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.
Good Morning!
This seems like a good palce to ask if mortgage loan originators, once licensed, can work anywhere in the country?
Are Loan originators like Real Estate agents, that once you are licensed in one state you can only work in that state?
Hi David,
Each state has its own licensing guidelines. The exam is a national exam but then each LO will tell the NMLS from what state they will be originating and then that state may impose licensing restrictions that are tougher than the Nat’l SAFE Mortgage Licensing Act. For example, LOs who want to originate in WA State must take an additional 2 hours of prelicensing education on WA State law and also pass a WA State exam, and take WA State-specific continuing education ever year.
So all states must, at minimum, follow the federal SAFE Act but then each state can ADD licensing requirements.
What I’m asking, especially in online mortgage brokerage, can a person in Washington State originate a loan in another State or is it a referral system?
Hi David,
A licensed loan originator in WA State may originate a loan on a piece of real property located in another state, as long as the loan originator is LICENSED in the state in which the property is located.
Referral fees are prohibited under state and federal law. A loan originator cannot earn a fee for doing no work (simply referring the customer to another LO.) ONLY the person who holds an LO license can take the loan application and earn a loan originator fee.
For an interesting local background story see the A+ Mortgage Consent order.
http://raincityguide.com/2008/06/12/a-mortgage-receives-an-f-from-hud/
David to anwser your question you must be liscnesed in the state the property is in in which the loan you are originating will be secured. Fullfilling the federal requirements for a loan originator are prerequisites to state liscensing.
As for Jillayne, real property refers to any immovable piece of real estate or single parcel of land. Commercial loans, as well as land loans do fall under the defenition of real property, The SAFE act does not apply to these loans. Specifically most states define required liscensing for any extension of credit on any piece of real property containg 1 – 4 residential units.
Finally RESPA who governs fee splitting, kick backs, and referral fees, prohibits any CASH payments for any of these services. However, it only prohibits CASH, this is how agencies such as Lending Tree can offer a free set of golf clubs after closing a loan through their organization.
Matt, RESPA Section 8 covers an “item of value” which may or may not be cash. It could also be gifts, trips, prizes, etc.
http://www.hud.gov/offices/hsg/ramh/res/respamor.cfm
I was asking about Quiken Loans as a prime example, or specifically the box on my Comcast Home Page that offers loans at say 3.9%.
Are those lead generators that are then sold? Are they simply selling those leads, or is there a clearing house with brokers in every State? Some of the ads, like Bank of America, promise service. Are they a clearing house for Bank of America Branches?
Ultimately doesn’t this all give an unfair advantage to large Mortgage Brokerages due to internet marketing?
Jillayne,
Thank you for pointing out that correction at least you added something of concrete value. I was unaware as to the change I was always under the notion it was dictated as cash value, not a thing of value, thanks again for pointing that out.
David Most things you see through the net are in fact lead generating services as you stated. They will take you information and sell it over and over again to as many lending insitutions as possible. So it does not give an advantage to anyone really, a mortgage company no matter the size can contact a lead generation company and by 1,000’s of leads in specific states, even specific zip codes, based on geographic market research.
To All,
As an industry standard as guidlines change we must take a look at the past and understand what type of future are industry is setting up to become. I would advise many broker’s out there to contact a close lender they use, to see if they can expand on the current business arraingement. We are a Direct Lender, and we have been helping our broker’s my converting them to retail branches. Just an idea.
The Think Big, Work Small guys nailed it with today’s video. B of A is blocking them from their loan officers!
They point out what I’ve repeated often in this forum– that the money made in a mortgage transaction hasn’t been lowered with the new rules, it’s just being redistributed to the execs at the big banks.
This takes earnings away from LO’s, and the consumer– who was supposedly being helped with the new rules– is just being ripped-off more.
http://tbwsdailyshow.com/2011/03/06/bank-of-america-blocks-tbws-daily-show-from-loan-officers/
It’s all a mess. I’ve been in the mortgage industry for 22 years working in servicing and for the last 11 years, in origination.
