Under the final Federal Reserve Board’s loan originator (LO) compensation rule, effective April 1, 2011, an LO may not receive compensation based on the interest rate or loan terms. This will prevent LOs from increasing their own compensation by raising the consumers’ rate. LOs can continue to receive compensation based on a percentage of the loan amount and consumers can continue to select a loan where loan costs are paid for via a higher rate. The final rule prohibits an LO who receives compensation directly from the consumer from also receiving compensation from the lender or another party.
The final rule also prohibits LOs from steering a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the LO’s compensation.
Though a lawsuit has been filed to stop the changes from going into effect, there has been legal research conducted by the FRB over the course of many years.
The FRB’s research found that consumers do not understand the various ways LOs can be compensated such as yield spread premiums (YSPs), overages, and so forth, so they cannot effectively negotiate their fees. Yes, some LOs spend many hours educating their borrowers but this is not true for all LOs.
YSPs and overages create a conflict of interest between the loan originator and consumer. For consumers to be able to make an educated choice, they would have to know the lowest rate the creditor would have accepted, and determine that the offered rate is higher than the lowest rate available. The consumer also would need to understand the dollar amount of the YSP to figure out what portion will be applied as a credit against their loan fees and what portion is being kept by the LO as additional compensation. Currently, mortgage broker LOs must do this, but LOs who work for non-depository lenders or depository banks are not required to disclose their overage.
LOs argue that consumers ought to read their loan docs and take personal responsibility for negotiating a good deal on their mortgage yet facts related to LO compensation are hidden from consumers when working with depository banks and non-depository lenders.
The FRB’s experience with consumer testing showed that mortgage disclosures are inadequate for the average random consumer to be able to understand the complex mechanisms of YSPs when working with mortgage broker LOs. Consumers in these tests did not understand YSPs and how they create an incentive for loan originators to increase their compensation.
For example, an LO may charge the consumer an LO fee but this may lead the consumer to believe that the LO will act in the best interest of the consumer. The FRB says:
“This may lead reasonable consumers erroneously to believe that loan originators are working on their behalf, and are under a legal or ethical obligation to help them obtain the most favorable loan terms and conditions.”
Consumers may regard loan originators as ‘‘trusted advisors’’ or ‘‘hired experts,’’ and consequently rely on originator’s advice. Consumers who regard loan originators in this manner are far less likely to shop or negotiate to assure themselves that they are being offered competitive mortgage terms. Even for consumers who shop, the lack of transparency in originator compensation arrangements makes it unlikely that consumers will avoid yield spread premiums that unnecessarily increase the cost of their loan.
Consumers generally lack expertise in complex mortgage transactions because they engage in such mortgage transactions infrequently. Their reliance on loan originators is reasonable in light of originators’ greater experience and professional training in the area, the belief that originators are working on their behalf, and the apparent ineffectiveness of disclosures to dispel that belief.
The FRB believes that where loan originators have the capacity to control their own compensation based on the terms or conditions offered to consumers, the incentive to provide consumers with a higher interest rate or other less favorable terms exists. When this unfair practice occurs, it results in direct economic harm to consumers whether the loan originator is a mortgage broker or employed as a loan officer for a bank, credit union, or community bank.”
Mortgage broker LOs have been forced to show all their compensation on line 1 of the GFE since Jan 2010. Mortgage Broker LOs will have very little difficulty in making the transition on April 1st. LOs who work for a non-depository lender or depository bank who are currently earning overage by selling the consumer a higher rate will need to make the ostensibly painful transition to full transparency.
* LOs who argue that consumers should take more responsibility for their mortgage loan ought welcome the FRB rule.
* LOs who argue that predatory lending was bad for consumers and bad for the mortgage industry should support the FRB rule.
* Mortgage broker trade groups who have been screaming for a “level playing field” should celebrate the FRB rule and reconsider wasting membership dollars on a lawsuit.
Remember, the FRB rule does not limit LO compensation. Instead the FRB is imposing LO compensation prohibitions. The three percent rule on compensation will come later, with the Dodd-Frank Act.
