it accomplishes the goals that the client has set for him or herself then that is the ultimate goal. The high paid LO’s of the subprime days are no longer. Its FHA VA or Conventional, thats it. The government has no business sticking there nose in where it doesn’t belong. People in the midwest did not do the crazy loan products that were offered and closed on both coasts. We did not have to since our property values did not increase by 28% a year on average. The government needs to stick to trade deficits and the GDP. Period!
Comment by mf on 19 August 2010:
Hi ARD,
Thanks for stopping by NAMF.
“So, your comment about what we as Dr’s get paid and disclose to our patients is false”
ARD, if you are going to perform an invasive medical procedure on a patient, and that patient asks you, up front how much the procedure will cost, are you saying that you have no ethical duty to answer that question honestly, and if you do not know the answer at the time, NO ethical duty to get back to the patient with that information prior to the surgery?
“Speaking about things you know nothing about is very unprofessional to say the least.”
I have a masters degree in moral psychology and spent 4 years studying philosophy, moral development, and in particular, business ethics and the law and have read over 1,000 codes of ethics. I do not have a medical degree but HAVE read many medical codes of ethics including yours. AMA Code Opinion 10.015 – The Patient-Physician Relationship makes it crystal clear that a doctor must put the patient’s welfare above the doctor’s own self interests.
Loan originators have no such code to turn to. State laws vary but at the present time, LOs owe no such fiduciary duty of care to their clients (with some minor state exceptions.) There is absolutely NO ethical oversight of LOs in the United States of America at this time. The minimum moral standard is the law.
“If the rate that he gives his client is a fair market rate and it accomplishes the goals that the client has set for him or herself then that is the ultimate goal.”
The problem with this sentence is the word “fair.” At this moment in time, that word is defined subjectively by each loan originator. What’s fair to one person might not be fair to another person. One loan originator can charge a client an egregious sum of money whereas another LO may charge that same client much less. Each says his/her fee is “fair.”
Yes, the predatory lending days are hopefully behind us. The government will continue to levy harsh regulations on the mortgage lending industry because the industry itself chooses NOT to self-regulate.
People all across the United States were effected by predatory lending and egregious fees charged by loan originators. Let me know if you’d like to do more research on that. You can start here:
http://www.nytimes.com/interactive/2007/11/03/weekinreview/20071103_SUBPRIME_GRAPHIC.html#
Gee I see a WHOLE LOT of subprime lending that went on ALL OVER THE MIDWEST.
I completely agree with you: I’d like the government to stay out of regulating loan originator compensation. However, the industry has to step up and decide to self-regulate like other professions; doctors, lawyers, CPAs, paralegals, nurses, and so forth.
The industry needs to create an informed consent process for mortgage lending. This is the research I am working on at the present time.
Comment by whiley2u on 22 August 2010:
Hi Jillayne. You know me from the Merkley/Klobuchar thread. Everybody, listen up–this woman will not change her viewpoint. She doesn’t like LO’s and ignores completely the big profits the Big Banks are making. All that she cares about is what LO’s earn on a loan, to the point that their earnings are all that count–not about how good of a loan the borrower is getting in terms of interest rate/points and service. To her it’s all about what the LO earns.
Comment by whiley2u on 22 August 2010:
Let me continue. Jillayne talks of paying us by the hour. Who’s going to do that? Every customer I know of has a simple question:
what are your rates and fees on a 30 year loan, and are you efficient and truthful. I get some basic info from the prospective customer and issue to them a UNILATERAL CONTRACT, which is the true definition of the revised GFE. My company and the wholesale lender CANNOT EARN MORE THAN THAT FIGURE. All YSP’s are paid to the borrower. There are no ‘hidden profits’.
Jillayne says, yes, but what are you making? I say, IT’S ALL THERE, completely disclosed, and it can’t be changed.
And then she’ll go somewhere else in the discussion. It’s truly a discussion that’s not ever a real discussion.
She ignores completely what B of A, Wells Fargo, Citi and Chase must be making on a loan where I can earn 1.25 points on a loan, give it to, say, Provident Funding, who then sells it to B of A, and B of A is still making a profit. And this same loan that I made was .25% to .50% better than what B of A was offering to their retail customers(at the same fees). She ignores what the Big Bank executives and CEO’s must be making on each mortgage. She just hates what LO’s make…which as we all know, is not much in today’s mortgage climate.
Jillayne, I want YOU to make just a certain amount per hour. Put your income where your mouth is.
Comment by Jillayne Schlicke on 23 August 2010:
Hi Whiley2u,
Thanks for stopping by again. Good to hear from you. Maybe you’re right. Maybe it’s time I leave behind my ten year rant about LO compensation. The predatory lending days are mostly behind us anyway and besides, LO compensation has been limited to 3 percent for all LOs. Competition will drive that down to 2, just like it was in the 1980s.