The LOC directive/rule won’t work. It benefits no one. I can agree with a 3% cap on a loan as long as this only involves Origination Fee and/or YSP/SRP/OVERAGE/PROFIT-MARGIN. Lender Fees belong to the lender and are rarely, if ever, paid to the LO.
How to fix? Require that ALL mortgage industry providers disclose net rate-price. Brokers have to disclose YIELD SPREAD PREMIUM. So now we should make Banks disclose OVERAGE or PROFIT-MARGIN. Bankers should disclose SERVER-RELEASE PREMIUMS.
If there is balance in disclosure on the GFE, then the playing field is level. There is no arguement that can be made that this is unfair to the consumer. There will always be differences from one GFE offer to another; so the consumer can then decide on their LO by:
1. Recommendations of the LO.
2. Experience of the LO.
3. Time-line gaurantees on closing the loan.
4. Perhaps who will service the loan.
5. Maybe on the location of the LO (are they easily accesiable).
6. Is there any credit towards closing costs.
7. The amount of lender fees.
8. The rate available.
9. Locking periods; float-down options.
10. Do they charge Escrow Waiver Fees or other non-FNMA/non-FHLMC fee adjustments.
This isn’t going away in my opinion. And I don’t want to do anything else in my career. But I also don’t want some ridiculous law impacting my livihood which ultimately impacts my business partners and our mutual customers.
Pay me hourly? Are you kidding?! I happen to think my service, experience, and knowledge our worth much more than what the average consumer would ever be willing to pay. And I don’t want the customer ever thinking “should I call him or not as I don’t want the hourly clock ticking.”
So will my idea of full disclosure work? Alas, I say not as the big banks will just dump more lobbying money to squeeze all the other players out. As the guys at TBWS said recently, ever wonder why none of the big banks have commented on LOC rules?
I’m a survivor but will gaurantee you that my Government will not tell me how much I can make. I’ll take care of that with my vote… as everyone else should too. And good luck to the NAIHP and their Federal Lawsuit. Way to go!!
I’ve been originating loans for 32 years. Thousands of loans, with NO COMPLAINTS from anyone– borrowers, lenders, or regulatory agencies. I’ve owned my own small mortgage brokerage for 13 years.
I never designed a sub-prime or Option Arm. When those types of loans needed to be made, I made them, but not many. I never approved any loans, of course. I packaged the loans and gave them to a lender’s underwriter to approve.
But the government–along with the Big Banks–have decided that I’m the reason for the mortgage meltdown. My YSP, which simply meant that the Borrower’s fees were paid partly or wholly with a higher interest rate, the same thing the Big Banks do with their SRP’s, were the culprit. This concept was pushed by Chris Dodd and other corporate shills. After all, they got their perks and campaign funding from BofA, Wells Fargo, Chase and Citi.
My bad. I never made enough to buy-off any politicians.
So they come up with a non-specific GFE which doesn’t even break-down my fees from the lender’s fees, and doesn’t even show the borrower how much cash they’re getting from a refi, or how much cash they need to bring in for a purchase.
But the ONE THING GOOD ABOUT THE NEW GFE, at least with brokers, is that it clearly shows that the YSP– that thing that Dodd and his cronies blamed for about every sin possible– as now A CREDIT TO THE BORROWER.
Now, I thought, we’re finally done with this issue. Sure it’s convoluted trying to explain to a borrower how their YSP actually makes the loan a, say, no-point loan, especially when the comparison is to a bank’s GFE which doesn’t have to show any SRP, but I can handle it.
But NOOO, that wasn’t enough punishment for us. The GFE that HUD itslf designed, STILL doesn’t do enough “for the consumer”, they proclaimed. Now they decided to control and limit even more what a LO can earn. Because, they said, it will help the consumer.
But it DOESN’T help the consumer. It just pushes the money made on a loan up to the executives at the banks, a true re-distribution of wealth to the wealthy. And if I WANT TO CHARGE LESS ON A LOAN, I CAN’T. How does that help a consumer?
So I’m just about out of business. My expertise and great rates will no longer be out there for the consumer to choose or not choose. The big banks, who can’t match my service or my rates will win.
Jillayne, you write commentaries on other sites, and they’re usually anti-LO and, by default, pro-Big Bank profits and poor service.