The two doods from TBWS have put out a series of entertainment videos that ought be taken with a grain of salt. Mike Anderson from Louisiana posted a youtube video meant to incite Realtors to earmark political action donations to fight off this new rule by telling viewers Realtor commissions might be next! And after that….used car salesmen and all commision salespeople. “This is a David v. Goliath story! Unprecidented! This is America, people. We need donations now!” Oh please. What a sorry-ass way to use fear to manipulate.
Rhonda Porter, whom I highly respect, says the FRB rule is bad for consumers because an LO would not be able to lower his/her commission to help pull a transaction together. The problem with all this talk of “this is bad for the consumer” is that nobody seems to have taken the time to read WHY the FRB rule was strutured this way.
The FRB says the reason why LOs will not be able to lower their fees if needed is because LOs bring their own subjective decisions into which customers are able to receive this “I’m going to help you by lowering my commission” gift, and which customers would not be offered this same gift. The Rule aims for fairness and takes the subjective decision out of the hands of loan originators. Maybe if I wear a button-down shirt and wave my hands around and video tape myself talking like a TBWS dood I’d get heard: Federal regulators don’t trust LOs. I know this sounds harsh, LOs but the industry did this to themselves. And don’t even get me started on the argument that all the predatory lenders are gone. I. Think. Not. They’re still around, laying low doing loan mods, short sale negotiating or predatory mortgage litigation scams waiting until the market turns.
Yes, I know the FRB Rule means banks and lenders will increase their rates to make up for the increase in their own cost of doing business. Yes, I know the big banks will be able to keep their profits. Oooo, I iz so scarrrred of the evewl banksters. To that I say, don’t like it? Then go open a bank. This is still America and last time I checked you can still start a business anytime you’d like. And besides, the last time I checked the banks are still funding the loans you’re making LOs, so stop talking out of both sides of your butt. If bankers are the devil, then perhaps you could find someone else to fund your loans. Let me know how that works out.
The Federal Reserve Board Rule prohibitions on loan originator compensation attack predatory lending. Consumers will receive more protection and for that consumers will have to make a trade: Rates and fees will be higher. Count me in favor of the new FRB rule. Four years ago I outlined solutions to the subprime lending crisis: “Let’s stop dancing around the ambiguous behavior we call “predatory lending” and define it”The FRB rule does just that.
Mortgage loan originators who embrace the new FRB Rule and can make the transition to this new consumer-protection wave of legislation heading our way will survive and thrive. Yes, even mortgage brokers will survive just fine. The FRB Rule is a speck of dust compared to what’s coming our way with The Dodd-Frank Act.
Borrowers DO read their loan docs, but that only helps if the docs CONTAIN the ACCURATE INFORMATION! My mortgage, like many, was MISSING information which was only discovered AFTER closing, years later. I was able to RESCIND my mortgage because of the fraud, you probably can to. CHECK YOUR DOCS!
Ooohh, Jillayne is just beside herself with glee. I think she’s been saving up her rant for just this occasion. HER SIDE WINS!!!
And what is HER SIDE? Clearly not LO’s. She hates them, hates them, hates them. I guess her business won’t be hurt because of this ruling– she’ll have plenty of banks sending her lots of novice students.
What a rant! She gloats and ridicules anyone who’s pointed out that the consumer will be hurt by this ruling. She ridicules anyone who’s pointed out that the costs for loans will increase; that the bigger and bigger profits will simply be pushed upwards to the execs of the Big Four. So what? The LO’s lose, lose, lose, and that’s all that counts to Jillayne.
She says, “Yes, I know the FRB Rule means banks and lenders will increase their rates to make up for the increase in their own cost of doing business. Yes, I know the big banks will be able to keep their profits. Oooo, I iz so scarrrred of the evewl banksters. To that I say, don’t like it? Then go open a bank.”
That’s so juvenile. It reminded me of a financial newsletter I receive, where the writer said, “Don’t like what Goldman
Sachs does? Then start your own Goldman Sachs.”
She says, “If bankers are the devil, then perhaps you could find someone else to fund your loans. Let me know how that works out.” So she’s admitting that we’re stuck with these fat cats, that we little guys and gals have no chance without them–because they have become ALL THAT WE HAVE.
