60 thoughts on “LO Compensation Limits Coming in 2011!”

1. Amen sister!

   In my career I am been a broker, a loan officer for a non-depository lender, and a manager in large depository institutions. I know how compensation works in all of these organization and so over the last few months since the Fed released the memo in August, I have been sharing the same opinion you put forth in this article. Silence. No one wants to talk these realities, especially the non-depository mortgage bankers, and the entire industry of consultants that depend on them for a living.

   I too see the mortgage broker being viable if not totally necessary. The large institutions will be clearing houses for underwriting, securitization and servicing. What retail originations they keep doing will become clerical, as monitoring compliance over compensation and issues related to over-time payments will make retail lending for them too burdensome. It will be much easier for them to set up wholesale shops and capture market share through a group they don’t have to supervise, Mortgage Brokers.

   While it has been convenient since the crash to blame everything on the no-good mortgage broker, I saw more consumer abuse and excess commissions in non-depository mortgage banking companies than I did at brokerages. Limiting overages and “underages”, as the new rules does, stops this non-disclosed practice at least at the loan officer lender. The companies themselves can keep charging whatever they want, but they know with out a complicit sales force it will be much tougher to woo consumers. Since January, under the new HUD as you point out, mortgage brokers have been fully disclosing the fees the consumer pays them. Even if a lender wanted to pay a YSP to an originator, there is no place on the form to do it! So the noise we hear about lenders restricting compensation to brokers is just that. Lenders don’t pay brokers anymore. Consumers do. All excess premiums paid by the lender in exchange for higher rates go directly to the consumer in the form of credits he can use to pay closing costs or even his mortgage broker. How much easier and clear can they make it? That is unless you are a mortgage banker.

   For mortgage bankers who relish their roll as the Wizard behind the curtain of non-disclosure, pulling the curtain back is obviously going to be met with some resistence. Don’t be surprised in the next few months if you don’t start reading how loan officers are over-paid and that their compensation should be tied to the risk they have in the game. Can you say “phone-officer?”

   They will approach the impending mass-exodus of loan officers problem on two fronts: Plan A: Demonize the role of all loan officers especially brokers as they put forth trial-balloon-reduced-compensation plans to see if they can get one to stick. But to really succeed they will keep pounding the message of Plan B: That loan brokers are dead. That there is no place for them. That everyone is going to put them out of business. That no one will buy loans from them. Ok, well except for maybe Wells Fargo and Citimortgage.

   An alternative approach to the problem was put forth this week by a noted consultant to the mortgage banking industry, Joe Garrett, in his recent weekly commentary:

   (1) re-do everything about loan officer compensation, (2) restructure it so the company can actually make money, and (3) because everyone else is making big changes, no longer be accused of declaring war on these loan officers. This is a great opportunity to start all over.

   Well said Mr. Garrett and thank you for writing your column Ms. Schlicke in support of the professional mortgage broker model.

2. Why don’t lenders disclose SRP’s? I like this article it don’t seem as bias as yours.

   YSP is the difference between the “par” rate (wholesale rate) quoted to mortgage brokers, and the rate you ultimately pay for your mortgage. YSP has always been regulated, contrary to popular myth that has been circulated via bank lobbyists. Yes, mortgage brokers can make some decent money getting a loan for a borrower, but not even close to the commissions that real estate agents charge – and not even close to the SRP (Servicing released premiums) that banks make on every loan they fund.

   If a mortgage broker is quoted a par rate of 4.75% for instance, and you are quoted 4.875%, the YSP is could be somewhere around .25% to .5% of the loan amount. That equates to between $250 to $500 on each $100,000 of the loan amount. But remember that the bank quoting the rate of 4.75% already has a mark up on that rate, because of course, the lender wants to make money on the deal. What is the actual par rate to the lender (bank)? And what rate will this bank make on the sale of the loan to an investor? In addition to fees collected for rate increases, banks also pile on charges for “risk based pricing.” So, if you are not the “ideal” home buyer, there can be a “hit” to the rate for credit score, loan to value ratio, loan amount, type of property, and much more. These “hits” to the rate are assessed against the mortgage broker, so of course the rate you will be quoted goes up. AND, of course, the bank is making money (SRP) on every single “hit” as well.

   So, what is SRP? SRP is the premium that banks make (and pass a portion onto their loan officers) when they sell a loan to the secondary market. Everyone should now be familiar with the concept of their loan being sold. Prime loans have long been sold to Fannie Mae, Freddie Mac, big banks, hedge funds, and other investors, both American and foreign. SRP is earned by charging fees, charging – (familiar with this?) higher rates – just like mortgage brokers charge. In fact, banks make a LOT of money on SRP, are not capped on the amount of SRP they can earn per loan, and unlike mortgage brokers are not required to disclose the amount of SRP they are earning or are paying their loan officers. Of course, they have every incentive under the sun to make as much money as possible, so those of you who go to banks, thinking you are saving money or getting better rates – think again – it is very likely that you are NOT!

   In fact, the truth is that mortgage brokers are far more regulated than banks when it comes to making home loans. Mortgage brokers must be educated in the loan process. They must be licensed, and must take continuing education on everything from loan financing to ethics. Bank loan officers do not have to be licensed, and in general are far less informed than independents. Bank employees are encouraged to sell you on “advantages” such as buying down a loan rate, when in fact, in most cases, the bank wins on rate buy downs. There are some buy down programs where the borrower will NEVER break even! (The cost of the buy down is more than you will save, even if you keep the loan until it is paid off.)

   Banks are permitted to charge up front application fees for your mortgage, thereby locking you into a loan with them. Mortgage brokers are prohibited from charging application fees – and are allowed to charge only for two upfront fees, the cost of the credit report and the cost of the appraisals. Do you know anyone who has “eaten” an application fee, even when they were able to find a better loan rate elsewhere? It happens all the time.

   To make the playing field even rockier – banks of course, have far more money than the mom and pop mortgage broker and they spend that money freely on lobbyists. The lobbyists work on our Congressional representatives to pass more laws to “protect” the consumer – but in fact, in most cases, the laws are protecting the very banks that are paying their executives multi-million dollar salaries, and whose greed and corruption created the financial meltdown we are all living through today.

   Next time you are ready to get a mortgage loan – why not ask the loan officer at the bank how much SRP they will be making on your loan? Or how much SRP the bank will be earning on your loan. Do you think those numbers will be disclosed to you?

   Of course banks have been trying for years to shut down the independent mortgage broker. The competition is not welcome. Sadly, they are succeeding. Independent mortgage brokers are disappearing at an alarming rate across the country. Those that are still in business are very often actually “net branches” of a small or regional bank – that of course, is taking their SRP off the top of every loan that closes. And so it goes – bureaucracy at its finest.

   The latest news is that Congress is getting ready to again drop the cap on the amount of YSP that mortgage brokers can earn on a loan. The proposed cap is 3%, which sounds very high, but remember that this number has to include ALL the fees that lenders charge and all the garbage fees you will pay for the loan that the mortgage broker will never touch. These fees include things like appraisals, underwriting fees, processing fees, credit reports, and on and on. Remember – banks have no such cap. But, to make matters even worse for the consumer, think about the small loan amounts and that fee cap.

   If a consumer is applying for a $50,000 loan for example, 3% is only $1500. When you subtract all the fees out of that $1500, (such as $500 for an appraisal, $600 lender fee, $400 processing fee, etc, the mortgage broker could end up paying to get you a loan. How many mortgage brokers will be helping those of you who need small loans? Just another strike at competition financed by the banks, via their lobbyists.

   This column is not intended to portray mortgage brokers as victims at the mercy of banks. It is more to open your eyes as consumers to what is taking place out there behind the scenes, and how this will affect your ability to get financing, and what you will pay for those loans. It is a time for full disclosure – and SRP should be disclosed too.