In your next opinion piece could you defend us a little?
You guys have interesting points, and I support mortgage brokers as I was a broker for over a decade before I went and got a job at a small lender. I wish I could still be a broker, have my own shop again me originating my wife processing, closing loans for people that trust me and making good money while still playing a hell of a lot of Golf. I do think the point of the regulation has not been discussed so I figured I would give justice to how I see it it and see what others think.
The finacial system is souly based on the stability of the banking sector and that is not going to change. The U.S. economy can not withstand another banking crisis, yet it also needs Mortgage backed securtizes to create influx in the market and help marginalize our governements debt. With that said the issue arising is that these so called “Big Banks” that lent far more than they had a risk tollerance for, never had enough profitability built into each loan. Dodd’s mentaltiy is each loan is going to have the same amount of risk, therefore each loan should have the same margin to cover any losses, and that margin is far to low. The fact that politicians want to strengthen the amount of cash or profit a bank has is not so Bank’s Corporate sector can get rich, there has already been numerous regualtuions outlining bonus structure and profit sharing since 2009 to reduce overall compensation to Banking executives, we must understand Banking Executives are regulated by other authorities like the FDIC and SEC becasue they have other outlets of income.
It seems that this factor is giving way for a lot that needs to happen in the future, we need to realize that in 2 years Fannie and Freddie will no longer be, and there will need to be a private institution that steps in to help Guarenttee these lonas, unless they see a large spread in the margin built in for default they will not have the desire to step in, and that could be catastrophic. This will impact the consumer 10 fold, mortgages going forward will be more expensive, but then agian so will gasoline, the price of milk, and shoe laces just to name a few, but that is natural growth. Some would even argue mortgages are not as expensive as they should be for the consumer,these banks need incentives to lend and low rates and big margins are all they anwser to. Others would start to argue that guidliens are tighter now so that defaults should go down and that alone should spark interest in the private sector from investors, however, what we need to realize is that we need to increase the volume of units to start to slowly increase the value in homes, so with that said it looks like we are starting to pave a way to remove credit based undewriting where an 805 fico can get whatever they want, and get to a place of manual u/w as there will be more margin built in Banks and Investors will have the ability to lend to people with non traditional credit, as long as the they can justify there payment ability. Therefore increasing the ability for these people to repurchase homes in the future. Especially the people that could afford a 200K home but went out and bought a 400K home and lost it. The idea of homeownership is still the driving factor in our regulations, and the fact that they are spinning that to trying to protect the costs for consumers is disgusting, becasue anyone with a clear mind will realize this will increase the cost of mortgages to the consumer, not decrease it.
Look I of course understand that they could of done this 100 otherways they could of minimized YSP to 101.00 and be done with it, and mandated banks to carry a greater margin in there portfolio, yes rates would go up .5% and yes consumers would get angry, but this is the way they feel (as they always do) they can lead the public by the hands and create an appetite for private investors to lend again bottom line.
The day of a Mortgage Broker may go away, however that does not mean that the way you do business has to. I will be honest I have applied for a 2 MM line of credit and a Lenders Liscense in the past and I know a ton of private companies looking for correspondants, it is not as difficult as it is made out to be to table fund loans. You are still a glorified broker, you still get competiive rates, you set your own margin, and you don’t have to worry about YSP becasue you don’t have any to show or make. Maybe that is something else people could think about, and trust me I can not stress enough how much I miss my 1099 income playing golf 3-4 days a week, still closing 40 loans a year and making 6 figure income, maybe that is a way to get it back I don’t know.
I’ve been a MLO for quite a while and have sat down in front of a whole lot of clients. The most common question asked of me is and was “How much can we qualify for”. Not “how much can I afford”. If I made the “affordability” determination for them based on what I think, More often than not it will be “less than you want to buy”. The borrower should have some resposibility here. If I don’t make the loan based on the borrower’s wishes, the gut next door will and it will be the last time I see that Real Estate Agent.
