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.
People who have loans in the $40 to $50 k range are ALREADY underserved because they can only go to either local banks or huge banks where the good LO’s are already leaving because they get paid minimum wage plus 50bps a loan.(These aren’t really originators because they don’t originate, all they do is fill in an application and pass it on into their nameless, faceless system)
These borrowers already have less ability to shop around than those with higher loan amounts. Now more borrowers will fall into this category than do currently.
And, as I did point out, you are correct, people will do loans for 1 or two points in my market. I do loans for less than a point all the time due to the loan size. And when the bank has to adjust their pricing across the board to have that 1 or 2 points priced in, those people with larger loans will be paying higher rates because instead of me giving someone with an $800k loan a rate with .5% built in, their par rate will already have 2 points built in. In fact, if the bank is paying 2 points, to the LO, it will have even more built in.
I could go back and forth on this, but I don’t think that you will budge. I will say that the mistake that you are making in your analysis is more with regards to the banks than to the LO’s. You are not being realistic about how the banks will react to this. I have talked to many people that will be making the decisions on how to deal with this issue. All of them understand that the banks cannot successfully continue after April 1 without finding a way to compensate LO’s properly. They know that if they do not, they will have only ineffective, unprofessional LO’s that will work for them. (Wells is already discovering this).
You also missed the point in my comments about shopping originator fee. Let me try again. Lets say that you get a GFE from 2 brokers and a lender. All have the same interest rate. Lets further say that one broker has an origination fee of $5,000 with a corresponding YSP credit of $5,000 for a net Line A of $0.00. The 2nd broker has a $6,000 origination fee with a YSP credit of $6,500 for a net Line A of -$500. The lender has $0.00 origination fee with no credit for a net Line A of $0.00.
Answer these questions:
What is the fee earned for:
Broker1?
Broker2?
Lender?
Which is the best deal for the customer?
Now lets say the lender calls the borrower and says my rates just got better. I can give you a credit for this rate of $1500. Now my net Line A is -$1500. Now which deal is better for the client?
You are correct, there will always be people willing to do loans for anything. Just like there are people that will fill customer service positions for less money than market……. in India.
One more point:
Lets expand the doctor analogy. When you shop around for a doctor or a contractor, do you always take the lowest bid or charge? If you do, you will either get incredibly lucky or, more likely, you will end up getting what you pay for. Either way, do you think that the government should REQUIRE that all of those doctors are contractors are compensated the same way? You know what happens when an insurance company makes doctors accept to little for their services? The doctors often drop the insurance company.
Which doctors drop the insurance company? The good doctors that have plenty of business and can afford to not have that insurance company.
Which doctors keep the low paying insurance company? The more marginal doctors that are desperate for the business.
Which insurance company would you want? The one that many of the good doctors reject, or the one that the good doctors can afford to keep? Which one do you think is cheaper?
I know doctors that will keep the low paying insurance company that they actually lose money on because they don’t want to punish the poor clients. However, many do not.
Do you trust the banks to subsidize non-profitable loans like this? As I said before, the banks will go one of two ways; they will either outsource to India, (or Detroit) where they can get cheap, unskilled labor, or they will raise the costs to everyone.
The only consumer that will be helped will be the one that was getting ripped for 4 or 5 points front and back. And those situations are largely gone at this point. As usual, the govt is punishing the many to protect the few. And in this case, the few barely exist anymore.
“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.”
I was enjoying reading your article until I came upon this piece. You have implied that anyone in the the loan origination business who does not have a college degree is a predatory lender. I am a licensed loan originator who graduated high school and I do not have a college degree. I do not consider myself unethical or predatory in any way shape or form. I have worked next to college graduates that are extremely unethical and shady. It is clear that you look down on anyone who is not a college graduate and your article is very biased. The part I enjoyed about your article was the explanation on the reason for some of the changes and gave me clarity on why compensation should not be based on the loan amount. I may not have a college degree right at this moment, but I can run circles around my college graduate friends when it comes to general knowlege, spelling, grammar, and mathematics. Just because I don’t have a piece of paper and $80,000 in student loans on my credit report does not mean that I am a predatory lender who knows nothing about anything. I passed the National Exam on the first try and I have seen college graduates fail over and over.
And yes, I see I missed some punctuation above. 🙂
Hi Kristi,
Thanks for stopping by NAMF. I believe it’s very difficult for someone who has not passed 9th grade Algebra, at the very least, to understand simple, let alone complex mortgage math.
A high school diploma or GED should be required to originate loans. The other barrier to entry that The SAFE Act puts into place is the new national exam. Some people will not be able to pass the exam no matter how many times they try. I suppose this is the best the government can do at this time.
In the future, a high school diploma or equivalent GED will be required. We have to start somewhere and the SAFE Act is a good start.
In the distant future, maybe a college degree will be required.
I agree with you….I’ve met many LOs with an MBA who were never required to take an ethics class as part of that degree and it definitely shows up in the classroom.