3. Hi EJ,

   I agree with you. Broker LOs already have to fully disclose all compensation on line 1 of the Good Faith Estimate. When the new rules go into effect April of 2011, the LOs who work for a bank or mortgage bank will no longer be allowed to earn that extra back-end compensation whether it’s from up-selling the interest rate or whether their bank manager is sharing in the SRP. All compensation must either come from the borrower OR from the lender but not both.

   That will force all LO compensation onto line 1 of the GFE for all LOs, no matter where they work.

   Broker LOs already made this transition in Jan of 2010. Yes their numbers are getting smaller but that’s to be expected in this market.

   I believe that even with the smaller loan amounts there will be plenty of LOs (no matter where they work) who will write that loan for that lower fee.

4. Hi Jillayne and others,

   I’ve written blogs here a number of times. EJ, your issue regarding the inequity of banks not having to disclose SRP’s is absolutely correct, and I’ve made that point here a number of times.

   First of all, my mortgage brokerage can offer rates .25% to .50% lower than the big banks–at the same fees–about every day. On my GFE, if I’m getting my borrower,say, a no closing cost loan, I first have to show in block #1 my fees, along with the lender’s fees.

   In block #2 I then show the YSP–which is, of course, the borrower’s credit to his closing costs.

   But then I have to show to the borrower, in writing with my own custom form, as well as verbally, how the YSP (rebate) is paying all of the ‘Origination Charges” (block #1), and then explain how the excess rebates that’s left-over will also pay his title fees. It’s pretty convoluted, and looks much more complicated than the GFE given to him by the banks.

   A few questions regarding how the new Dodd bill will work with the banks:

   1) So LO’s will now have to disclose their fee in block #1. For a no-point loan, or a no-point and no-cost loan, how will they show that the lender fees (including the LO commission), and the title fees, are paid? Since they still do not show the SRP, how do they complete the GFE in a way to show that the fees are paid?

   (This question shows, by the way, how silly–and bad for the consumer–is the fact that SRP does not have to be shown).

   2) This question applies to brokers as well. If my fee cannot change except for the size of the loan, does that mean that I HAVE to charge my usual 1.375 point fee, even if I want to charge less?
   I’ve asked this question many times and have never received an answer from Jillayne.

5. The “Think Big, Work Small” guys recently did a 3 part video regarding the new Fed Rule. Their interpretation is that LO’s working for banks and bankers (those with SRP’s) will STILL be able to make money on the back-end, with bonuses, expense reimbursements, and so on. The Fed Rule apparently allows these kinds of payments to LO’s, and are vague enough that they can be ‘played with’.

   So, the banks with their SRPs’s can still pay their LO’s more than what is shown to the borrower on the GFE. There goes the idea, if there ever was one, regarding equal transparency among Brokers and Bankers. There goes the notion of true transparency for the borrower.

   Brokers are the only truly transparent originator in the business, which we should use as a sales tool. But there’s another obstacle thrown in front of us–we will only be able to charge the borrower upfront ‘point’s’ OR receive all our compensation through the YSP. No more loans where our 1.50 points are paid partly by the borrower and partly by the lender. So on any given day we will not be able to offer to our clients the whole set of ‘tweener’ interest rate options to our clients. “Mr. Jones, we can make your loan at 4.75% with 1.5 points, or at 5.125% with no points. No, we are forbidden to offer you a loan at 4.875% with 1 point, nor a loan at 5.00% with .5 point. Yes, a bank can offer those but we can’t. It’s all for your protection, they say.”

   Jillayne, you’ve been cheerleading for these new types of regulations from the beginning. These changes will NOT limit and fully disclose LO commissions for those working for the banks. But these changes WILL put the brokers–the truly transparent originators–out of business.

6. Hi Jim,

   The Think Big Work Small guys have been wrong before. I say let’s wait until we see the final rules in writing.

   Surely all companies no matter how they’re doing business are going to be huddling with their attorneys trying to figure out a way around this.

   If a bank can “bonus” the LO why can’t a mortgage bank or broker “bonus” an LO? I think this is a great question for the regulators to ponder before issuing their final rules.

   I’m not so sure that the bank LOs who are getting a bonus or expense accounts are making as much income as brokers, Jim. They’re probably being paid a heck of a lot less than you are. At least that’s my hunch.

7. Hi Jillayne,

   Thanks for your response. I hope you’re right about the ‘Think Big’ guys being wrong about what brokers can offer to their clients regarding interest rate/point combinations.

   Even though I charge no more than 1.5 points to the borrower, I probably make more than most LO’s–but only because I own my business and do not split the fee with anyone. Of course that’s why I can offer such competitive loans…unless Frank Garay is correct about brokers now being limited to full-point or no-point loans. This would put us all out of the business, much to the detriment of the consumer (and us).

   I don’t see how the broker can ‘bonus’ the LO. The banker can pay the bonuses through using the still non-disclosed SRP. Our YSP’s are fully disclosed.

   Oh well.

8. Hi Jim,

   The Fed Reserve Board rule and Wall St Reform are two different things. The FRB Board’s rules are not law. Dodd-Frank Wall St Reform is a law with rule-making still ongoing.

   Wall St Reform says the LO may not receive compensation from the borrower and also the lender.

   That would include any overage charged by selling the borrower a higher rate loan and any servicing release premium the lender earns after the close of escrow.

   IF indeed the final rule comes out allowing SRP-sharing at the depository banks, I think there’s going to be a LOT of yelling and screaming in 2011. Remember, SRP is different than overage (selling the borrower a higher rate at the close of escrow/primary market) SRP is a secondary market activity.

   I agree with you: it should be the same across the board.

   If not…then brokers should use the differences to their advantage.

   I think it’s fine for banks to pay LOs on basis points (volume) and I also think it would be fine for banks to pay LOs bonuses based on other things such as loan performance (! what a concept) and quality control (good, clean, well-documented files with no errors) and also bonuses based on customer service feedback surveys (again, what a concept!)

   But these bonus type payments should be able to be paid out at all institutions, not just banks. Reward w-2 employees for the behavior that benefits everyone: the company, the consumer, the community.

9. Here’s the REAL effect the Fed’s new rule:

   LO’s can’t make an “overage” by charging a higher (higher than what?) rate. LO’s also can’t take an “underage” (agree to be paid less than their standard commission) by giving the borrower a lower rate. LO’s must be paid their standard commission – and not one cent more OR LESS – no matter whether they charge rate/points/fees that are profitable to their company (or bank) or constitute a huge loss for their employer. Therefore, a LO is incented to quote pricing that is beneath their company’s quoted pricing, secure in the knowledge that their own commission cannot legally be cut by one red cent. In recognition of the danger that this system poses to creditors (banks or mortgage companies) – with LO’s quoting below-market pricing yet being paid full-boat commissions – creditors will jack up their standard quoted rates in order to insure against the danger of rogue originators who deeply discount rates in order to bring in more loans. Aside from the few consumers who stumble across a rogue originator, most consumers will pay markedly HIGHER rates.

   In the old days, some people got charged higher rates than others. The Fed has now fixed this. Now everyone will pay higher rates.

   These rules may limit originator income. They’re certain to radically increase creditor income at the expense of the consumer. It’s the law of unintended consequences. Credulous supporters of government do-gooderism will undoubtedly think they’ve improved things, but creditors will end up making more money than ever. It will all be hidden behind the scene, though, so the do-gooders can continue to be proud and sanctimonious, never understanding or acknowledging that consumers everywhere are paying dearly.

   The new Fed rule doesn’t officially go into effect until 4/1/11, but mortgage industry gross profits are already higher than they’ve ever been in history, in no small part because banks are gearing up for the day when they won’t be allowed to charge “underages” to the originator.

   Thanks Federal Reserve!
   Signed, John Q Smith, CEO Humongous Mortgage, Inc.