The government allowed Wall Street to give us products to sell and we simply sold them. BofA sold them, Wells sold them, and they definitly made more money than me. As to the compensation. If I can make a loan for less than and at a lower rate that BofA or Wells why is “ANYONE’ harassing me about what I make. You just cannot say or insinuate that I’m doing a disservice to the borrower and Barney shouldn’t be able to either. I don’t know how you get paid as an Author but I’ll bet the government doesn’t tell you it has to be by the word or by the page and not by the content.
I find it hard to believe that you blame sales people (LO’s) for the mortgage crisis. You have all this education and you can’t see that this problem was created by BIG BANKS and their crazy products, then the crimes they committed selling MBS full of crap as an “A” paper. I have a lot of formal education, but I’m not going to tell you what it is because it’s not important, what is important is that you are wrong and you hide behind your site. I suggest you stop your assault on the sales force and put it where it belongs, on Wall Street and large “too big to fail” banks.
Regardless of your negative thoughts, loan officers are only trying to make a living and be successful to provide for their family. One of my favorite parts of your ranting is when you said that someone with an 8th grade education could be a loan officer. I will assume that you mean formal school room; control influenced “learn the way we say is right” education.
Clearly, we are not doing surgery as loan officers; anyone that has the desire to learn to be a loan officer can do so. To be a good loan officer, one must have the personality and want to do it, formal education, is not nearly as important as these characteristics.
My formal education has helped me understand markets, finance, and business; it does not necessarily make me a better loan officer or mean that someone with more experience couldn’t do a better job. Attacking people because they don’t have formal education is wrong.
You won’t change your point of view; no matter what valid, logical, and correct points many people make. So I can only conclude that you identify with this on a very deep level. You want all this change in regulation to change the rules, instead of changing the fundamentals of how the “game” is played. You want control and a level playing field and think you are better and the world would better in that situation. Just so you know that is not capitalism, BY DEFINITION NO MATTER HOW YOU SPIN IT, NO MATTER HOW MANY DEGREES YOU HAVE, NO MATTER WHAT, IT IS NOT CAPITALISM!!! So if it’s not capitalism what can it be, correct answer is SOCIALISM so you are a socialist, which is fine but you need to admit it… acceptance is key and if you don’t know who you are you don’t need to be telling others what to think or MORE IMPORTANTLY HOW TO VALUE THEIR WORTH OR HOW ONE SHOULD VALUE THE WORTH OF OTHERS, (That’s communism in case you missed that) What you don’t realize is that what you want more than control is freedom, however, that scares you so you pull at straws to get control.
Do you think lenders advertise to clients to give them what they can afford? Do you not see that all these banks have credit cards too charging 20% interest.? The fact is this bill benefits large banks, the same ones that crashed the largest economy in the world, the same banks that could care less if they hurt anyone. Whose main focus is to make a profit and maintain control. You are acting like one of their puppets with no original thought. You simply agree with whatever they tell you and then say loan officers should be paid like accountants or lawyers. Then you say we should have a regulatory agency, what a joke do you really think that if it was in the banks best interest to have one, we wouldn’t already have one. If you’re going to write something at least find an original thought and not an agenda. You are doing more harm than help right now so if you really want to help the consumers write the truth. Also, all regulations do is regulate the past, the government never creates a policy that helps going forward. Maybe they should spend more time enforcing the laws they have in place instead of making more laws not to enforce. Then through law suits the courts are left to sort through their mess and that takes years, then once it’s out of the public’s view it’s forgotten. Not to mention no Fed charges are ever filed. Big corporations make this economy run, so they control what laws are enforced and how laws are written. This is our Country and nothing will change until people like you make the decision to think for their self. So I ask you please don’t take a stand until you can with an open mind.
I will leave you with few questions a little more relevant to your article.
Who Profits the MOST from Loans?
Who manufactured the loan products that led us to the mortgage crisis?
When foreclosing are lenders following the law right now is there anything in this bill to address that going forward?
Were there laws in place TILA, RESPA, SEC laws, Common Law, Federal and State Laws that broken to cause the mortgage crisis?
Has the federal government or congress put any more resources in the enforcement agencies of these laws?
You say lending is not like buying retail so I assume you mean that the service you receive is not the same. However the product is. If you get a FHA mortgage from one company it is going to be the same FHA mortgage as from a different company.