Mortgage LOs want to be looked up on as “professionals” yet without a college degree (and not even a h.s.diploma) they stay classified as “an emerging profession.”
I find it amazing how comfortable people are with the government telling anyone how much money they can make. THE GOVERNMENT IS SETTING INCOME FOR AN ENTIRE INDUSTRY!!! Communism anyone?? The problem needed to be addressed but not by the government. You want to limit peoples income or apparently not let them have a job anymore because they dont have a college degree? I went to college but if someone goes through the required steps they have as much right as I to have that job. Stop thinking you’re above everyone. The problem isnt the LO’s its the banks who buy and service these loans. They set the guidelines, they come up with the “exotic” finance options. Reducing LO income only hurts the Lo’s, it doesnt fix anything.
Of course regulating LO’s doesn’t strike at the root of the problem. It only addresses the secondary and public symptoms of a much deeper issue. Sort of like sticking a bandaid over a sore that has gangrene. I am in favor of any regulation that protects consumers as long as it works, don’t get me wrong. But Wall Street has set up brokers and LO’s as their patsy and we are taking the full brunt of the blame and anger. Right? Because its a lot easier to point at one shady LO that has no power and no lobby in congress than it is to point a finger at the nameless, faceless corporation that (by the way) funded your campaign.
As far as education goes . . . you don’t need a college degree to do this job, but it helps. However, you do need knowledge gained either from a mentor or classes. My great-grandmother passed the bar exam in California without ever setting foot in school after she turned 15. She was mentored by her husband who had a law degree. SHe eventually became president of the LA county bar association.
But keep in mind, she had to pass the bar exam–a nationally recognized test of proficiency. In addition, she is the exception, not the rule. Imagine having to figure out which doctor got their licensed without going to medical school, or which attorney got their job without ever going to law school. Knowing the education requirements gives us a sense of security when hiring a professional. Our jobs are very important–we are dealing with people’s biggest assets and their financial security–and it would be nice for people to associate the title of LO with something respectable that implies professionalism and expertise.
Jillayne,
Sorry but all I’m seeing at this point is collusion on the part of all the major lenders to give LOs a pretty significant haircut.
There are primarily three different ways that residential mortgages are originated these days. Through a direct lender, through a mortgage correspondent and lastly through a broker.
A Direct Lender like Wells or Chase in times past has compensated an originator with a percentage of the origination fee plus a percentage of any overage.
A Mortgage Correspondent in times past has compensated an originator with a percentage of the origination fee plus a percentage of any SRP AND YSP.
A Broker in times past has compensated an originator a percentage of the origination fee plus a percentage of any YSP.
Compensating originators with YSP will be a thing of the past primarily because it is interest rate based under the FED’s new compensation ruling. BUT, SRP is not rate based and IS allowed under the new FED ruling because it is payment to the correspondent to release servicing rights to the lender. The whole concept of paying originators SRP/YSP was to share in both the initial profitability (yield) as well as the ongoing revenue that lender derives from the originated loan by servicing it. Unfortunately it appears that compensation proposals currently being floated at most of the major lenders do not fully take that into consideration.
Like I said it’s just a way for the Lenders to blame the haircut on the feds and pocket the revenue instead of sharing it. They have been wanting to do this for years!!!
Hi Ken,
Yes, the banks will keep the SRP and not be able to share it with the originator. I’m sure they’re thrilled.
But I don’t think there was any conspiracy theory on the part of the banks to make it happen.
So….. I’m confused Jillayne. Do you think that an originator should be required to have a college degree, or just pass Algebra. That’s quite a different take in two of your posts…
Hi Rob,
In the future, I believe LOs will eventually be required to have a college degree. Today? No. We can’t make that a requirement today because we’d probably lose 75 percent of our loan originators. So we set the bar low to start: Licensing and passing a national exam. If a person doesn’t understand at the very least, high school (9th grade level) algebra, it would be tough to get the math questions correct on the exam. So the exam now the minimum barrier to entry.
The SAFE Act does not require an LO to have a high school diploma. The next step would be to change this to requiring a HS diploma or its equivalent. Over time, the next step will be to require LOs to hold at the very least an associates degree….and then many years from now maybe a 4 year degree.
LOs want to be seen as a group of professionals. Right now, LOs are classified as an emerging profession. Higher duties to clients…higher levels of education will bring LOs into the same classification as other professional groups.
“But I don’t think there was any conspiracy theory on the part of the banks to make it happen”
You are delusional if you truly believe this statement.
As far as I’m concerned, whether a LO has a college degree or not has very little to do with their “qualifications” in doing their job. I’ve been in the BUSINESS (processor/closer/underwriter & LO) for over 18 years & don’t have a FORMAL college education. However, I do believe that I’m a well rounded, very knowledgable, extremely trustworthy & well compensated (not overly by any means) LO. My point is as follows –
The most important factor is whether or not the LO understands what a mortgage loan IS & how to help their borrower make an EDUCATED decision on the various products available. With that said, it also takes a great amount of INTEGRITY to complete a loan transaction properly. The problems in the last 3 or 4 years has been that the LO’s were either GREEDY & didn’t have a conscience about what product they SOLD to the borrower AND/OR the borrower was over zealous in buying what they WANTED instead of what they could actually afford which consequently led them into obtaining crappy loan products AND/OR mis-management of their income. Then there’s the the whole “faux paz” with Freddie, Fannie & the Government…which I’m not even going start on.