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12. I’ve been doing loans for about 18 years and will probably stop doing them in the near future. No longer will i fix credit, work on evenings or weekends or hold the hands of my borrowers and realtors. It just won’t be worth it. This is one of those laws that will have “unintended consequences”. Mark my words, jobs are going to be lost. Real Estate transactions will take 60, 75, 90+ days and we all better get used to it. And forget about loans that are $100,000 or less. I don’t like doing them now. This will also negatively affect the real estate market. This is socialism at its best. I am very disppointed in our government. We “loan officers” didn’t create the 100% stated income home loans, Wall Street did. If a borrower or Realtor asked for a 100% stated income loan and I said “no” then they’d just get it from somewhere else. If the banks and wall street didn’t offer them then we wouldn’t have had the financial crisis we did. Jillayne, you’re severly misinformed about the real world. I guess I’ll just go sell real estate. Any idiot can sell a house and make 2.5% to 3.0% commission and in some cases more, like Freddie Mac and Fannie Mae REO’s pay $1,000 to $1,500 bonuses on top of the commission and you don’t even need a high school diploma…all you need is a real estate license….or is our wonderful government going to socialize them too? Watch out Jillayne, doesn’t take too much to write a stupid article and bash someone elses industry. I don’t know what you’re paid, but in my opinion it’s too much

13. You don’t need a high school diploma to be a loan originator, either.

    Well suppose I *am* totally mis-informed about the real world. Hearing that sooooo many LOs are going to leave the industry will mean those that remain will gladly do those loans that you would have done and gladly collect your fee.

    I’ve heard the “less than $100k” argument for a year now. In areas where loan amounts average less than $100K the cost of living is also a whole lot less.

    If you want to go ahead and take a stab at doing what I do be my guest.

    Most LOs I meet are doing loans for 3 percent or less anyways in today’s tight market.

14. There are still many concerns about Dodd Frank that no one can anticipate. I agree with Aaron, when he says there will be unintended consequences.

    – Most of the small, p-t originators will be gone, because lenders will structure compensation in such a way to leverage scale. Not sure if this is good or bad, but it will push people out of work, and it doesn’t reflect the quality work some people do this way.
    – Too much of the industry is going to banks. Easier to regulate, but creating a rather large monopoly on the business. Is this what consumers want, or what lobbyists want?
    – You state that most LO’s are doing loans for 3% or less. Not sure where that is, but most loans we do are in the range of 1.50%. $300k deal is paying at best $4000-5000, of which a % is paid to an originator. If I were charging 3% on a $300k loan, that’s $9000. Must be a different market because that is very high.
    – This is still the only private industry I can think of where compensation is regulated by law. And still, there is no regulation for banks’ earnings, realtors, investors, or even hedge fund managers or traders. There are many hands in the cookie jar, not just LO’s. But will they ever be regulated?
    – Jim W said he has his own brokerge, charging 1.50% and doing well since he does not split fees. Our understanding is that he will be required to charge a flat fee per loan come 4/1, or will receive compensation from his wholesale lender based on aggregate L/A, loan quality, etc. His model – where he originates AND manages – seems to be frowned upon by the regulation.
    – Here is the Fed’s response regarding fixed compensation: “A payment that is fixed in advance for every loan the originator arranges for the creditor (e.g., $600 for every loan arranged for the creditor, or $1,000 for the first 1000 loans arranged and $500 for each additional loan arranged).” $600 for every loan originated? This only shows how out of touch the Fed is regarding the maount of work done by an LO. National average for productivity is what, 4 per month? So you help a client with their largest financial transaction, and the Fed thinks you should make less than $30k a year.

15. Peter J, you made excellent comments. I still can’t get over the new rule which mandates that I CANNOT cut my fee. How does that help competition? How does that help the consumer? How can that even be legal in our ‘free-enterprise’ system?

16. Please..stop with the whole “high school diploma” bit..it’s elitist purely and simply.

    I have a college degree from a good university and some of the people I respect the most for their ethical behavior and business sense never took a single college course. Bill Gates left school early to build his business, is he not a professional? Why do you keep hanging your hat on whether or not someone was good at taking tests and belittle people that either had to go work, or were driven to get started in their career? Kudos to you for getting seventy five degrees…I’m sure you felt the bosom of the academic society very comforting. (I believe we would call that “reverse elitism..see everyone can belittle someone else.)

    Ethics is innate. It’s a product of your upbringing and your personality. It has absolutely nothing to do with your level of education.

    The other “fact” you keep throwing out is the 3% commission structure you seem to think everyone is getting. Even in the heyday of the housing boom the exception was the originator charging outrageous fees to close a loan, and in my experience I saw more of those predatory fees from companies like Ameriquest that dictated to their loan officers how much they had to charge than were being charged by independent brokers.

    The bottom line here, as has been stated by any number of people above, is the banks will continue to take a cut off the front of the transaction, a cut from the transaction, and a cut from the secondary market transaction. The originator will still have to qualify people, consult with people, fix or advise them about credit issues, all without the bank so much as offering a word of encouragement. This is the ultimate “independent contractor” business in many ways. If you want to change it, then make sure I get paid for the work I do, not JUST the loans that close, because that is less than half of what my job entails.

17. In reference to Aaron’s comment on not doing loans less than 100k..I believe that market just went away completely for loan originators. I’m not so sure LO’s will be lining up to do that loan. The laws have shifted us to volume now. We have to close more to be paid. Am I going to pursue the under 100k market, or is my time better spent serving customers over 100k? Don’t forget we are 100% commission, so the answer is fairly obvious. The ‘unintended consequences’ will be the under 100k market will be largely under served and ignored.

18. I guess the biggest thing for me is that there is no real clarity and April is just around the corner. None of the investors are saying much as to how they envision compensation will be paid out so it is difficult to prepare. Regardless, change brings fear but it also brings opportunity and I am going to focus on the opportunity. One last note, everyone keeps mentioning the $100K loan, and heck yes I will take those but in my market, were starting to see more and more $40K and $60K loans. Those will be tough depending on how the comp rules end up especially if after fees you end up netting 1% or less and that is before you split that with the house.

19. It’s amazing to me the banks have this much pull to take over Government laws to benefit their pocket book. Let’s sum up what Banks/Feds are doing which is basically being bought out by high powered banks.
    Making the Housing crisis worse by implementing new laws that really have ZERO impact on what is really going on with the market. Or having loan officers who work for Brokers basically quit. Why? Because they won’t be able to make enough money to survive unless they join the bank “Cult” that can tell the LO, sorry it’s the law that I can only pay you minimum wage or the same amount on every loan. Lets call it what it is, the banks will have to pay their loan officers less, so in turn they will make more money. Funny how every law that has taken effect in the last two years have benefited the bank, but not the broker or “Small Guy.”
    Why is it that the only business that is regulated on the amount of money a person can make is going to be in the Mortgage business. So Feds, let’s start regulating how much the “Car Dealer” can charge in interest rate, warranties, net profit on the car, the same amount a salesperson makes per car. Or insurance companies on the premiums they make or better yet every retail business in the country that has to charge a certain amount. Every business in America would go under if we regulate the amount a business can make. Guess what, sometimes you buy clothes on sale and sometimes you pay retail, but to tell an owner on what they can charge is flat out wrong and shows the true Government transparency which is to be at large banks’ beck and call. Whatever the banks feel like implementing next, everyone be ready for since they are just laughing at the rest of us who are just trying to make a living. FEDS, YOU SHOULD BE ASHAMED OF YOURSELVES!!!

20. One more thing. Many people believe it’s the broker that caused the problem in the first place, guess what YOUR WRONG!!! It’s banks and Wall Street who created the programs for people with 500 scores, and the brokers just followed their guideline since it were banks that were buying all these loans. Brokers don’t make guidelines and programs, BANKS DO!! B of A might be the biggest bullies and worst bank I’ve ever seen. People really need to fight back against these Greedy Slime Balls.