I mostly like loan originators. Every now and then I’ll have one as a student that will blow me away in an interesting way. Typically this has to do with his/her behavior in the classroom or lack of ethics. I came very close to kicking an LO student out of my classroom last month and after teaching in this industry for over 15 years, I’ve only kicked one LO out for horrific behavior.
People tell me I have this jaded perspective about LOs because I have interacted with thousands of loan originators. I simply see a wider variety of LO behavior.
Comment by Jillayne Schlicke on 23 August 2010:
Hi Whiley2U
Regarding LOs and how much they make, I’d have no problem with Lo compensation being unlimited…unfortunately there’s something that goes with “unlimited” that this industry doesn’t seem to want to do.
What I support is transparency in compensation.
Give the consumer a chance to hear what an LO’s total compensation is. Today, mortgage brokers must put all compensation on line 1 of the new GFE, but that wasn’t the case in 2009.
Today, mortgage bankers do not have to disclose their overage.
Next year, Wall St Reform will limit all LO compensation at 3%.
Part of the reason why the government passed this law was because most LOs will only be transparent by force of law.
In addition, roll back the clock a few years and we saw LOs handing out a good faith estimate quoting a 1 percent fee but then the final loan docs in escrow showed the LO earning 2 points up front and 2 points in YSP. Bait, switch.
So you see, the new limits placed on loan originator compensation have nothing to do with me.
The industry did this to itself.
Comment by whiley2u on 23 August 2010:
Hi Jillayne,
Yes, I’m a mortgage broker and have to put in the YSP (Block #2) as well as the total lender compensation (Block # 1). How does the new rule apply to the banks? For the Banker what’s now going to be shown in Block # 1? And what’s going to be shown in Block # 2 for the Banker? What will the Bank (if a customer went directly to BofA or Wells Fargo have to show in Block # 2? If the Banks are still going to be left off the hook in Block 2, isn’t that the hidden profits you’re always complaining about regarding LO’s? Do you know specifically how that’s going to work?
Comment by whiley2u on 23 August 2010:
Also Jillayne, do you know how it’s all going to work regarding loans where NOW I can get paid by the borrower (say, 1/2 point), AND INDIRECTLY through the Lender (say, 3/4 point from the borrower’s YSP)? In other words, am I right to assume that Brokers will only be paid completely from the Borrower, OR all of the Lender fees have to be paid indirectly from the Borrower’s rebate? So, I’ll have only two loans to offer–one where the Borrower pays the points/fees upfront, or one where the rebate credited to the Borrower pays the points and the Lender fees? Is this how it’s going to work?
Jim
Comment by Jillayne Schlicke on 23 August 2010:
Hi Wiley2u,
Not sure how the new rule will apply to bank loan officers and mortgage banks who, for now, are able to hide their overage from the consumer. The consumer sees a higher note rate than what might be available from a broker, but not the LO compensation.
We will have to wait while the rule-making process unfolds.
Yeah, there’s going to be no indirect compensation allowed. Everything will need to be on line one of the GFE.
I’m guessing….I do not know for sure….that a borrower will still be able to cover his/her costs by choosing a higher rate.
Years ago, (I’m reaching back in my memory to the 1980s) we simply increased the borrower’s loan amount if the borrower wanted to refinance and not come into escrow with a check to cover closing costs.
Comment by whiley2u on 23 August 2010:
Yes, before ‘rebates’ we simply added the fees to the loan size. What I fear is that the new Dodd bill (and the new HUD Reg Z) will eliminate our ability to make all of the ‘in between’ interest rate/point combinations that so many of our Borrowers prefer. You know, loans with rates that effectively translate to a 1/2 point loan to the Borrower, or a no-point loan where there’s also enough rebate to pay 1/2 point to the Borrower’s other closing costs. But I think that the Banks (maybe not bankers) will still be able to offer ALL of the interest rate/point (or less points, or no points and pay some of the other costs) combinations.
Jillayne, this has been one of my points to you throughout our many communications. This situation is grossly unfair to brokers and, possibly, to bankers–giving the whole industry to the Big Banks. Does any one out there know enough about this to explain it to me?
Comment by Jillayne Schlicke on 23 August 2010:
Hi Wiley2u,
Your fears are valid. We will have to wait until the final rules are ready for industry review.
Selecting a higher rate loan in order to cover costs, was, from my memory, still an option, but LO compensation will be limited to 3 percent total LO fees, no additional YSP or overage on the “back end” beyond that 3 points.
Comment by whiley2u on 24 August 2010:
Jillayne,
Here’s a description of how the new compensation rules will work:
“The new law also states that mortgage originators can be compensated either directly by the consumer through fees or charges paid by the consumer, or by a third party (such as the lender), by not by both. It appears that these provisions will primarily affect brokers, since as the employer, the lender compensates loan officers and loan officers do not collect their compensation directly from the borrower.”
So, I can offer a customer either a loan where they pay the 1.25 points up front, or pay no points (along with, of course, the corresponding interest rates for each scenario). No 1/2 point loans and so on. But the Big Banks will be able to make all of the combinations. There goes, Jillayne, your level playing field.