However, here’s food for thought…
Taking from your “perception” of how to “regulate” LO’s, perhaps we should regulate who can & cannot borrow mortgage funds…the EDUCATED or the UN-educated? Seems to me it’s an “education” problem on BOTH ends!
Hi TJones,
Yes, there are folks who agree with you that maybe homebuyers should be required to take a class before they buy a home.
But then what about the folks who were serial refinancers and refinanced every few years taking out cash and using their home as an ATM…..do we have them go to a class, too?
With some of the state bond money programs, the first time homebuyers are required to take a class. it would be interesting to take a look at those statistics to see how many of those folks end up in foreclosure.
Let’s see…….A law, passed by individuals who vote in their own raises every year at the expense of taxpayers, which will dictate what an industry is allowed to pay an employee. Also, they want to tell the company how they can pay an employee but it cannot be a pay plan based on the profits of the loan.
Will those that sell cars be next? or insurance? or any other industry that sells a product and the company pays the employee based on the profits generated? When you say it aloud it has to make one laugh.
It would be nice if the ignorance in DC could have come up with the idea to approach this matter with input from those that are in the business.
The majority of the 300 million people that are in this country (legally) feel that those that are in DC are paid too much and do not like the way their compensation plans are calculated.
Hi Shane,
Car salesmen and fire insurance salesmen were not a part of the mortgage industry’s meltdown.
The federal government is slowly trying to change loan originators from being retail salesman into a person who will owe his or her clients higher duties of care which will include higher duties of full disclosure of all material facts.
If loan officer pay is to be regulated by federal law then so should every other profession in America, otherwise singleling out one profession is discriminatory and unconstitutional. Why don’t we limit what Barney Frank can earn in a year or tell LeBron James he’s only allowed to make X amount of dollars. This consumer protection bill is a good idea gone array.
Sure they were if they borrowed the money and didnt pay it back. The real culprits are the investment bankers on Wall St who created the high leverage low documentation loan products, what about their compensation, their lobby is so strong in Washington that politicians are scared to death to regulate them for fear of being booted out of office.I’m all for disclosure but limiting your pay or anyone else’s goes against what working hard is all about. The harder you work the more you earn.
Hi Jillayne. I’ve been following and contributing to these blogs for a year or so. And thank you for this wonderful, frustrating, but always interesting forum!
You say that LO’s are now ‘classified as an emerging profession’. And who’s doing this classifying? You? I do not accept that you have the right to classify me.
I’ve made thousands of loans over 32 years and consider myself to be a true professional. I’d say that professionalism–in any business arena–is attained by an individual’s specific working knowledge of the business, his/her ability to function highly in that business, and to do so in an ethical manner.
If an individual can attain the above qualifications, he/she is a professional. A high school education would certainly be a help, but is not mandatory. The same for the merits of a college education.
The free market-place will promote the true professionals, and will discard those who prove to be non-professional.
And speaking of a free market-place, we no longer have one in the mortgage business. The fact that SRP still does not have to be disclosed in any way will still allow ‘non-disclosed profits’ to continue. Yes, the LO’s working for bankers will now have to show what they make, but their employers don’t have to show what they’re getting in the ‘back-end’.
Because of the LO limits the bankers themselves, especially the Big 4 Banks, will make even more on each loan (and the LO’s less). And that profit is all undisclosed. The LO’s will be the only ones making less.
This whole disclosure issue–if it was truly designed for the consumer–could have been made a lot simpler. Elizabeth Warren was on the Bill Maher show the other night and she decried the fact that there wasn’t just a one page disclosure statement describing the basics of a mortgage. She made it sound like it was somehow the lender’s fault!
I had to laugh. They made a good one page GFE into a 4 page disclosure that doesn’t clearly specify closing costs, or even show how much cash the borrower is getting on a refi, or needs to bring in for a purchase. The government also makes me have the borrower review and sign about 30 more pages of disclosures. As I tell my customers, this wasn’t my idea.
Here’s all they needed to do to simplify the basic disclosure and make it very transparent: Every day the Fed would get the published rates and lender fees from, say, the Big 4 banks. Then on every lender’s initial GFE we would have a form that shows the average of those rates/fees among the Big 4, along with our own rate/fees.
AVERAGE 30 YEAR FIXED RATE: 5.25%, one point
and $900 lender fees
OUR RATE: 4.75%. one point
and $1100 lender fees
And then, and this is very important, right when we’re ready to lock-in our rate for the borrower, we have to send the borrower an updated form, again showing that day’s Big Bank average rate/fees along with the rate/fees we will lock-in for the borrower. The borrower should then look to see if my rate has gone up relative to the currently quoted Big Bank’s average.