21. Rcik, I couldn’t agree more. I’ve made the same points (again and again) in these blogs.

    Jillayne has suggested repeatedly, in different ways, that LO’s are somehow getting what they deserve with all these unfair regulations being wrapped around us by HUD, Congress, and by the states. Yes, I’ve run across greedy and deceitful LO’s through the course of my 32 years in this business. But, short of a LO pulling off out and out fraud (forged and fake documents, etc.), the ones that are most guilty of the meltdown were the Wall Street/Big Bank manipulators who designed risky and anti-consumer loan programs (Option ARMS, No-Doc loans, 2/28 sub-prime loans at 100% LTV with NIV, etc.).

    Wall Streeters and the Big Banks were largely unregulated in regard to CDO’s, ridiculous over-levaraging, and fraudulent ratings by Moody’s, who were basically paid by the Big Players.

    These mortgage pools were wildly popular with investors throughout the world, and many towns, cities, and labor pension funds bought them. The Wall Streeters inflated the Real Estate bubble, making billions. When the bubble burst they made billions. And they’re making billions now as they inflate other investment bubbles.

    ‘Bad’ loans–loans that paid LO’s ‘too much’, or loans that were clearly not appropriate for certain borrowers, could have–SHOULD HAVE–been blocked by the lenders’ underwriters. They know when a loan is not right for the borrower.

    But the underwriters were instructed to approve these loans, as long as they went by the loose guidelines promoted by the Wall Streeters and Big Banksters.

    Why? Because greedy Wall Street firms needed more and more of these crappy loans for their CDO’s, which were making them fortunes. They knew that they were inflating a big RE bubble, but they didn’t care. Let’s make all the money we can now, and to hell with the future was/is their attitude. That seems to be the mantra for many mega-corporations these days.

    LO’s are now so severely regulated, by rules that are so unintelligible and utterly ridiculous, that I expect Rod Serling to step into my office and say, “Welcome to the Twilight Zone.”

22. Rcik, Life is not the great conspiracy you make it out to be. Truth is, the entire issue stems from a few Government idiots that believe people have a RIGHT to be a homeowner. To promote this mistaken belief, they loosened the regulations at Fannie Mae and incepted Freddie Mac to allow people who had less to buy more. Then, to ensure banks would lend to these people they added substansive penalties to declinations along with burden of proof requirements, effectively forcing banks to lend to people with poor or bad credit. You want blame, then blame Barney Frank. Home ownership is a privilege, nothing more, nothing less, and Dodd-Frank is a poor attempt to fix what they broke.
    Jim, Don’t blame “wall street or the big banksters”, they ARE regulated and with very few exceptions Bankers are the honest hard working people America needs them to be. You should focus on the “disadvataged borrowers”, most of whom overstated their income, or had inflated beliefs in their ability to repay. look also at the Government who changed the rules allowing for no doc or stated income loans to be sold to Fannie & Freddie.
    Shouldn’t the Borrower know not to apply for something they can’t afford, and when they fail to repay, shouldn’t they be penalized instead of coddled? A Mortgage is a contract, with the property as collateral. If you fail to meet your contractual obligation, the collateral should be forfeit. If you can’t understand that, you have no business entering into a contractual agreement.

23. OK, since Jillayne agrees that income should be totally disclosed, and doesn’t seem to have a problem with my income being limited to 3%, I see she has a CE class that lasts 3 hours and costs me $25.00. Doesn’t really tell me how much she’s going to make, does it? Tells me how much it will cost ME! So, let’s limit the class size to 9 people, $75.00 an hour is plenty for this service.

    LOL, I just became the government!

24. Hi Natalie,
    Course providers don’t really compare to that of loan originators, do they? Were course providers involved with predatory lending? No, unless we count the hundreds of times we taught that subject.

    You’re engaging in the Ad Hominem fallacy. Attack the argument, not the person in order to be taken seriously.

    Try again.

25. John–

    Yout pushing the fallacious republican talking point that it was all the fault of fannie and freddie (and of course those dems who pushed poor people into home ownership).

    This lie is an attempt by repubs to spin attention away from the real culprits. I don’t know if you were a LO two/three years ago, but all of us in the business saw first-hand what happened.

    The mortgage pools that the Wall Streeters and Big Banksters sold all over the world were SUB-PRIME and certain OPTION ARM loans, not fannie/freddie loans. These loans had NOTHING to do with fannie/freddie, nor with FHA, nor with any government guaranteed loans.

    The companies originating these loans for their Wall Street purchasers were New Horizon, First Franklin, Ameriquest, Countrywide, Wachovia, World, WaMu, Argent, and so on.

    Fannie and Freddie’s downfall came later, mainly due to corrupted investment policies, but NOT from their loans–until later, after the meltdown, when every lender began experiencing higher and higher foreclosure rates due to diminshed equity, loss of jobs and savings, and super-stringent new underwriting requirements.

    You say, “Don’t blame “wall street or the big banksters”, they ARE regulated and with very few exceptions Bankers are the honest hard working people America needs them to be.”

    Give me a break. The Dodd/Frank bill may deal severely with the little guys, LO’s and small mortgage companies, but it hardly touched the big guys. Their high-stakes gambling in highly leveraged investments and derivatives continues much as it did during Bush’s term where the SEC conveniently looked the other way.

    We taxpayers paid heartily to bail out Goldman Sachs and the other Wall Street firms, and B of A, Wells Fargo, Chase and CITI, and we reward them with an almost complete monopoly of the mortgage industry.

    Many say that they should be going to jail, but instead we reward them once again with huge profits and million dollar incomes.

    While the door on us originators is slammed shut, because, after all, the meltdown was OUR fault.

26. Oh, and John also states, “Shouldn’t the Borrower know not to apply for something they can’t afford, and when they fail to repay, shouldn’t they be penalized instead of coddled?”

    This is just more of the republican party line, and it overlooks, once again, the elephant in the room:

    Just maybe many borrowers found out that they couldn’t make their payments because they didn’t know that the Banksters’ greedy schemes were going to crash the economy, taking their jobs, savings, and equity. They didn’t know that they would not be able to refinance again because of their equity-loss, and because of new overly stringent underwriting standards.

    Yeah, that crash and its repercussions should have been part of their budget analysis. Right.

    It comes down to this: The Wall Streeters DESIGNED these risky loans, and then they APPROVED them through their proxies, the underwriters. They didn’t have to create and approve these loans. They knowlingly inflated the RE bubble, making billions along the way, and then they bought insurance with AIG, betting that the bubble would burst, and it did. They made billions more, because Paulson bailed out AIG.

    I get the feeling that you’re not interested in delving deeper into what actually happened, since you’re just parrotting the republican spin, but you can read up on what happened with ‘The Big Short’, ‘Griftopia’, and many other books.

27. So Jim, Do you think the bankers and Wall St (and by default the regulators and politicians) are going to let this happen again in our lifetime or will Dodd-Frank Wall St Reform put an end to it?

28. Hi Jillayne. Wall Street makes tons of money inflating bubbles, and then they make tons of money when they burst. This has been going on for years, but has become more severe of late.

    From what I’ve read the next bubble may be with gambling up currencies, commodities, and several other things. You might like to read ‘The Bubble Economy’, ‘Aftershock’, or ‘Winner Take All Politics’.

    It’s apparent that they’re done with real estate for a while.

29. Oh, but in regard to Dodd-Frank, the concensus (except among republicans who are told by the corporations and their bought-off politician shills that the true American way is to bow to the corporations) is that Dodd-Frank does not stop the high-stakes gambling sufficiently.

    Dodd, especially, was a corporate shill. Thank god he’s gone.

    But now we have Spencer Bachus, the repub taking over Barney’s job as financial overseer in the house, saying that his committe shouldn’t regulate Wall Street–but should SERVE Wall Street.

    What we have going on is a corporate oligarchy.

30. I would like to answer Jillayne’s question to another poster. She asked… “Do you think the bankers and Wall St (and by default the regulators and politicians) are going to let this happen again in our lifetime or will Dodd-Frank Wall St Reform put an end to it?”