Comment by whiley2u on 24 August 2010:
Oh, and one more thing–the wording is vague, but it looks like we can’t make a different amount per loan, except for the loan size. It seems to mean that we can only make a fixed percentage per loan–for me, 1.25 points. So, I’m currently making a $700,000 loan where I’m earning just .875 point, because it’s a big loan, and because I’m being competitive. The new rules apparently say that I HAVE to make the loan at 1.25 points, EVEN IF I DON’T WANT TO DO SO. If I had to charge 1.25 points I’d probably lose this loan.
Now, on a small loan, say $75,000, I will charge a little larger percentage, in order to be cost effective for my company. I guess I won’t be able to do that either, so I can’t make small loans.
And this is good for the consumer?
Comment by Jillayne Schlicke on 24 August 2010:
Hi Whiley2u,
Thanks for the update. I think it’s too soon to rush to conclusions about how the final rules will play out. I am with you: A level playing field is needed and if bank/mortgage bank LOs get to continue to earn overage without transparent disclosure to the consumer, nothing has changed.
Now looking at it from another perspective, brokers would need to then USE that to their advantage and SELL their full transparent disclosure to the consumer.
We still have many months left before the first draft of the rules are published for all to read. I say let’s chill until the regulators give us the rules.
Until then it’s all speculation which can incite fear.
Comment by whiley2u on 31 August 2010:
Hi Jillayne,
I hope everything’s good with you.
Well, Jonathan Foxx of Lenders Compliance Group has begun a series of articles regarding the Dodd Act. In the article he does say that “mortgage brokers cannot receive some portion of compensation from the borrower in the form of points and another part of the compensation from the lender in the form of YSP.”
Here’s what I wrote to him regarding my many questions. It’s long, but is the best encapsulation of my–and most other brokers–concerns:
The part that I was most concerned about regarding mortgage broker compensation appears to be true. As you put it, “Thus, mortgage brokers cannot receive some portion of compensation from the borrower in the form of points and another portion of compensation from the lender in the form of YSP.”
Maybe you can further enlighten me about this provision, and I’ll inform other brokers who are equally confused. First of all, with the new Good Faith Estimate instituted by HUD on 1/1/2010, the YSP is NOW A CREDIT to the borrower’s closing costs–it is NOT paid to the broker. Now, someone might argue that a broker is still being paid indirectly by the use of the YSP. Which way are they looking at the issue?
If they’re looking at YSP the latter way then, yes, brokers can only earn their compensation with either a loan where the points are ‘upfront’, paid by the borrower with cash-into-escrow or by a higher loan size to cover the fee (on a refinance); or the loan needs to be structured in such a way that the YSP completely pays the broker his fee. In this case I’ll have only two loan combinations to offer to my clients–full, upfront points, or ‘no points’, and all the in-between loans, where the borrower is effectively paying .5 or .75 points, for example, are not allowed. Wow. Those ‘tweener’ loans are often where the best deals are for the borrower. This will put any brokers still in business out of business. Because–and tell me if I’m wrong–the Banks (maybe not correspondent bankers?) will still be able to make ALL the rate/point combinations. Is this true?
If this is true other issues arise. As I look at my best lender’s rate sheet today, I see 4.125% with a 1 point rebate, and 4.25% with a 1.625 point rebate. If I earn 1.25 points per loan, which of these rates do I choose? Neither pays exactly 1.25 points! Currently I can offer the client the 4.25% loan (1.625 rebate) and he would be credited that full amount, INDIRECTLY paying my 1.25 fee and he’d have the other .375 point credited to his other costs. Is that combination going to be impossible as well?
Also, Jonathan, if we go the ‘fee-paid-by-rebate’ approach, can the lender fees also be paid by the rebate? Can the lender and title fees also be paid by the rebate? And, again, what if those amounts are a little higher, or lower, than what the rebate will provide? Does the ‘left-over’ rebate simply go into the lenders pocket?
Actually I have more questions, such as–does the broker now have to make specific points on EVERY loan, no matter the size of the loan? EXAMPLES:
On a $500,000 loan I may now charge one point or less. On a $50,000 I may charge 1.75 points. If I HAVE to charge the big loan 1.25 points I may not be competitive, and could lose the loan. If I can only charge the small loan 1.25 points it may not be profitable for me to make that loan.
It’s hard to believe what they’re doing to all of these small mortgage businesses throughout our nation. It really is an outrage. And they’re not just destroying us–they’re really hurting the consumer, because eventually anyone wanting a loan will end up going to the Big Banks, and their rates are horrible. For example, B of A’s rates on a 30 year loan, taken from their website, are 4.75% with 1.125 points. My rate at no points, and crediting another .375 point to the borrower, is 4.25%. When we brokers are gone borrowers won’t have us around to give them a much better rate. The consumer is being ripped off horribly.
Thanks, Jonathan!