So if my home and family is kidnapped by some thugs, I should be happy if they give us anything to drink and eat. You’re unbelievable, Jillayne, truly unbelievable.
Jillayne disingenuously throws away the whole issue of LO’s being locked-in to a single fee with every loan, with the comment that, “The Rule aims for fairness and takes the subjective decision out of the hands of loan originators.”
What’s wrong with me wanting to take a lower fee because a loan is big and I don’t want to make 4 times as much on that one as I would on a small loan? Yeah, I guess it is ‘subjective’– I’m subjectively choosing to not be greedy.
My bad.
Jillayne, I have one practical question that I’d love to see you address, something you ignored in your rant: How, in specific ways, does a brokerage pay its LO’s when a loan’s fee is borrower paid? In this case the LO’s HAVE to be paid a salary. How would you do it? And how, if you owned a brokerage, would you make sure that your LO’s always provided their borrowers with the option to take the lower rate, fees paid by the borrower? Because they would certainly be disinclined to offer that option.
So much for free-enterprise, so much for helping the consumer, so much for fairness, so much for small businesses.
BUT JILLAYNE WON!!!
Jillayne, I’ve written in your blogs many times over the last year or so. I’ve often made very good points, and you’ve usually ignored them or talked around them. But sometimes you have responded to my thoughts with interest, and you– a few times–have actually agreed with me (and me with you).
Your diatribe above is insulting, condescending, and callous. We’re talking about many of our jobs and businesses here. We’re talking about what’s good for the consumer here– or at least you USED to talk about that, all the time.
But your post is all about how LO’s finally got what ‘we deserve’. Is that what you’re really all about, just punishing LO’s?
A sensible and thoughtful discussion would have included things good– and bad– about the FRB Rule. Your rant included nothing about the weaknesses and contradictions in the rule.
I’ll put aside all the anti- free-market aspects of the ruling, and ask you a few, specific things.
1) Given the fact that the GFE will now show clearly what the LO earns, whether his fee is earned from the borrower or from the lender (YSP), why is the borrower-paid fee ‘negotiable’ and the lender- paid fee is not?
For example, if a borrower wants a large loan and I want to be competitive, I can only lower my points if I provide a loan where the borrower pays my fee. If he wants a loan with a higher rate but with no points, I’ll HAVE to get him a rate where my 1.5% YSP is covered. So what’s the logical reason behind that part of the rule?
2) Related to the above question, since my GFE will show my fee anyway, why does the rule not let me make a loan where the lender pays some of my fee, and the borrower the other part? Often these ‘tweener’ loans are what the borrower wants.
3) Also, why does a LO have to be paid a salary or by the hour for the borrower-paid loans, but not for the lender-paid loans?
4) And as I asked in my previous post, how would a brokerage make sure that its LO’s always offer to his clients the borrower- paid option, because clearly a LO would earn more the other way. You’ve always pointed out that a ‘zero point’ loan was not always the cheaper or best loan.
Further, how does a mortgage brokerage structure his LO’s pay when some of a LO’s loans are borower- paid, and some are lender- paid. I mean, how much can you pay her per hour without getting into trouble? How do you document those hours? Put yourself in an owner’s shoes–how would you structure it?
Jillayne, please answer the above questions. Please be specific with your answers. Please don’t say, “Well, the FRB is just trying to protect the consumer”, or “That’s just the way it is because you all brought it on yourself”.
Don’t be evasive. What, specifically, is the logic behind these rules? If you can’t answer these basic questions then maybe you should lighten up just a little about how glorious this FRB Rule actually is.
Hi Jim,
Always good to hear from you whether or not we agree. Today I was teaching a class on Short Sale Fraud all day and then visted my mom in the hospital so I’m now just getting home. Dinner, family time, laundry, etc., and sometimes I just simply have to prioritize so if I don’t answer right away, assume I’ve read the comment and will respond back as soon as I possibly can.
When I write blog posts, I like to take on taboo subjects that no one else wants to blog about. I like to take position that make people really think.
My target is not loan originators or mortgage brokers or bankers. Instead I dream of the day that we can say predatory lending is gone for good.
Predatory lending is a behavioral choice that was not reigned in by the bankers or brokers so instead the fed government is forcing this on the industry.