So if the Big Bank quote is still 5.25%, $900 fees, and my lock-in quote has gone up to, say, 5.00%, the borrowers can question me about it, and cancel the transaction if I don’t lower my rate.
Yes, if you must, you could also display what the loan officer is earning on the transaction–just do so in a way that won’t confuse the borrower, and falsely cause the borrower to believe that they’re paying more than the basic rate/fee quote.
Make sense?
Hi Jim,
“You say that LO’s are now ‘classified as an emerging profession’. And who’s doing this classifying? You? I do not accept that you have the right to classify me.”
There really is a body of written, published work that explains the difference between professionals and non-professionals.
The problem with your response is then you go on to say that in your opinion, you’re a professional. Subjectivism means anything goes! That means anyone can say “I’m a professional” and they’d be correct….in their own opinion.
But there are others who have came up with an objective opinion.
http://en.wikipedia.org/wiki/Professionalism
If you just google “definition of a professional” you’ll have lots to read.
Jim I agree with you that the banks hiding their SRP profit confuses things but I honestly don’t think we’re going to be able to change that in our lifetime, if ever.
One of the reasons we switched to the new GFE was because LOs were using the old GFE incorrectly, putting their fees all over the place and hiding them here and there. Consumers could not figure out how to compare fees when shopping for a loan. The new GFE was suppose to make shopping for a loan easier, and was suppose to make it harder for LOs to commit predatory lending.
Eliz Warren will probably revamp the GFE and TIL and maybe she’ll put it into one, one-page document. I’d love to completely get rid of APR, too.
Jillayne, actually I nailed the definition of ‘professional’ very well. The site you directed me to listed these as the top 4 qualities:
1.A professional is a person that is paid for what they do.
2.Expert and specialized knowledge in field which one is practicing professionally.[6]
3.Excellent manual/practical and literary skills in relation to profession.[7]
4.High quality work in (examples): creations, products, services, presentations, consultancy, primary/other research, administrative, marketing or other work endeavors.
Other qualities listed include motivation, attire, and good relationships with colleagues.
But I found one of the qualities particularly interesting:
7.Participating for gain or livelihood in an activity or field of endeavor often engaged in by amateurs.
So, the definition separates the amateur from the professional, such as in comparing a professional attorney from a person who studies law and gives free advice to his friends.
So, yes, as I review all of the above qualifications, we are all professionals.
The list of qualifications DOES NOT mention education or licensing. But even if it did require these things, well, we have them. I, for example, have studied for and passed a grueling California State R.E. broker’s exam in order to get that license, and I have to study courses and pass them regularly in order to keep that license. I, and most of us, have studied all aspects of the mortgage field, top to bottom, federal and state, and have passed two difficult tests in order to be NMLS certified and licensed. That license also demands yearly education requirements, background checks, credit reports, etc.
So–enough about me not being a professional. But I wonder why the LO’s at the depository institutions don’t have to pass the 2 exams. That would certainly imply that they are not as professional as the rest of us!
And what about those functioning as bank executives—what courses and licensing do they have?
Jillayne, you didn’t respond directly to my proposed one page disclosure which would compare my company’s rate and fees to the average of the Big 4’s rates/fees.
I know that it will never happen because the banks don’t want it to happen.
It would just make the fact that their rates are so much higher than ours too obvious.
But your continual obsession with just he LO’s compensation also ignores the broader issue–that the Banks and their hidden SRP’s are ripping off the consumer.
Jim, a consumer now can compare your GFE and TIL to the big bank’s GFE and TIL.
In terms of banks ripping off consumers, well a consumer is free to rate shop and compare costs from bank to bank, lender to lender. Free market capitalism says there is room for all of us, banker, broker, lender, credit union.
In a brief review of your article and comments I have the following thoughts:
1: Though your 5 hour example may miss the mark on the time it takes to fund a loan, the point that is over looked that like the Realtor an LO can spend hours with clients advising, reviewing the clients documentation, getting a DU, and then providing pre-qualification certification, etc…only to have the client change their mind or go to that cut rate low service loan provider…
2: Some of the brokers here have stated that their fees are fully detailed on the HUD1 and the customer knows what they are paying for. Two problems with that thought. One, it assumes the borrower knows how to read a HUD1 and has the time to take action if they see fees they are uncomfortable with. Two, I have seen brokers and escrow working together and not showing the yield spread premiums on the HUD1 given to the borrower.
Jillayne….below comes directly from Wikipedia. Can you really say any of your proposals/arguments promotes capitalism….which is one of the base princples of our society?
Capitalism is an economic system in which the means of production are privately owned and operated for a private profit; decisions regarding supply, demand, price, distribution, and investments are made by private actors in the free market; profit is distributed to owners who invest in businesses, and wages are paid to workers employed by businesses and companies.
I am a capitalist too, being self employed (I own NAMF through its parent company, CE Forward, Inc.) I’m all for private ownership but corporations still must follow the law.