Shouldn’t each lender decide what they charge for their services? (rate, fees)
Or should we just charge the same for all lawyers, doctors, real estate agents, accountants?
Why is making money on a YSP bad for the consumer? If they agree to the rate, terms, APR, GFE and understand everything they are receiving.
How does the loan officer making money off the rate matter to the consumer when the bank is still making money off the rate?
(Please give an answer other than it gives incentive to the LO to give higher rates and push bad products. You are not speaking to the public here we are professions and know the business. There are no bad products and they can shop your rate or take 2 seconds to Google it. These people are about to be responsible for a mortgage.
You say we need liquidly in the market. For the market to open up we need good loan products how does limiting the competition among lenders drive the release of new loan products?
You say Fannie and Freddie won’t be around in 2 years and we need private funds to take over the backing of MBS. We didn’t have a problem until the selling of MBS full of mortgage defaults were sold as good paper. If we are correcting the problems why is this a concern?
Thank You
Oh wow, a lot going on there, Matthew. I’ll just take the high points.
Yes banks created the loan programs. LO are the ones who sold the loan programs to the consumers. Nobody held a gun to any LO’s head and FORCED them to sell toxic pay-option ARMS. There was a choice.
Some LOs chose NOT to sell the toxic loan programs. Banks will come back again someday and sell ARMS once again. Except this time with the LO compensation prohibitions under the FRB rule along with Dodd- Frank, far fewer people will be sold loan programs that are not in the consumer’s best interest.
There were too few regulators out there trying to regulate too many brokers and non-depository lenders and all the LOs. If you want more regulators that’s fine but then the industry will pay MUCH higher fees to fund those regulators.
Nothing wrong with earning YSP…provided the YSP is fully disclosed and explained to the consumer. The Fed found that most consumers don’t understand YSP, btw.
I’ve answered a LOT of your questions regarding consumers and their ability to shop on a new blog post here:
https://mortgagefiduciaries.com/2011/03/federal-reserve-board-rules-on-lo-compensation-prohibitions-aim-to-end-predatory-lending/
Matthew, I’m hearing from a lot of LOs that under the new FRB Rule, their compensation will be increasing.
So I wonder how many ppl will continue to complain about rates going up to cover for that? Hmmm.
What I can not stand is we are still debating the reason for the mortgage crisis of 2007!?!?! Yes there are consequences that we are going to have to deal with for a long time (IE stagnant Home Values), but why are we not talking about going forward in a productive manner. Why are we not using policy to help consumers. I will tell you why our Country is in Debt, SERIOUS DEBT, and everything they do is in a function to erase that debt. The so called mortgage boom of the last 10 years was suppose to be the way out of debt, why do you think the Bush administration de regulated everything we would be out of our minds to believe they did not know that they where going to see an influx in housing, an influx in residential mortgages, and an oppurtunity to lend money to forgien investors. This was there new form of exporting, for the last 13 years or longer we as a country have been exporting Mortgages to forgein investors. The fault does not lie on Wall Street, or Main Street, or anywhere in between. We are subject to horrid diplomacy and public policy, and this Dodd – Frank Reform is unconstitutional, weather it puts more or less money in my pocket, the goverment setting price targets and determining compensation is wrong, and as someone who is being positively affected by this change it feels wrong. Apparently we all forgot what right and wrong is, and everyone is out for the next big head line, why else would these two abosolute incommpitents put there names on the Bill….politics is a dirty dirty game atleast with Bush it was about Capitilization, now its all about control.
Knowledge is power
Jillayne,
I originate loans in the Pittsburgh area. We have very affordable housing. The problem I see and have already adjusted to is it is no longer feasible to originate loans under 125K. This is a large part of the Pittsburgh middle class market. The unintended result of this legislation is a whole gruop of people will now be unable to have a variety of options to shop for middle class home mortgages in our market.
Thanks,
MattS
Hi MattS,
I will bet you five bucks that there are plenty of LOs who will gladly originate those loans in your market area.
No because after costs, five bucks is about it.
What you continue to ignore is the overhead involved in pursue loans. This market will not be pursued.