    I am sad to say that I personally feel things like this will happen again. Reform has some positive influence but until the deterrent is stronger, meaning people go to jail, I doubt reform and regulations on their own will prevent things like this from happening again.

    Numerous times over the past few years I have tried to turn people in for blatant loan fraud in transactions that I refused to be a part of. Those involved were Realtors and loan officers, and in some cases the borrowers themselves. In one case the LO actually worked for a big box bank, where you don’t have to be licensed. NOTHING ever came of any of those cases because all regulatory agencies told me that they did not have the manpower or funding to investigate.

    One case in particular did go as far as the Arizona Association of Realtors who after they investigated the case and looked at the supporting material, actually said they believed loan fraud had taken place. It went no further than this because they did not have the legal authority to request financial records. In this case and others, the Department of Financial Institutions, the FBI, the AZ State Attorney General, all did not get involved because of manpower and budget issues. Only the AZ Association of Realtors got involved but they were only able to take it so far.

    If regulation can’t or will not be enforced, and the lawmakers are not willing to fund the budget needs of the regulatory agencies themselves, were doomed to repeat this again. Some of the additional regulation will help, but most from of what I have seen will have major unintended consequences instead of resolving this once and for all.

31. Look anytime the government gets their hands on this business, it is never good for the broker, because the banks want us out!

    New govt. forms to take care of the wolves (Brokers) do more to confuse the client then clerify. Can you say TIL. my closing attorney used to call it the untruth in lending.

    By the way, who the hell is Barney Fife and Chris Dodd to write anything even remotley considered ethical.I have been in this business since 1982 and was always very considerate of my customers; otherwise we would all go broke, as we would never get return business.Bad news travels fast.

    The banks don’t care if you come back, the have their boiler rooms full of talking heads selling their wares.The majority of Brokers are good , honest, hard working people, who have their clients best interest in mind, otherwise they would be out of business.

    As for this article cheerleading the reduction in our income, would the author take a pay cut if the Fed’s required it because they don’t like what or how she writes.Why is it every time you want to help the consumer, you do it by killing the other guy.

    I find it ironic that Dodd gets a sweatheart deal from Countrywide then proceeds to slam Brokers. It’s called Govt. slight of hand, don’t look here look over there. I realy don’t care that he got a good deal,but don’t come back with a self rightous attiude about how you are going to save the public by slamming brokers, which is smoke for proecting the banks.

    I don’t know who penned this article, but you are woefully ill-informed.People don’t stay in this business for years by being loan sharks.There was a time when you could make money and use the YSP to help the client pay for their closing cost, but who wins now, NEITHER. Just saying!

32. Jillayne Schlicke is simply another socialist central planner. These losers always use the brute force of government to feather their nest; they can’t compete in a free market. It’s a downhill spiral for the American people and our economy as long as these central planners are in power. Did you ever wonder why they haven’t attacked realtor compensation yet? The big banks don’t have realtors in their structure, yet. It’s only a matter of time; after all you can make 6% on a real estate transaction and not have a college degree. That makes Jillayane really mad.

33. obviously you have never originated a loan in your life.. some loans are easy to originate while some are very time consuming and difficult thus validating a higher fee for services rendered.

34. one last thing. You speak about what a loan officer deserves in compensation based on the amount of time and effort put into a loan . What about the countless hours put into prospects that go no where . This is 90% of the typical Lo’s day. Do those hours just not count for anything? When a drug company sells a medication for $200 do you think thats the cost of production ? No its the cost of all the other failed drug trials and research to come out with the product.

    Take the blinders off and stop saying that no one should be compared to loan originators. In your world there will be 5 lenders in control of all aspects of the loan from credit to appraisal to rate to closing costs . This will really help the consumer .. I just had have a client pay anther 400 for an appraisal because we changed the bank. Its a perfect HVCC appraisal but yet the new bank requires there HVCC.Theres something that really helped the borrower.

35. Hi david,

    I’ve been teaching these last few days so there was no time for much else. Regarding LOs who do lots of work with no compensation, I AGREE WITH YOU!

    Why should borrowers be able to talk with loan originators and get all kinds of free advice, help on improving their credit, education on mortgage lending, etc., and loan originators are not allowed to earn a fee for providing those services?

    This is unfair to loan originators and also to consumers.

    Consumers who DO obtain a loan are paying for that “free” advice in the form of their loan origination fee!

    I don’t want to pay a loan originator to help other people for free.

    The way things are set right now, compensation is earned when a loan is made. I firmly believe LOs should be allowed to earn a fee from consumers for all the help they’re now doing for free.

    We’re not there yet. Someday. LOs need to be able to create a system of industry ethical guidance and oversight first, before regulators will take us seriously because a fee-for-service model can easily be abused by LOs.

36. Hi Alessandro. My background includes processing, underwriting, origination, compliance, loan servicing and education in the mortgage lending industry.

37. Hi Mr. Max. I was in grad school with people who were so far left-leaning it was frightening. No, I’m not a socialist and didn’t even vote for Obama. As a small business owner who studied Friedman, I’m definitely a capitalist.

    Regarding Realtor compensation, the average compensation nationwide is 2.5 percent per agent. The 6 percent model is typically split between two agents.

38. 2.5 PER AGENT ON EACH SIDE TOTALING 5%. NO REALTOR IS DOING A DEAL FOR 1.25% . THEY WONT EVEN SHOW THE HOUSE . YOU KNOW IT AND I KNOW IT .

39. Hi phil,

    I agree with you on the topic of government regulation. The mortgage industry is being over-regulated right now because the industry itself was not able to rein in the greed factor. Blame whoever you want regarding the meltdown, but the industry did this to itself. There was a great article written recently by Bill Black (former bank regulator) about bank accounting “control” fraud. I think you might like it. He’s saying basically that the banks made bad lending decisions because they knew they could get away with it. And what happens? Sh*t rolls downhill and lands in the laps of LOs.

40. Have been in this industry for over 35 year anything the government can come up with a capitalist can figure out how to make it work them. Simply put… the One or two person broker shop will survive. The larger shops will have to hire on volume alone. So the part-timers are out and the serious folks that see this as a long term CAREER and not simply a pay day will do beautifully. Service sells.

41. Certainly, there were issues within the mortgage industry. I don’t think anyone would deny that.

    But the central issue was that due to forces on the secondary market, lenders could pay more, by way of YSP, for certain loan types, i.e. Neg Am, which of course incentivized some LO’s to place borrowers into certain ‘risky’ loan products when it wasn’t in the best interest of the borrower. that was clearly bad.

    Having said that, if a borrower thinks the quoted rate and fees are too high, the borrower should walk down the street to another big bank, broker, credit union, quicken loans, or check out this new invention called the internet.

    I charge 1 point on most loans. Do I feel bad for a borrower who pays more? I do. Even more so when I lost out on the business.

    But the reality is that an originator’s primary obligation is to place the borrower into an appropriate loan product, not provide the lowest rate/fees. Some originators or lenders will, some won’t. did these clients just fall off the turnip truck? have they never purchased any other service or product in their life they don’t know to get a few quotes?

    At any rate, compeition keeps prices/rates down, not the government. If the borrower doesn’t like the rate/fees quoted, they aren’t handcuffed to that lender. They can go to another lenders and should! When you get your bathroom remodeled, if you get just one quote and go with it, can you complain later that it’s too much? (you could complain later if the contractor didn’t build to code or sue if the contractor used inferior materials, but a just would laugh at you, assuming the quote and the final fee were the same)

    At any rate, see our proposed solutions in #6 below, along with some of the other relevant issues to be aware of.