Well, Jillayne, in my ‘free-market’ business I will not be able to CUT what I charge my customer, even when I want to: 1)Compete with another lender, or 2) Just because I WANT to give the customer a better deal. Yeah, that’s capitalism– turned on its ear.
Jillayne, This has to be the worst article i have ever read. You talk about accountants , lawyers, and other proffesionals, as disclosing fees? But they are not mandated, that is why one accountant makes $50,000 a year and some make $1,000,000. You are ridiculous in your statements. You make reference to originating loan in 1980? Really? There is no other busines I know that regulates how and how much a worker can make, that is decided by the employer. A realtor isnt told how to get paid. All that is happening with this law, is that the unscrupulous LO’s ae going to work for Banks. I see it all around me. So You are forcing good LO’s to go work for the Banks so that the banks can make money.
If you truly think this law is about protectiing consumers, you are blinded by the politics. This law is passed as a diversion from the problem, and that is that the ones with the money make the laws to benefit themselves.
Why is it that as soon as the meltdown came, and the industry was crumbling , the BIGBANKS were getting bailouts, 2 months later as I drive around, all i see are new Bank Branches popping up like Chain stores. If there was a true crisis the banks would have been saving money cutting costs. But they nknow that through this mess they will make more profit and gat a larger piece of the monoploy.
Please do not write articles that have no basis on the real world. That is what poiticians do, they make laws based on who will contribute to their campaigns not to truly protect anyone!!!
I just wanted to add my last name, in case anyone started to claim Iwas hiding something.
I agree with Paul. It’s so obvious that the Big Banks are benefitting hugely from all this focus on LO’s. HUD crammed these regulations through with very little foresight, and maybe even illegally. I still can’t get an answer from anyone regarding the ‘tweener’ loans, those loans where part of the origination fee is paid by the borrower ‘up-front’ and part is paid INDIRECTLY through the SRP.
HUD either doesn’t understand the business, or, more probably, is being influenced by the Big Money interests.
Merkley and Klobuchar in the Dodd-Frank bill display the same ignorance of our business.
I meant YSP above, ’cause I’m a broker.
It’s difficult to agree with any legislation that hinders the income stream of an employee at will and not the financial institution they are employeed for. Regardsless of the endless issues that have stemmed from the mortgage colapse it had nothing to do with the amount an INDIVIDUAL was paid or compensated. There where stringent regulations set up as of 97 in regards to most states and the allowable fees a lender can charge. So insitutions agreed to ignore these factors. The issue at hand was that the industry was the only financial industry that did not require it’s individuals who deal with the public to be liscensed independantly nationwide. Realtors, Investment bankers, stock brokers, finacial advisors, all need to be liscensed. Unfortunately the mortgage market was so deregulated that even a person who delivered pizza’s in February who didn’t graduate high school could in a 90 day period become a loan officer and earn income 6 figure income and up. This issue has been corrected, rightfully so, and now loan originators have to pay yearly fees upwards of 10’s of thousands of dollars depending on the amount of states they choose to do business in just to do their job, and now people want to limit how much money they make?? It is absolutely nausiating.
I have originated loans for more than a decade and consistantly closed 70 loans annually. I tend to think I am extremely confident and knowledgeable of the mortgage market and what benefits another individual, I truly think alot of people who are educated in finances would leave the mortgage industry and this would truly hurt the people who need their coaching, understanding, and dedication.
Hi Matt,
“Regardsless of the endless issues that have stemmed from the mortgage colapse it had nothing to do with the amount an INDIVIDUAL was paid or compensated.”
But then you also say….
“Unfortunately the mortgage market was so deregulated that even a person who delivered pizza’s in February who didn’t graduate high school could in a 90 day period become a loan officer and earn income 6 figure income and up”
So which is it?
BTW the SAFE Act says that a high school diploma is still not required to become an LO. An LO must take a mere 20 hour course and pass an exam (and of course have no felony convictions in the past 7 years, etc.) so the bar has been raised a bit but is still quite low.
Jillayne, maybe BANK LO’s only have to take the 20 hour continuing education, but the rest of us–Brokers and non-depository LO’s, had to study for and pass 2 very difficult tests in order to keep our jobs and businesses.
Most of us here are not defending the banks’ cozy status in this regulatory upheaval.
I’m still wondering about the fact that on April 1st I CAN’T even LOWER my fee to the borrower. It’s not allowed. How does that help me or the borrower if I’m not allowed to compete?
Hey Jillayne
I don’t know which state are u in & in which world you live in, It’s so hard to earn lively hood for an LO these days which works strictly on commission,even if you receive a draw you have to pay it back from commission, it might be easy for you or in your state, it’s easy imagination that you can make money in six figures, sounds too good to be true.
I want to ask you few questions if you can answer:
1. What’s the average turn time for closing a loan 30 to 45 days? So as you are saying LO only worked for 5 hours for a loan.
2. We are in state of GA, our average loan amount is about $125-$150K, so you are comparing an average $ 350K Loan amount, No way?
3. We don’t even do Jumbo loans, how come you can compare each LO with your average calculating system & on one weighing scale?