I have a single Dad right now buying a 2 BR home for 39K. I am doing the loan only to help him out. I will lose money. I can only do so much charity. The new office policy is no loans under 100K. This policy has already been adopted by many offices in the area. You cannot tell me this was the intentions of the lawmakers. Once again they do not understand the industry.
Ladies and gentlemen, I find it frightening that the law makers who think this is a necessary step for lenders to take in order to “protect” the consumer cannot provide the subsequent guidance and policy directives to implement it. We are rolling out a plan that creates confusion and chaos for the LO; therefore, making it nearly impossible to know how to offer a rate, lender credit, closing gifts, marketing, etc. to facilitate the transaction.
Furthermore, do we get TARP (or maybe AMOGS American Mortgage Originators Getting Screwed) money to offset the potential lower incomes we may receive that will consequently affect our capacity to provide for our families or pay our bills on time (assuming we budgeted our expenses based on our income, the new costs associated with licensing, etc.)? This is a classic case of penalizing the honest people for the deeds of some bad people (most of which are no longer in the industry, nor are the loans that this law was intended on correcting. My market requires a lot of lender credits and I have offered many discounts of my commissions for single Moms and Dads, past clients coming back, Military service members thatget discounted costs (I am a disabled Veteran Myself), using my commissions to offer FREE home buyer seminars to educate the public, etc. I think that we should leave things well enough alone, and simply penalize those who are dishonest, or do things to warrant consequences; just like the REALTORS do.
Or, in teh above article, Pay us $10K on every loan, regardless of the loan amount. I feel bad for the guy who does do a credit clean up on a 80K loan with a rescore requirement, etc. Lo’s will not longer “want” to help people or go the extra mile if they will not get paid for theirtime, energy, services, experience, etc. I hope this gets overturned and re-evaluated using a pilot program with a test group or something. This is too big of a game changer to get wrong.
Mike
Hey Mike read the news ….
http://www.namb.org/images/stay-of-rule.pdf
If any of you have not heard or seen what has happened today, Dodd Frank has been repealed and put off until April 5th…Chris Dodd actually apologized to the Federal Reserve about how some of the output of this law is un constitutional and he actually said “my bad”….yet another reason I do not live in CT ….. Can’t wait to see where this takes us, 5 days hit the streets hard people, especially while everyone is tryignt o figure out what just happened!!!
Also to Mike thank you for your service to our country, you are apprecaited in the hearts of thousands even if you can’t see that everyday, please believe that.
Paying LO’s by the hour? You’ve got to be kidding. Sure the way you put it—the “hefty compensation” sounds like a lot. But in case you didn’t figure this out—it’s a sales job. You can spend hours (unpaid!!) dealing with numerous clients shopping for loans etc. Just like the realtor spends hours showing houses just to get paid 1.5% of the price of the home “just for filling out a contract”.
Every sales position which is based solely on commission is subject to hours of unpaid grunt work trying to find the “sale”.
And…let’s suppose I did agree to work “by the hour”…do I bill the client for every 15 minute phone call made on his behalf? Do I log the minutes spent e-mailing a processor or underwriter? Do I charge time-and-a-half for sending out that pre-approval on a Sunday afternoon so the buyer beats out someone else’s offer?
And…just curious…are you paid by the word for your articles?
Regarding the “HEFTY” $600 per hour wage that you say LOs make- HA! If you could make that much money with a high school diploma, don’t you think EVERYONE would be signing up to do this job? You couldn’t be further from the truth in your wage calculations. You are not taking into consideration how many hours per week LOs spend doing preapprovals for customers and we don’t get one penny to do them. We don’t get paid anything to go out and make sales calls on Realtors, builders, financial planners, CPAs, etc. which is where our business comes from. When you take into consideration our time on the phone fielding calls, inquiries, going to meetings and conference calls because there are 700 policy changes per week (it seems like) and not getting paid to do it, it probably averages out to be about a HEFTY $15 per hour wage. And adding in the high stress level that comes with this job- believe me, I would’ve chosen another career 20 years ago had I known what I know now.
Hi Sandy,
Most consumers don’t want to pay people for the time spent sourcing their business but I do understand that the hourly rate does include all that.