    ISSUE 1 of 8: THE FED VERSUS THE CONSUMER FINANCE PROTECTION BUREAU (CFPB)

    There is a turf battle going on in D.C. It’s the Fed versus the new CFPB. In a nutshell, the Fed is LOSING its authority and oversight of mortgages and is not happy about it. The Fed had their authority revoked because the mortgage meltdown happened under their watch. So in July of 2011, the CFPB will have oversight of issues related to mortgages. The Fed wanted to keep authority, which explains why it is making a lot of what appear to be irrational rulings as of late. It’s odd why the Fed would be making all of these ‘last minute’ rulings considering they won’t even have oversight in a few months. (The word on the street is they are doing it to annoy the CFPB who will have to deal with and perhaps modify any Fed rulings. )

    We kindly ask that the mortgage industry not suffer because of a turf battle between 2 governmental agencies. At minimum, we ask that the Fed’s 4/1/2011 effective date be pushed back until the new CFPB issues its rules.

    ISSUE 2 OF 8: PLEASE COORDINATE YOUR EFFORTS

    We are urging the Fed, Congress and the White House via the new ‘Consumer Finance Protection Bureau’ (CFPB) to get on the same page. As it stands, the Fed is set to implement new LO compensation regulations on 4/1/2011. Then in late 2011, Congress is likely to start enforcing the mortgage piece of Dodd-Frank, which may be different. Then, even more regulations would be expected in 2012 when the new CFPB is likely to come out with additional or new disclosures, possibly with further conflicting regulations or disclosures.

    Are 3 rounds of potentially conflicting regulations productive for anyone, including the consumer? (Technically, 5 rounds, if you count the 2010 GFE which was botched and made even more confusing, and then HVCC, which later had to be repealed and replaced).

    Here’s an idea: Let’s set a goal of coming out with one coordinated round of updates for the consumer, broker, lenders and governments’ benefit.

    ISSUE 3 of 8: TESTING & IMPACT

    We also need to remind these entities that these new regulations, many of which are well-intentioned, could actually have some unforeseen consequences, potentially NOT great for the consumer.

    Ok, yes, we’re in the industry so we’re biased perhaps, so let’s remove the bias. Has there been an independent ‘impact study’ so see what the short-term and long-term impacts will be on the consumer, broker and lender? If so, we’d like to see the results of the study. (As a side note, had an impact study been done BEFORE implementing HVCC appraisal rules two years ago, which had to get repealed and replaced because it was rushed through, it would have saved everyone, including the government, time money, and a lot of aggravation, including consumers who had out-of-the-area mis-appraising their properties which result in not being able to get loans, or delaying ability to get loans.)

    ?
    ISSUE 4 of 8: COMPLIANCE AND COMPETITION CAN PEACEFULLY CO-EXIST
    As an industry, we of course want the consumer to be protected from irresponsible lending practices. (We know, we know… there were some issues over the last few years. See our suggestion alternative solution in #5 below) . We too want to solve those issues. But what we don’t want is so much protection/regulation that it impedes normal business, eliminating flexibility and choice for the consumer, the broker and the lender.

    Think of a cyclist who wears a helmet. The cyclist wants the helmet to be strong and protective, but it also must be relatively light, offer good peripheral vision, and allow freedom of movement to see obstacles, etc. Could it be stronger and more protective if it were a lot bigger and bulkier? Of course it would. But make it too big, bulky and heavy, and it would cut down on riders’ visibility, peripheral vision, ease of movement, actually causing accidents. So yes, too much protection can actually cause more problems than it solves.

    It’s clear that banks, brokers, and other lending entities obligation is to place the borrower into the right loan for that borrower. We support regulations should ensure that. It’s also clear that didn’t happen all the time over the last few years and we offer some solutions to that below in #5.

    Having said that, like other professions, there is NO obligation for a bank, broker or credit union, or other lending entity to provide the borrower with the lowest rate or fees. You offer a quote on the federally mandated GFE and the client can take it or leave it. Having said that, it just so happens that brokers generally beat out banks on rate and pricing. See the attached WSJ article.

    Some examples:

    Is a dentist obligated to fill a cavity safely and appropriately according to ADA approved procedures? Absolutely. Are they obligated to have the lowest price. Of course not. Is an attorney obligated to provide the best legal advice to his ability according the oath all attorneys take before being able to practice law? Of course. Are they obligated to have the lowest price? Of course not, some charge $500/hr some $100/hr. The point is that you can take care of a client, offer the best service and advice, but also charge higher fees at the same time. Each professional sets their own fees and it’s the consumers decision whether to use that professional.

    If a bank’s or broker’s fees are too high, the consumer will likely go with another bank or broker. Or maybe not. Maybe the consumer is ok paying more for better advice, service, etc. That’s up to the consumer, not the Fed to decide.

    ISSUE 5 of 8: ONE EXAMPLE

    Let’s look at just one example of an issue that is created by the Fed’s rules.
    Let’s say there’s a mortgage brokerage called ABC Mortgage and Mark is a loan officer who works for ABC Mortgage. ABC Mortgage Brokers has 3 wholesale lenders with whom they submit most of their loans to: Wells Fargo Wholesale, Citi Wholesale, and Flagstar Wholesale. Under the lender’s interpretation of the Fed’s rule, if compensation is going to be ‘lender-paid’ (which it is most of the time), ABC Mortgage would now be required to sign ‘static’ pre?determined compensation agreements with each lender. So ABC Mortgage’s agreements might look like this:

    1) Wells Fargo 1 pt compensation*
    2) Citi 2 pt compensation
    3) Flagstar 3 pt compensation**

    * 1 pt is 1% of the loan amount. So on a $100,000 loan, 1 pt is $1000
    **3 points sounds like a lot, but smaller loan amounts 3 points would be considered fair compensation.

    Let’s say loan officer Mark is doing a loan for you. Mark generally charges each client 1.0 pt origination. That. You’ll recall from above that Mark’s company‘s ‘static’ compensation agreement was 1 pt with Wells Fargo. Since Mark charges 1 pt and that’s the fee you think is fair, this means that Mark must try to place your loan with Wells Fargo. But what if Wells Fargo doesn’t have the right/best program for the consumer? Mark would then have to look at his 2 other options, Citi and Flagstar. But if he takes you to Citi, he is now required to charge 2 pt origination, per the ‘static’ agreement.which means a higher interest rate for the consumer. Are you going to want to pay more and is that in your best interest as a consumer? No and no. This is clear and unrefutable evident that although designed to ‘protect’ the consumer, you see how these rules have an unintended consequence ultimately hurting the consumer. This is just one example.

    ISSUE 6 of 8: ALTERNATIVE SOLUTION –HIGH RISK LOANS
    Ok, so let’s get down to the crux of the issue and some solutions that make sense. The fundamental issue a few years ago was, due to demand on secondary market, lenders were paying a higher compensation to loan officers (in the form of YSP) on loans that could be described as ‘high risk loans’, i.e. Neg Am. Therefore originators were monetarily incentivized to place borrowers in certainly loan programs, some programs which were in fact higher risk or more complicated products. Clearly, this was not good and needs to be corrected.

    The solution is straightforward.

    In order to prevent this practice, the Fed/Congress can simply establish a category of ‘high risk’ loans. (NegAm would be considered a ‘high risk’ loan). Then the Fed simply prohibits lenders from paying higher YSP to the loan officer on any ‘high risk’ loan. Therefore, you’ll never have a loan officer monetarily incentivized to place a consumer into riskier loans.

    It’s an elegantly simple solution that will protect the consumer, still maintain a healthy sense of competition in our industry, and as an added benefit, will avoid the confusion, cost, and administration for lenders and brokers that is associated with implementation of the proposed changes by the Fed, the subsequent changes in Dodd-Frank later in 2011, and possible further changes by the new ‘Consumer Finance Protection Agency’.