4.It’s hard to find customers, it’s a tough competetion out there, most of the time borrower tries 2 or more LO’s on the internet before finally agrees to negotiates fees & loan term with us that too if we are lucky & too competitive.
5. Can you guarantee of every loan we start we can close, there are so many fallouts, appraisal value issues, borrower’s income or tax return issues, or may be investor overlays, you never know. I would be more than happy to receive a fee for certain set hours in the beginning on each loan even if loan doesn’t close.
6. The cost of generating or buying leads on internet are so high & nothing is exclusive, it’s been sold to 4-5 different lenders, it’s a cut throat competetion to sell loans to these savvy borrowers.Companies like Lending Tree or Lower my bills etc, do you know what lowest rates they advertise to generate these leads which don’t even exist & then LO tries to cross sell them the actual current existing rate in the market.
7. There is always a cost for a loan to be started at the prequel level which is Credit pull cost, DU run, so even if the loan is undoable or borrower decides not to go with you, you have a cost on each prequal loan.Who pays this cost?
8. We LO’s are available to answer any questions or concerns to borrowers even at nights so in a way serve & available to customers much more than your counted 5 hours.
9. Who covers Early Payment defaults? We are not a BMW or Mercedes dealer where Technician being paid $ 150 – $200 per hour (definitely it will be split with company) & our job is done & we can do so many loans in a day like they do so many cars in one day.
10. How many loans an average LO closes in a month, hardly not even 2-3 under tough 2010 guidelines & lender overlays? You are grossly mistaken, you are only talking about a few successful 2%-5% & those few successful persons are in every field not only in mortgage.
11.What have you done where Lender”s started their own AMC’s to cover HVCC & making tons of additional money on top of regular appraisal fees?
12.What have you done where Lender’s started their own Title companies to make Tons of money?
13.Do you know the mortgage companies which provide leads, how much they spend on an average LO in between Lead costs,credit pull fees, DU runs & most importantly monthly Salary/Draws. It runs into thousands & they trust us & taking chances on us, if we fail to close some loans, we loose jobs which we all can loose but more easily in mortgage industry as it’s a commission based industry.
14. Do you remember how much time it takes for a loan to be successfully closed & funded & it takes about 15-25 days after that for an LO to be paid W-2 income, isn’t is too much?
15. Maam, you are sitting on a very high & comfortable position, do you know how an LO Breathes & lives the most uncertain & stressful life every day whether he will be able to close a loan or not, if yes if he can hit the deadline to be paid after next 15 days or misses a cut off by a day, he can delayed by 29 days to get paid.
16.Most Importantly, I would like to say that you used even the 3rd party fees, Underwriting fee & processing/admin fee in our credit like we make it, you know where it goes?LO never gets this money but a people like you still using the word may & wants to count it with LO incentive?
17 Real estate agents make much more easy money & they are not being regulated & insurance agents even get commissions & residual income?
18. It’s not the LO’s who sold loans at a higher rates, it’s the super Greedy banks who had given them the chance & invented products like Subprime loans & option arms which can make make banks lot of money. By selling a payment of $ 15-$25 more to a consumer as of today regular fixed loans & making an additional $ 500 on a loan as per LO share does not invite foreclosures & please ask every convenient store to display on each product that they bought it for 35 cents & selling it for a $1 or less, you know how much is the profit, please use your calculator 200%.
19. Are you trying to say that you are gonna cap the income on this industry so no LO can make more than 24-40K, unless they fall in 2% to 5%.
Which is much lower than any lowly paid banking jobs even a Teller since they don’tt have to sell a loan but still have a surety of being paid.
NOTE: I can only point out one sure thing, some one is trying to cut the middle man completely out of the mortgage business by facilitating the Giant Banks to take over & monopolize the system since their LO’s are already being paid Salaries only & we beat them every day coz they are selling much higher rates & can’t compete with us & it’s not gonna happen, you are gonna see so much of protests, endless LO’s loosing jobs or quitting the industry, massive unemployment & so many branches of mortgage companies closing down as they would go bankrupt, it’s gonna further worsen the economy & don’t forget the rally’s in Egypt,it’s gonna happen the same, any ruler who is trying to benefit one segment or handful of people but in a way harming the survival of common citizen & their families, please find a safe hiding place in advance if you haven’t found any coz you only can see with one eye or what you have been shown. By the way h LO makes makes a point or even less for himself but the system costs are so higher 3% can’t even cover it unless the loan amount as you say should be $ 350K.
***This will ruin the small mortgage businesses/branches, LO’s, their immediate families & any connecting people with them, you will see if this massacre is not being stopped.You will see much more foreclosures than you can anticipate***
??? I hope this is not what you want ???
Guys come lets fight this unconstitutional ruling.