I am all in favor of having consumers PAY LOs for the time spent doing things that are now done for free, e.g., helping people improve their credit score, counseling first time homebuyers, and so forth.
Even with time spent in meetings, training, and learning policy guidelines, this is an industry where someone with no high school diploma did earn huge wages during the bubble run-up.
That’s all being reversed now and only those who truly love the industry are sticking around.
Jillayne,
We are about 15 days or so into the new legislation and from watching multiple industry leaders and small independant banks change their comp sturcture I have noticed that mortgages have become more expensive for the client, both in interest rate and in total cost. Since there is now no ability for a LO to give incentives by providing a lender/broker credit to the client based on the same comparitive rate every loan that closes at a target rate the extra premium now filters to the bank and subsequently to the LO. For example I closed 73 retail residential loans last year for a total of just over 19MM, as i researched and adjusted the new comp plans for my company and our competitors, 90% of those 73 loans would of been atleast 85 basis points more expensive for the client on average, IE the credit I gave the client to offset their cost in most cases did not exist, in some cases the rate was underwater. Do the math we would of generated just under $150,000 additional revenue on 73 loans (based on the average target rate increase and new additive overage in the market) now take that on a larger scale and look at a company that closes thousands of loans annually. Do you think this is justified? Do you think this was something that was not obvious to everyone involved? Do you truly think congress or the Fed cares how much money LO’s make or consumers save or do you think they are more concerned about liquidizing Big Banks and having greater tollerences built in for default risk?
‘Theoretically’ is what happens when you don’t work in the field. There are a lot of points to be made, all of which cannot be covered here but here are a few.
To say an originator earns $600 an hour per file completely ignores many things; the time and expense the originator spent to market his services to get the loan which is where most originators spend their time, staying current on loan options, post-closing, and time spent staying ‘compliant’. It also completely disregards differences in business models.
A bank LO gets the benefit of the bank dropping thousands of mailers every month, emails, TV, radio, billboards, all of this costs money, which the bank pays for, not the bank LO. The bank LO is also usually less involved in the processing of the loan and therefore derives less revenue per loan and as a result. Loan officers working for a broker usually bear the cost of their advertising and are more involved in the process, often doing their own processing and therefore must derive compensation for these functions and expenses.
When was the last time you needed to know the ‘revenue’ a company generated so you could make a decision on the purchase? To say consumers needs to know the revenue on a loan is ridiculous and only confuses the consumer. If this was the case, since banks NEVER disclose revenue how on earth do consumers identify the best offer between banks? Simple, they compare the rate and closing costs for the same loan. Yes, it’s that simple and the obvious is never mentioned. Why? Maybe it’s just ignorance, but it appears that the changes are primarily aimed at brokers, leaving banks to conduct business as usual. For instance, banks still charge a higher rate for small loans than large loans, increasing their percentage revenue on small loans while being able to offer a lower rate for large loans to be more competitive, but brokers cannot. Also there are stipulations on how the consumer can pay for services from a broker, but not banks. This benefits the banks and puts the broker at a disadvantage. This does not benefit the consumer and limits their choices.
To think controlling compensation benefits the consumer also disregards that a broker gets different wholesale rates from different sources. One source might offer very attractive wholesale pricing, but be very demanding of documentation. Another might have higher wholesale pricing, but is much easier to work with. If compensation is the same for all lenders, then the law creates the motivation for the originator to drop all the difficult lenders and ‘steer’ loans to the source that will be the easiest to get loans completed, since the compensation is the same. Does this benefit anyone? It engineers out of the system the motivation to compete and increase efficiency. This is an unintended consequence of removing reward and is in opposition to what made America a great innovator. Following is another example.
Some loans are much more difficult requiring more skill and time than others. For years consumers that were denied by a bank LO because the bank LO’s compensation was not aligned with the time required to complete a difficult time consuming transaction, could get help from a broker, who was able to charge for the added difficulty of the scenario. Controlled compensation forces brokers to fix their compensation for the majority of loans they expect to do, so since there is no additional compensation for difficult loans, these consumers can no longer get financing from a broker either.