My target is mis-information, trade association propaganda that seeks to motivate using fear. My agenda is to take a stance that no one else is willing to take, in order to wake people up.
I am constantly getting backlash for this and that’s okay. I do have an endgame which I will reveal soon and I think you’re going to eventually see that loan originators and I agree more than we dis-agree.
Most of the LOs I meet in the classroom want the predatory lending to be gone for good, too. They just don’t want to have any of that change effect them personally. Unfortunately that’s not going to happen.
The FRB Rule changes need to happen and the pain LOs are going through is just part of a process.
Change
Is
Difficult
I’m horrified at how the TBWs dudes are inciting people to foam at the mouth over this without considering the GOOD that the changes will bring.
So is it possible that there will be some GOOD that comes out of the FRB rule change?
Take a step away from all the trade association propaganda and think about what the change really means for not only small businesses, mortgage brokers, LOs but also for consumers.
Instead of focusing on the dark, focus on the light. It’s there.
1) ANSWER:
Lender paid fee is not negotiable because LOs had the ability to increase that fee by selling the consumer a higher rate than the consumer could have received had the consumer shopped around. Since most consumers don’t shop but instead trust their LO, the LOs were in a one-up position of being able to take advantage of the customer by selling them a higher rate. When I say “them” I mean customers who don’t bother to shop. This lead to an un-even (or the fed would say unfair) treatment of one borrower to another. The rule aims for fairness to all borrowers so some don’t get the benefit of a lower rate while others won’t. This also brings ECOA and Fair Housing issues into the picture.
2)ANSWER Because consumers didn’t understand that the lender was paying a fee to the LO in addition to the LO earning a consumer-paid fee. YSP was too much for them to understand. You and I understand it because we’re in it all day long. The average random consumer (in their test/studies) didn’t understand how this works.
3)They can be paid that way. Where did you read that they could not?
Thanks.
4)Brokerage will have to set up their own internal quality control system to make sure their LOs are following the new rule. Pay structuring will need to be hashed out by hiring an attorney to make sure you’re within the guidelines.
There are many law firms out there offering this service.
As a small buz owner myself, I have hired an attorney on more than one occasion for expert help. That’s what I’d do as a broker.
Hi Jillayne, thanks for getting back to me. Thanks for trying to answer my specific questions regarding the logic behind certain important parts of the Rule.
Question # 1: I asked, why is the borrower-paid fee negotiable (wide open) and the lender-paid fee is not? You answered, “Lender paid fee is not negotiable because LOs had the ability to increase that fee by selling the consumer a higher rate than the consumer could have received had the consumer shopped around.”
You IGNORED completely that the new GFE now shows what the LO is earning EITHER WAY, lender-paid or borrower-paid. The key word in your explanation is “HAD”. The new GFE has solved that issue. You tried to dance here; it didn’t work.
Question # 2: Same problem, Jillayne. I had asked why we couldn’t do loans where our fee comes from a combination of the lender and the borrower, because, again, the new GFE shows how much we’re making in either case. Your refutation’s key word is “DIDN’T”. Again you’re ignoring that the new GFE does not allow rate manipulations to benefit the originator. Strike 2.
Question # 3: I asked why a LO has to be paid by the hour or by salary for borrower-paid loans, but not for lender-paid loans. You answered that they “can be paid that way”. Well, that’s vague. Do you mean that LO’s can be paid per hour for lender-paid loans just as they have to be paid for borrower-paid loans? Well, I’m sure they could be paid by the hour or salary for all loans, and that’s where your treasured Big Banks are trying to take them.
But if you weren’t trying to be misleading with me, and were truly wondering which lenders were insisting that borrower-paid loans had to pay their LO’s per hour for these, check out what CMG Mortgage states:
“When the borrower compensates the mortgage broker company directly (“borrower?paid”), the
amount of compensation can be negotiated between the mortgage broker company and the
borrower. YSP can only be applied to settlement costs and cannot go toward origination.
Tolerance cures can be deducted and broker credits are allowed. In these transactions, the
mortgage broker company may not compensate their loan officer for this specific transaction
except in the form of a salary or an hourly wage.