    ISSUE 7 of 8: HOURLY/SALARY
    In the latest development in Feb 2011, the Fed appears to be saying if compensation is ‘borrower-paid’, the LO must be on hourly or salary. Both brokers AND consumers need the ability to do structure the loan as either a) borrower paid or b) lender paid compensation. By not having that flexibility, options are limited. And since an LO can NOT switch between hourly/salary (for borrower-paid transactions) and commission (for lender-paid), the Fed is basically forcing originators to be hourly/salary. Most mortgage brokerages, like most real estate brokerages, i.e. Century 21, Coldwell Banker, etc operate on commission, not hourly/salary. Can you imagine if Century 21 had to put all their agents on hourly/salary? Century 21 would end up firing 80% of their agent, if not more. The same thing would happen in the mortgage brokerage world. Do we really want to create MORE unemployment now as we’re trying to recover from a recession?

    Putting an LO on hourly or salary is NOT addressing the issue. LO’s have been on commissions for years with few, if any problems. The issue that cropped up just in past couple of years that we are trying to solve is prohibiting lenders from monetarily incentivizing loan officers to place borrowers in what may be ‘riskier’ loan products. Therefore to solve the problem, as mentioned above in#5, the Fed can simply create a category of ‘high risk’ loans and those loans cannot come with a premium to the LO. Simple.
    ISSUE 8 of 8: COMPETITION, OR LACK THEREOF
    If mortgage brokerages were in fact forced to go hourly/salary, brokerages could very well close leaving many loan officers to take jobs with one of the big Banks, i.e. BofA, Chase, or Wells. This means the big banks will grow even larger ( ‘too big to fail’?) and obtain even MORE of the market share. With more business going to fewer banks, the result is likely less competition and higher rates and costs for consumers. (And with Fannie and Freddie likely being phased out, costs are already expected to rise) And by the way, brokers on the average give BETTER rates and pricing to consumers. See Wall Street Journal article, “Mortgages: How to Pay Less”, 8/14/2010 by Jessica Silver-Greenberg. See attached

42. TO: HGP2 – well said! I couldn’t agree more. I’ve been in the mortgage business since 1985. Been a Mortgage Broker in the State of California since 1996. Amazing changes! But I’ve never made 3% compensation on every deal. I’ve been playing by the rules since January 2010 and only negotiating my compensation with the borrower. ALL YSP has been given to every borrower in every transaction since January 2010. We are over-regulated, but we still serve a great purpose….the client!!! Everyone needs to get over this and move on.

43. Welcome to my ice cream store. Thanks to govt. overreach and unconstitutional meddling, we can now only offer you vanilla, french vanilla and vanilla bean. Don’t bother going to another ice cream store, it will only offer these same flavors as well. Oh, and remember when I used to throw in extra toppings or, if the service was slower than usual, buy the toppings for you? Well, sorry, I can no longer do that either thanks to the same govt. restrictions/regulations. Oh well, look on the bright side – at least your choice of ice cream isn’t the most important decision you have to make today (or perhaps in your lifetime).

44. My prediction: Within around 2 years time, all LO’s will work for the big banks; BoA, Citi, Wells, etc. Then by around 2015, the job of mortgage origination will be handed to the Federal government. When that happens it will make today’s loan process seem like a walk in the park!

    The only ones to benefit from this will be the huge banking monopolies that already effectively control Washington. Oh…& our elected officials…who will pass all of this legislation on the backs of the American people but will have their own “private” system to originate their own mortgages. Welcome to the United Socialist States of Amerika!!

45. Hey there. Just a couple quick things to point out that may be of interest to anyone reading your blog. First, in all of the shops I have ever heard of (Bank or otherwise) the junk fees aren’t paid to Loan Officers – we don’t get a portion of the undewriting fee or processing fee, tax service fee, flood fee etc. Typically these fees are charged by the actual Bank or Mortgage Company or Brokerage. The idea that Loan Officers are receiving compensation from Line 1 AND from these fees is incorrect.

    It is correct; however, to point out that as of April 1 there is no YSP or SRP that is paid to the Loan Officer. What I think that many are failing to realize is that these profits for interest rates will still be made – they just won’t be made by individuals. They will now be made by large corporations and/or by Mortgage Companies and Brokerages. The idea that consumers will get better rates and fees may be wishful thinking. I am a bit cynical when it comes to these types of things. More than likely, the Banks will just make more, the Loan Officer will make less and the consumer will get (more or less) the same type of terms they would have been offered previously. At the same time, you won’t have Loan Officers having an incentive to offer terms that are better or worse for the consumer and overall that is a good thing (in a lowest common denominator kind of way)

    I think the thing that everyone needs to realize is that like all legislation, these new rules will have both good and bad consequences. What is really happening (to greatly simplify everything) is that the Loan Officer has lost all control over pricing. This will be both bad and good for the Loan Officer and for consumers. With ownership and/or Banks in control of pricing, rate sheets will already reflect the profit that the Banks and/or owners wish to make. On the one hand, the Loan Officer will be paid a minimum amount per deal. They can’t make more. This can be looked at as a positive for consumers. However, the Loan Officer also can’t make less than the minimum and this will take away our ability to help consumers because we can’t make less than the minimum amount per transaction. I’m sure that last sentence will be glossed over, but imagine all the transactions that Loan Officers have given a portion of their commission on to help facilitate a purchase or refinance. Those days are gone. The Loan Officer can still give a portion of funds to the transaction but they will HAVE to raise the rate and change the terms of the transaction to do so.

    To Brian (a few comments above mine). Unless you are the actual Broker/Owner of your shop, you won’t be able to change your compensation based on which wholesale lender you place your loan with. The Broker/Owner will be the one that establishes how much per loan you will make. I believe this is going to be one of the real issues with the new rules. At the same time, like all recent rules and regulations, there will be a lot of different interpretations of how to implement these changes. The issue in this case is if you choose incorrectly, you may be on the hook for up to 3 times the amount of compensation you were paid if you were paid based on an illegal comp plan. My advice: make absolutely sure that the compensation plan your company is putting together complies with the rules.

    In the new post April world we are going to see two different versions of Loan Officers – those that can generate their own business and those that can’t. The ability to bring business in to a company is a unique ability and there is a premium associated with that ability. This is why you are going to see Banks paying less to their Loan Officers and independent companies paying more. The Bank knows that they will be able to generate their own customers based on existing bank accounts and relationships. They also realize that they can pay their originators less because of the ability of the Bank to supply leads. Loan Officers that can generate their own business won’t work for Banks. And herein is one of the biggest consequences of the new law – there will be a drain of talent away from large institutions to smaller companies that pay more money. Consumers will ultimately suffer if this indeed turns out how I think it will. It’s not just the rate and the terms that make a transaction a good transaction – it’s also how well the Loan Officer understands current guidelines and how much experience and knowledge they have.

    Mortgage companies are going to have three things to consider: how competitive they need to be to keep consumers happy, how much they need to compensate their Loan Officers to keep their sales staff happy and how much profit they ultimately need to make to keep the doors open.

    There will be more attrition as a result of the new regulations and more than ever we will be in a market where the strong are the ones that survive. In Oregon we have gone from approximately 14,000 licensed originators to roughly 3,000. These are not exact numbers but this trend is going to continue.

    Ultimately Loan Officers will seek out companies and plans that are most favorable to them. In most cases this won’t be large Banks.

    Using history as a guide, my parting comment is that rules and regulations were never the problem. The problem has always been the enforcement of these rules and regulations. Let’s hope that there will be actual enforcement this time. Those of us that play by the rules are hurt by competitors that don’t.