Originator compensation DID NOT cause the housing bubble and bust. Just like Stock Broker compensation did not cause the DOT COM bubble and bust. It seems all this talk is not about ‘protecting consumers’ but about turning originators into low paid order takers. It’s about one business model working to eliminate another. Banks are set up like McDonalds, where each step is conducted by one department or person, so that the skill level of that person can be lower, making that person easily replaceable and therefore less expensive. This is what big businesses do to increase profitability. Just what you don’t want when you are dealing with the biggest transaction of your life!
In addition, the proposals for ‘controlling’ originator compensation have gotten ridiculously complex without any study, or data showing why it is needed, or that it will have any positive impact, and no negative impacts. Legislators keep stressing the importance of the consumer to shop, but regardless of regulations on the industry, this will not encourage consumers to shop. If this is the goal, it could be accomplished simply by a rule that requires each loan file to contain two additional offers for the same type loan, procured by the consumer, showing that they are taking ‘the best’ offer, or that they have another reason for selecting their provider, still an overreach, but this would accomplish what legislators what, while assuring the consumer of their options. This would reduce all the inefficiencies placed on the industry, allowing providers to be more competitive.
There are great LO’s working at banks, but brokers, almost by definition, are small locally owned businesses that still have several advantages. They are usually less expensive, and more responsive to the consumer’s needs. If a business brings a product to market, it shouldn’t be the government telling the business what, or how it should derive its income if the consumer determines it in her or his best interest. Continued legislation that puts one channel of a product or service on an un-even playing field in competing for consumers business is a loss for the consumer.
Hello please think,
I have been in this industry for 28 years.
Regarding $600/hour….okay, then cut that in half. $300/hour. Most attorneys charge way less than that per hour and they have an undergrad degree plus law school.
To hold a loan originator license, you don’t even need a high school diploma. Just a 20 Hr class + the test and neither if you work for a depository bank.
Making a retail purchase like a car or a big screen TV is arguably more different than purchasing a mortgage loan….the consequences of being put into a predatory loan are far more grave (foreclosure) than purchasing the wrong car loan or the wrong TV.
We definitely agree on compensation when one file is tougher than another file. I think LOs should be paid MORE on tougher loans and the files that are easy…those borrowers should be charged LESS. right now everyone is charged X percent of the loan amount which means the easy borrowers are subsidizing the cost of the tough hand-wringer borrowers. I think this should change.
RE why we have LO compensation prohibitions, check out this case: FTC v. Golden Empire. LOs are no longer allowed to make their own decisions on comp because it can (and did in that case) lead to discrimination.
If the industry wants the government off its back the mortgage industry MUST self-regulate ethical conduct. I’ve been saying this for 10 years and I’m all for it.
Until then expect more state and federal laws.
Thanks for stopping by!
Paid hourly? Lmao. You have not been in the mortgage industry for 28 years lmao. Wow what a liar. Anyone whos been in the industry for even a few days will know that gettin paid hourly is an absurd way to get paid in this industry. So you just need be quiet and worry about your own wallet instead of someone elses. Its not the loan officers responisbilty for the homeowner to make their payment. Take responsibilty for your own actions. No one held a gun to the mortgagors head and said your better take this loan. Now shut up. Barney Frank in the 90’s lead the way to make banks “lend” to lower income people and minorties or forced to be fined. Now they want to call it targeting low income borrowers. No crap they targeted them because the government threatened to sue if they didnt. Now they want to lay the blame on the pawn aka loan officer? Lmfao gtfo. This is how i know you are a liar and there has been no way you have been in the mortgage industry for 28 years. Liar liar liar! Fannie mae and freddie mac are the main institutions for obtaining funds for mortgages. They provide funds for 90 percent of the industry. Fannie mae and freddie mac are quasi government owned. They created the toxic loan programs themselves along with wallstreet. Point your finger at them. Not the loan officer who busts his behind to help people. Get into another career because you are obviously a crappy journalist. A good journalist takes a lot of time to research what they are going to write about and get the the source of what they are talking about. All you are doing is ranting about how jelouse you are of others pay. This article is worse than a yahoo news article.