Loan Originator Compensation Fed Rule
Brokered Transactions”
So again, no real answer from you. Strike 3.
Question # 4: No real answer from you, just that we should see an attorney. And you ignored completely the earlier part of my question, which was how is the owner of a brokerage going to ensure that his LO’s are offering the borrower-paid option along with the lender-paid option, because clearly any LO would prefer that his client take the lender-paid option to avoid being paid by the hour.
Jillayne, you pretended to answer my very real questions about how these rules make any sense, and in your usual way you evaded them. These rules DON’T MAKE SENSE, and you DID NOT make sense of them. Instead you kept up your usual explanations, just as I had forecasted in my previous post. As I had clearly requested, I sincerely wished that you could make logical sense out of these rules as they apply to NOW and not to the past.
At least the Think Big, Work Small guys show a real understanding of the ridiculous predicament these rules are making for us– and for the consumer.
I have no idea where you’re at–except that you hate, hate, hate them Loan Officers.
Nope, I do not hate LOs.
I do wish that we could end predatory lending which is a behavioral choice.
I do believe the consumer needs protection from the choices LO have been able to make to sell a higher rate and take the overage as extra comp.
Yes I am well aware that broker LOs show all their compensation on line 1 of the GFE but that is not the case for LOs who work at a depository bank or non-depository lender.
Brokerage owners will need to figure out how to make the transition.
The FRB rule is forcing company owners to change their LOs from being motivated by money money money money money to being motivated by factors other than money.
Let me see how I might counsel you to motivate your LOs.
How about you motivate your LOs by their default ratio, quality control/compliance, customer service satisfaction survey ratings.
Some LOs won’t want to be motivated this way and they’ll leave the industry. THAT’S OKAY BY ME. Let them leave and stay in the retail sales mode of sell, close get paid. Sell, close get paid….with no concern for the customer other than getting the deal closed and getting their fee.
THE INDUSTRY IS CHANGING right in front of your eyes. Some mortgage broker owners will get it and start to change WITH the laws.
Some will resist and resent and yell and scream and say “UNFAIR!” and flap their hands and arms around wildly crying socialism, obama, conspiracy theories. These company owners are wasting their time while their competitors are figuring out how to make it work.
Your comments regarding questions 1 and 2 only revolve around a broker’s world. This is not the case for bank or non-depository lender LOs. If anything, the new FRB rule levels the playing field between brokers, lenders and banks.
So, keep that one part of the Rule– that ALL LO’s have to show their full commission, just as Brokers already do. But all the other points that I made remain true. Since we’d ALL be showing our fee– which cannot change– there are no logical reasons to disallow fees paid by a combination of lender-paid ‘rebate’ and borrower-paid fee.
And there would be no logical reason to pay LO’s per-hour for borrower- paid fees, while paying them a commission on lender-paid fee loans.
In either case each LO’s fee is locked-in, and any further ‘rebate’ goes to the borrower’s credit to closing costs.
The entire issues about ‘steering’ and ‘predatory’ lending would be eliminated by just that one change, making ALL LO’s show their entire commission on the GFE. And remember, just as it is now for Brokers, the LO’s would be legally committed to that initial fee. It could not change, and any larger ‘rebate’ would go directly to the borrower.
The elephant in the room, of course, remains the SRP, which FDIC banks do not have to disclose. If, after the GFE is issued the rates improve and the ‘rebate’ SHOULD be a larger ‘rebate’ to the borrower, would they actually receive that larger credit? Or would it simply go to the banks? We know that it wouldn’t go to the LO.
As a side note, it seems apparent that the reason you dislike LO’s is because of the greed that some of them have shown in the past. Yes, I’ve met greedy LO’s (as well as many thoughtful and ethical ones).
Now I’m not discounting the fact that there’s greedy people around, and I dislike that fact just as much as you. But us ‘good’ LO’s could do little to eliminate the ‘bad’ ones. So punishing all of us because of a few LOs’ greed is not fair. Especially when the government’s rules end up hurting the consumer as well as us good guys and gals.