Regards
Mark
Lets get it going Mark, People need to be educated as to what is going on. This law will hurt consumers not help them in any way…
Yeah and we should pay Real Estate Agents by the hour and while we are at it we can pay Escrow Officers by the hour. Then all the real professionals leave, the consumer ends up paying more and it takes 2-3 times longer to close. Consumer is left with less choice and less quality service. What a great solution not to mention the expense of getting licensed and staying licensed. Who will want to jump through all the hoops to find out they get a whopping $12-15 per hour. If you want to natioanlize banks this is a good step towards that goal. Getting a mortgage will be like going the DMV.
@Jillyane. I lost my position as an LO in a great company because of the collapse and had to start working with a Internet Cubicle Company. Their rates are incredible and everything is online and my compensation although much lower than before was still good. In January they change the compensation plan as a preemtive move to the upcoming Dodd Frank. I am basically a glorified processor now. I have to keep a ridiculous volume in our pipelines just to get paid $35k year. I have no time to service the client as i did in the past. If you are a problem file you get pushed to the side. This is the reality. And after Dodd Frank it will only get worse not only for the industry but for the economy. Imagine if someone came into your NAMF and said Jillyane this how your getting paid and this is all you can charge. Also we’ll let your bigger competitor, who can out market you, charge the same and make more that you could’ve helped for much less. But you can’t because your not allowed to compete in a profitable way. Compensation is key to our market to insure competition. If a buyer/seller doesn’t care that a realtor will make 2-4% on a transaction then why would they care how much an LO makes if they received the best rate and lowest fees. When i worked for Chase Bank i always lost clients to Mortgage Brokers and Direct Lenders due to them being able to offer lower wholesale rates. I have no problem telling a client how much i make. I have a problem with the government telling me how much i can make. I guess i am almost working for the government. I’m not the smartest person in the world but i can tell you, this benefits nobody except the Banks. So next time you get a loan, with a higher rate and crappy service, well you made your bed. I think I’m gonna start a Hot Dog Stand or a Food Truck at least i’ll be able to price my own menu.
I stumbled across this thread while trying to do some research on the impending DODD Frank changes that will come to my life April 1. I started during the boom, but stayed because it can be an honest living for a smart, articulate, indiviual with a knack for numbers and problem solving. I made the move to “cozy” big bank years ago becuase I saw the writing on the wall. If you feel a mortgage professional is not worthy of professional salary, I don’t think I will be the one to change that, but if you strive for “transparency” in fees, do you feel our job should include, credit counseling, product review, and 24 hrs access to our industry expertise? I really feel that the good and honest mortgage professionals have done too good of a job making the mortgage process seem “easy” I think this assumption is at the base of the perceptions you have around compensation. Lately, I spend as much time keeping up with industry changes as I do helping homeowners. The SAFE training and background checks have consumed most of my week. Now I am waiting to see my new comp plan. The rumors are hourly rate, possible overtime (ha that funny), and flat fee per loan. So where does all the profits go when the loan is sold on the open market. I am confident that the attorneys and executives in my company to find a way to still pay loan officers “EXACTLY” what they want to. Actually, they may even find a way to save a buck or two and blame “Da Man”…So once again after 15 years in the mortgage business I am faced with the decision to stay or go. The average Bank LO in my market makes 40K. It’s alwasy a value based analysis. Like any job we weigh the time away from family vs. the goals we have professionally. But don’t worry about me, if I leave, im sure I will be replaced by someone willing to take my place at the going market rate. My company may even start to outsource originations overseas. (i.e. the same way we have done most of our customer service.) (said sarcastically). Maybe I will go back to school and buy some letters to but behind my name so I can justify making over minimum wage. By the way, what college major addresses the actual items we discuss with a potential customer. I don’t think the typical, Business, Econ or Physics major would be very successful in this line of work. If so then shouldn’t our role be compensated for when were are selling a product and important and profitable as ours
Dodd Frank is a special treat for the few mortgage lenders who weren’t buried alive by HVCC. You may as well buy a gun and end it youself rather than give the government the satisfaction of ending it for you.
The same thing applies to appraisers. There are apparently still a few out there living in fantasy land and believing that Dodd Frank will magically restore their lost clients and extorted fees.
For an originator it is not the time spent on the file it is the time spent getting the customer (loan applicant). I know originators that drive around and call on realtors 30 hours per week and fund only 1-3 loans per month. Also, these days only one out of every three or four applicants ever close (work for free most of the time).
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Anyone that thinks it is a great job and pays too much should try it. 80% to 90% that try to originate loans fail to make a decient living at it.
Mortgage Brokerage Companies will wind up violating the Fair Labor Standards Act (FLSA) if they pay an hourly fee because you are required to pay overtime to loan officers. And secondly what mortgage brokerage company will be able to afford a loan originator who doesn’t produce any loans for a month or two? The bottom line is the LO comp puts all mortgage brokerage companies out of business period. It is impossible to run any sort of profitable business under the new regulation. The big banks get bigger.
And the best part to the loan officer comp rule is that it also puts Net bank branch mortgage banking operations out of business. They haven’t analyzed the recent fed oral guidance to understand how screwed they are yet.