But it’s also a fact that the truly greedy actions from Wall Streeters and the Big Banks are what caused the financial meltdown that we’re all suffering from. You have stated many times that LO’s did not have a gun at their heads to force them to make crappy Option Arms and Sub-prime loans.
But it was the Wall Streeters/Big Banks who designed these loans. And then they demanded more and more of them to feed their mortgage pools to then be sold as AAA stamped investments all over the world.
Their proxies, the underwriters, were instructed to approve these loans. I think that you’ve mentioned that you were an underwriter at some time in your life.
Then you know that an underwriter can certainly tell when a borrower actually qualifies for a better loan. And a lender can certainly cap what a LO can earn on a loan. (In fact, every lender I work with has caps on what a LO can earn). Those underwriters should have been instructed by their bosses to refuse a loan that was not right for a particular borrower. And those lenders should have put more stringent caps on what a LO could earn on a loan.
So it’s wrong to simply blame them greedy LO’s. The self-regulation of our industry should have started with the Wall Streeters and Big Banks.
Hey, maybe we should put a cap on what the execs at BofA and Goldman Sachs earn in the mortgage business. Better yet, just pay them per hour.
Hi Jim,
Thanks for waiting patiently for my comment.
Well everything rolls downhill as the saying goes. The banks will always try as best they can to push lending to the limit….they never seem to learn, and they’ll use 3rd party originators.
Then when business dries up they’ll pull up the stakes and cut off the brokers and bring all the business they can to their retail staff. This is the nature of mortgage lending; always moving from one cycle to the next.
When the up cycle starts again banks will once again open their doors to the brokers and the broker numbers will grow as LOs leave banks to make more money as a broker.
So yes, unfortunately the fantastic LOs who are left end up getting stuck with having to learn and live with the new laws. We went through all this during the consumer protection wave of the 1970s when we ended up with TILA, RESPA, ECOA, FCRA and Fair Housing (technically in 1968) and we’re going through another wave of consumer protection sentiment.
I definitely see what the banks did; my eyes are wide open on that one.
But since sh*t rolls downhill it lands in the lap of the ppl who are right at the table with the consumers.
The lenders will, someday, try again to make risky loans.
What the FRB rule aims to do is to put a system in place that would not allow LOs to steer people into a worse-off loan scenario only so they can make a higher commission….something that happened daily during the subprime boom.
I would be in favor of changing compensation at the bank or investment bank side to a model that favored loan performance over profits. Yet if you think about it, making good quality loans IS profitable for a corporation.
Hey Jim, check this out:
http://nationalmortgageprofessional.com/sites/default/files/Fed_Appellate_Doc_04_04_11.pdf
It’s the FRB’s response to the appeal in which they tear to shreds all of the points made by NAMB.
After reading this, I will eat a shoe if the FRB rule loses the appeal.
Hi Jillayne,
About your post above, I did go to that site and briefly skimmed the 28 pages. I haven’t read the trade groups’ argument yet.
But I did see the same contradiction in the government’s argument that I posted earlier– they’re hammering on about eliminating a LO’s ‘hidden commission’, but that issue will be eliminated with the fact that EVERY LO, with EVERY institution, will now have to show ALL their commission on the GFE.
There can be no hidden fees, and it makes all the absurd rules regarding borrower-paid vs. lender-paid fees just plain ridiculous. It makes ‘steering’ impossible– if your fee is spelled out in concrete on the GFE, what’s the use in steering the borrower to a loan that makes you more money. Because you CAN’T make more money, no matter what.
I don’t know if our trade groups brought up that point in their discussion or not. They should have if they didn’t.
But it still makes no logical sense and you have not attempted to make sense of it. Instead you just say that, well, sh*t runs downhill.
And why the requirement that on borrower-paid fees all LO’s need to be paid by their employers in a salary or per-hour structure?
It doesn’t make any sense, and it certainly hurts the consumer because most LO’s will want to steer their clients to the lender-paid option.
Yeah, that will be the new type of steering, and I’m sure the government (and you) will be complaining about it eventually. And LO’s will again be blamed, where it’s these absurd rules that should be blamed instead.
Oh well, sh*t runs downhill. Guess we should all just quit.
Hey Jillayne, why can’t you just admit that my point is valid? Believe me, I’m not going to go on repeating this point anymore. I’m hoping that you’re not the only person reading this blog, and that they ‘get’ it. Is anyone else out there?
I do not understand why you have to back everything in the new Rule.
Take a look at this case study:
http://www.housingwire.com/2011/04/25/ftc-mails-1-5-million-in-mortgage-refund-checks-to-hispanics
This is one (of many) reasons why the FRB rules are in place and how subjective decision making by LOs can lead to unintended discrimination.
OK, for the sake of argument, let’s agree that Golden Empire was charging more to their Hispanic borrowers. Why did they do it? Apparently, because they could get away with it. Of course that’s not ethical.
But what I was pointing out in my posts to you were the contradictions, hypocrisy, and sheer idiocy within the new FRB Rule. I was accepting the INTENT of the rule, while showing how the rule was not congruent with these intentions.
For example, as a one-man company, I’m the LO as well as the owner. So if I make a ‘borrower-paid’ loan I will keep the entire commission– I’m the owner so I don’t have to worry about paying a salary or per-hour amount on these types of loans. And, according to the FRB rule, I can charge any amount I wish, because the fee is negotiable.
With some Hispanic or with anyone who’s gullible or otherwise sufficiently unsophisticated, I CAN STILL OVERCHARGE them. I wouldn’t do so, but I could do so. I could easily explain away the big fee in block #1 on the GFE to someone this compliant and non-questioning. So the Rule’s intentions are not fulfilled. It doesn’t work.
On the falsely named ‘lender-paid’ loans we are all limited to earnings that are a fixed percentage of the loan-size. But my fixed percentage can be different with each wholesale lender I deal with. With an unsophisticated borrower I could take his loan to the lender where I get the bigger rebate, instead of taking the loan to a lender who has better rates but pays me a smaller rebate.
I wouldn’t do that, but I could.
I’m just looking for the new rule to make internal sense, but it doesn’t get close. It’s full of contradictions and absurdities.
Since you brought up lender rip-offs, let’s look at the rates of the 4 Big Banks. Today B of A quoted their rate for a 30 year fixed-rate loan as 4.875% with 1/2 point. At that same rate, including the fee for locking in the rate, I would make that loan at zero points to the borrower, and I would make 3 points from the rebate (although I wouldn’t actually make this much– my lender caps out rebates at 2%). This wholesale lender would later sell this loan to B of A wholesale, which is clearly STILL making a profit!
What’s also frustrating in this example is that I’M NOT ALLOWED to even offer a 1/2 point loan, because in order to collect my total 1.5% fee, the loan would have to pay me with another 1 point through the rebate, and this type of combination is now illegal for me.
So what I would offer in reality would be 4.75%, with zero points to the borrower AND with a credit of 1/2 point to his closing costs. This is clearly a much better loan than B of A’s.
Do you see how much B of A is ripping off the consumer here with it’s retail loans? True, it’s ripping off everyone equally– Hispanic, white, black, or whatever. So it does rips-off everyone the same. Whoopee.
You send two lines and I write an essay… that’s ok, gotta keep my writing chops in gear. And even if my posts go largely unread I feel good exposing these issues.
After my post above, I wondered how much the borrower would save with my loan over the B of A loan. On a $300,000 loan he would save $3,000 immediately (zero points compared to 1/2 point, plus another 1/2 point credit to closing costs). And the lower rate would save him $272.16 a year, $8,164.80 over 30 years.
Hi Jim,
I read all your comments though I may not have time to respond to all of them. Regarding blogs in general I find that all kinds of people may be reading and not commenting….because they tell me when I see them in person.
Well BOA isn’t necessarily ripping people off. The Rule still allows consumers to shop and compare. If people want to rate/fee shop, they can do so and find a lower rate/fee combo with, it sounds like, a mortgage broker.
BOA saves lots of money by bringing in brokered deals v. paying their retail people.
Question: “With an unsophisticated borrower I could take his loan to the lender where I get the bigger rebate, instead of taking the loan to a lender who has better rates but pays me a smaller rebate.”