I’m an Operations/Underwriting manager and have been in the mortgage business (prime only, never sub-prime) since 1985. In the late 80’s and through most of the 90’s an originator was paid 50-70 bps per deal and overage was rare. This was pretty standard at most independently owned mortgage companies and large banks. The succesful loan officers made lots of money by doing volume. This was before housing prices really started to rise, and the average sales price was under 100k. Even with these small loan amounts back then, our average loan officer made anywhere from 50,000 to 100,000 a year, because they worked all the time hitting the streets and bring in 10-20 loans per month, not 3-4. If you have to charge a point or more in overage to earn a decent living because you’re only doing 3-4 deals per month, then your not a successful sales person and shouldn’t be doing this. That having been said, I don’t believe that regulating loan officer compensation to this degree is really the answer. I believe the problem came about to all this mess in the underwriting criteria, and still continues to be the problem. I have always worked for a independent mortgage banker, never a broker or a big bank. Our largest volume of loans have always been FHA, we had and have experienced seasoned government loan officers, and were doing FHA loans all along, before they became everyone’s answer to losing sub-prime. To this day the automated underwriting systems are still approving loans with debt ratio’s as high as 50%. These are FHA loans which meet the TOTAL scorecard criteria. This is really where the regulation needs to come into place. Before automated underwriting a real underwriter reviewed every aspect of the borrowers ability to repay the loan. Borrower’s were required to explain problems with their credit, and prove what steps they had taken to prevent it from happening again. To show they had saved money for an emergency, provided a budget to show they have planned for their new mortgage payment, etc. In some cases the underwriter would request the customer come into the office and meet with her, so she could personally council the borrower in cases where she felt it was necessary. This doesnt happen anymore. We sell our closed loans service release to large banks, such as Suntrust, US Bank, GMAC, etc and not one of these lenders will purchase a loan, goverment or otherwise, that has been manually underwritten. What a shame! That they would rather have all automated cases, high ratios, then to have a manually underwritten, thoroughly documented loan. As underwriters with an independent lender, our job is to basically make sure the income and assets and other data entered into the system is correct, thats it. Until the automated underwriting systems are gone, and every loan is required to be underwritten by an experienced underwriter, I dont believe this problem has really gone away. And I dont think loan officer compensation, while some reform is needed, is going to really fix the problem. We made FHA loans throughout the 80’s and 90’s the old fashioned way, and some people had credit criteria that is not acceptable today, but guess what, we didnt have one buy back loan, not one, and I’m not kidding you. Any loan that went info default was an extreme situation, usually death. Because by the time the borrower was finished writing explanations, proving why things happened to their credit, I mean proof, letters from creditors, Doctors, etc., (some of you from the old days remember the way and underwriter could force you to document a file)by the time the borrower made it through this process, they had an understanding of the importance to keep their credit up to par, the importance of making your house payment, and what they went through to get that loan made them appreciative, and I belive most borrowers came through the experience with an understanding (that they dont have today) at the end of the process. It sounds like it should be easy for us to have our own criteria, our own ratio caps but its not that easy. When you have a customer that meets all of FHA’s criteria, all of the lender’s criteria that you’re selling the loan to, and you have an automated approval, its hard to reject an applicant without them believing you are discriminating against them somehow. But get rid of the automated underwriting, and then we’re back to basics and the approval of a loan is contingent upon the underwriter seeing in the file that the borrower can make this payment. I believe until automated underwriting is gone, we will one day be back into this mess again, even without sub-prime being available.
Hi Angela,
Thanks for your thoughts. Right now FHA is being used by the government to cushion the decline of the real estate bubble and the withdrawal of private purchasers of our residential mortgage backed securities.
Fannie and Freddie are also being used this way. Loan limits are still very high and underwriting guidelines are still not tight enough.
But if we clamped down and went back to 1980s style underwriting immediately the whole system would collapse. So we have to go back there slowly.
I don’t think automation will completely go away but human underwriters can make a come-back big time, especially with the anti-steering provisions of the Fed Reserve Rule and Dodd-Frank.
Hey Jillayne
In case I wasn’t clear and as you made quite obvious; I was in fact stating that deregulation of the mortgage sector as well as the bond rating system is the largest contributor to the decline in the housing market. I do think that the requirements for becoming a loan originator should still be higher, however I do not know of many people without a college education let alone a high school diploma that can pass the federal SAFE exam.
Unfortunately you are a little off on your description of Fannie and Freddie as well as your feelings on the FHA. First of all Fannie and Freddie are being desolved they are not being used as a tool, when in fact the fed’s are trying to attrack private funds to enter back into the market and purchase MBS’s. In no way do the feds think that eliminating private securitization is somethign that will positively impact our current housing sector. As for the FHA I would imagine that the second increase in mortgage insurance over the last 10 months would be a pretty big indicator that the Federal Housing Authority and HUD want nothing to do with mortgages right now.
I think it might be in your best benefit to pay more attention to what people are actually saying than just assume you know what they are thinking, just a helpful hint, what do I know I only close 20MM in volume annually of retail originated loans, and hold liscenses in every state in the North East….thanks though for the attempt.