In WA State (I think you’re outside of WA State but I honestly can’t remember) a broker owes fiduciary duties to his/her clients. This means all compensation is disclosed and explained up front. With unsophisticated borrowers, you would(in wa) owe a greater duty of care to look after their best interests.
That doesn’t mean you work for free but all compensation must be explained. In addition, if you’re steering them to another loan program because it pays you more, if the loan program were a worse-off loan program your entire fee would be subject to challenge if the borrower believed he/she was not well served. So it’s not a given “I can do this if I want to” in WA state.
We had regulators at a dinner meeting last night who admitted that they too are in learning mode and have many questions for the FRB on how to enforce the rule. As time moves forward and we get closer and closer to Dodd Frank, this idea of steering them to a loan where the LO is paid more will once again come under the knife.
Hi Jillayne. Well, you wrote, “BOA isn’t necessarily ripping people off. The Rule still allows consumers to shop and compare.”
Couldn’t the Hispanics have done the same with Golden Empire?
Regarding fiduciary responsibility, as a California RE Broker, I’m working under such guidelines. And of course steering naive borrowers into the ‘borrower-paid’ loan so that I could charge more, or steering such borrowers to a lender that allows me a bigger rebate but has worse rates, could be legally actionable.
And I personally have never done such things, and never will, with or with/out all the new regulations.
The point, again, is that the new rule with it’s convoluted and ridiculous regulations regarding LO compensation, DOES NOT solve the steering problem. In fact it just makes more problems– it doesn’t do what it purports to do.
No one asked, but here’s a few changes that should solve a lot of the problems and absurdities with the new Rule– and with Frank-Dodd.
ALLOW the LO to be paid a commission on ALL loans, not just the wrongly named ‘lender-paid’ loans. But make it the same percentage (points) on both lender-paid and borrower-paid loans. Then there would be no steering of borrowers to the ‘lender-paid’ loan, which is of course what the Rule will do now.
MAKE the percentage fee that is charged THE SAME with all lenders. There goes steering a naive borrower to the lender with worse rates but provides a higher ‘rebate’ on lender-paid loans.
ALLOW loans that pay a combination of lender-paid AND borrower-paid fees, so that we can actually compete, apples-to-apples, with a bank which can offer a 1/2 point loan, but we can’t. Because, remember, a LO will be locked into a fixed percentage no matter which loan a borrower chooses, and the Origination fees, and the Borrower’s credit are clearly shown on the new GFE.
ALLOW us to reduce our fee, so that we can charge less on a big loan, and/or actually give any borrower a better loan. If a borrower wants to negotiate a lower fee with us, and we’re willing to do so, let it happen. Isn’t that BETTER FOR THE BORROWER? We won’t be able to charge more, just less. And I know that you’ll say, “But that would mean that what is charged is back in the LO’s hands, and they can make subjective decisions about how much to charge with each loan”.
So, limit the total fee to something reasonable, like 2.5%. An originator cannot make more than 2.5% on ANY LOAN, no matter if it’s lender-paid, borrower-paid, or a combination of the two. Even if I charged 2.5%, my loan WAS STILL BETTER than BofA’s loan!
I dislike all these limits on compensation and their destruction of free-enterprise. I hate how the Big Banks get a pass on these issues. I especially wonder why these new rules are needed since the new GFE spells out already what the Origination fee will be, and that figure was already locked-in. And the new GFE gives the entire rebate to the borrower to pay his costs. If the rebate improved, it would go straight to the borrower and NOT to the LO.
The new GFE should have settled the entire issue. Borrowers could compare and shop, and know that the originator could not hike his fee percentage later. These new regulations are over-kill.
But at least my ideas, as described above, are fairer, make a lot more sense, and offer a lot more options to the borrower than what the FRB rule is doing.
Jim, these are all very well thought out suggestions.
What will likely happen is that over time we will see more Q&A documents from either the FRB OR from state regulators (at the direction of the FRB) helping to clarify what will/will not be acceptable.
I have been told that state regulators will be meeting with the FRB in the future to bring questions, concerns, and yes, suggestions to the table. Send your suggestions to your state regulator and ask them to forward them along to the FRB.
We also have the Dodd Frank Act coming our way soon and often which *does* limit LO comp to no more than 3 percent.