46. Hi, I didn’t get a chance to read every post on here but I wanted to point out that the Loan Officer compensation changes due “in the Spring of 2011? are not from the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is Reg Z of TILA from the FRB.
    It has very similar rules but the FRB desired to get it’s foot in the door first and hold onto that footing.
    By now, we know that the Dodd-Frank Act is having trouble being funded so who knows if/how it will pan out.
    “The LO was charging .50% loan origination fee and $1800 dollars in junk fees: processing fee, underwriting fee, administration fee,”
    Since your cousin was using a non-depository lender there would be hidden SRP which is not transparent and making that statement more true then not. If this were a brokered deal I would have to disagree with some of your “junk fees” and the .50 loan origination fee would be quite generous. Normal broker origination fees average about 1-1/2%.
    Broker processing fees are typically nominal for the hell processors go through sometimes and for no pay if the deal doesn’t close. Underwriter fees the same thing. They are not income to the broker but to the wholesale lender for their underwriting work. If the broker is working as a net branch or for a large broker house, the price the broker pays to originate loans with the house will generaly go into an admin fee that again the broker does not collect. Just wanted to make the distinction between real and junk fees. Also all originator and lender fees are already fully disclosed on line 1 of the GFE.
    “After LO compensation limits of Wall Street Reform go into effect, all this LO compensation will be forced onto line 1 of the GFE, hopefully giving my cousin and other consumers the ability to shop for the lowest rates and lowest cost loan.”
    Well again, it’s TILA Reg Z regulated by the FRB. And it was Reg X, RESPA under HUD that gave us line 1 of the GFE in Spring of 2010.
    That happened a year ago and all broker and lender fees are already in line 1. Credits to the customer, generally YSP, are shown in line 2 already. It is now very transparent.
    “For consumers reading this blog post, it is important to understand…”
    I agree. They need to understand they they have full transparency now with GFE-2010, and the FRB is changing that around. Here is how:
    The FRB has retructured loan officer compensation basically putting the RESPA rule aside. Brokers may now get paid in two different ways: directly from the consumer,which fee may be negotiated, or by YSP from the creditor which must be at an agreed upon rate cemented with a contract. That rate may be reviewed and adjusted periodically. Some banks like Wells Fargo are making originators stick to the same fee for either compensation option.
    The important thing is that the two may not be mixed unless the YSP is going to third party non-recurring closing costs.
    “This last bullet point eliminates yield spread premium income from LOs who work under a mortgage broker AND ALSO eliminates “overage” income from LOs who work for a retail bank as well as LOs who work for a non-depository lender. This will force all LO compensation onto line 1 of the Good Faith Estimate.”
    As I mentioned, yield spread premium will not be eliminated and will now become a viable choice on how an originator may be paid. Mortgage bankers will still receive overages, or SRP. They are soliciting brokers like crazy using that as a come-along. The Good Faith Estimate…gosh, who knows at this date. It’s crazy but the Paperwork Reduction Act (another finger in the pie) is attempting to regulate HUD and the FRB to consolidate their RESPA and TILA forms. So the now trasparent GFE may change. Basically the customer is better off now.
    It is extremely hard to keep up with the Fed’s rule on all of this as it is in a very fluid state with few updates, very little clarification and a lot of interpretation. I will be in a teleconference with the Feds soon and look forward to their answers to a lot of our questions. I am attaching a couple of links for your review.
    http://edocket.access.gpo.gov/2010/pdf/2010-22161.pdf
    http://www.federalreserve.gov/bankinforeg/regzcg.htm
    http://www.bankersonline.com/regs/226/suppi226-36.html#top
    Thank you!

47. I think everyone needs to originate their own loan, see how easy it is. see how it feels to have these starving realtors breathing down your back. Have hundreds of people that cant qualify calling you all day and night- weekends too.

48. Hi Jillayne and all,

    Hmmm, I just found your article today and read that as well as many(not all) of the posts here.

    I am a licensed broker in CA and have been in both the real estate industry and mortgage industry for well over 20 years.

    Jillayne, you made some good points and laid out many of the basics of how business is done but when it came to things like admin fees and YSP’s not being disclosed properly or at all you seemed to imply certain activities were far more common than in reality accross the board.

    May I ask since when are loan processing fees and underwriting fees junk fees? These are services that are performed on every loan. I’m not familiar with any loan that can fund without them? I don’t care for admin fees but these other fees are for services that are not in any way junk.

    The admin fee (something I’ve never really liked) I know some Companies use this fee to charge a little something extra but this is not a fee that goes to an LO no matter if they are a Broker or Banker except if vary rare occasions. Often times the LO pays it to the company out of what they make on behalf of the borrower but it doesn’t go to the LO. I do know there was some LO’s that used this to make some extra which is not good but that was very rare and I’ve reviewed thousands of loans as part of a case study.

    If you weren’t implying processing and underwriting were junk fees then my bad :-).

    At least in Ca. we have been required to fully disclose all YSP for well over a decade. This was not required to be disclosed on the GFE but had alwasy been requied to be disclosed prior to signing loan documents and should have always been disclosed on the Estimated Closing statement after the borrower had made their final decision on what rate and fee they were choosing.

    Quite frankly the GFE we got in 2010 is a joke as it doesn’t even require a borrowers signature! How brilliant is that? Great job of regulation. LOL

    Lets face it. While many people in the mortgage, escrow, title, banking and in particular the real estate brokerage industry did many things that in some way contributed to the foreclosure market what we have seen it is the broker/lender that has been scape goated!

    If you want to protect borrowers and home buyers I’ll list some things I tend to believe you would agree with:

    1) Mortgage bankers must be required to fully disclose all fees earned to the borrower on a loan regardless of how it is earned or paid to. That would include any fee made on a loan from it’s own banking line that the company and or LO make dispite the loan being priced at par.

    * There is a cute trick some Mortgage Banking Companies started using last year of pricing a loan at par on their pricing systems but par actually means a full 1 point rebate! Not disclosed to the borrower.

    2) Get rid of this notion the broker can’t recieve a YSP and charge a borrower a point or fraction of a point because that limits the borrower so they can not get a loan at a 1/2 point cost since no YSP is allowed to pay the other 1/2 point as an example. The same goes for other fractions. If you want to limit what someone can make there are other ways.

    3) Outlaw Real Estate Brokerages from having in house lenders. That is clearly steering and there is no way around it. There should be no ownership of a mortgage banking or brokerage by a real estate firm.

    4) Outlaw the Controlled Business Agreements between lenders and Real Estat firms. Just because the real estate broker gets their NMLS license should not allow the relationship.

    5) Outlaw Developers from having their own inhouse lenders and from steering borrowers to any particular lender and especially outlaw a developer from offering an incentive to use an inhouse service!

    *This was one of the largest scams around where the Developer doubled dipped and real estate firms doubled and they were strong arming buyers/borrowers to use services in a non competitive manner.

    * Developers/Builders would offer a $5,000 or even $10,000 credit to a borrower if and only if you used their inhouse lender! Shouldn’t a credit be a credit and allow the borrower to shop for their own lender?

    6) Regulate the fees an escrow company can charge. Ever wonder what a loan tie in fee is? What a funding fee is? Talk about junk fees!
    * Also make it a requirement for escrow companies to fully disclose why they can charge more for the escrow of a $500,000 home sale than for a $250,000 home sale escrow.

    6a) Outlaw Real Estate and Mortgage companies from owning their own escrow companies. This is a total rip off of the consumer where they influence the consumer to use their inhouse service.

    *Kind of makes you laugh when you find out because then you wonder what the heck the escrow fee was for?

    * In non escrow states the attorneys really piled it on and they haven’t caught any flack for it?

    7)Examine/ audit regularly the practices of each actual bank of how they allow a property to be appraised when a loan is done retail vs. what is required when a loan is done wholesale.

    * In California Wells Fargo retail and then Washington Mutual retail were infamous for their retail loan officers flat out telling consumers they could get a property appraised for a higher price and they did!

    8) Make all banks fully disclose in writing what quote” relationship banking benefits” are to a borrower. In other words exactly what it means to each borrower in dollars and cents rather than simply allowing them to use the inuendo of a term. If they had to do that borrowers would laugh at them. LOL

    9) Start regulating the real estate agents and brokers more heavily. I know the National Association for Realtors is a huge lobby but these are the most incompetant and least knowledgable licensed people in the bunch.

    10) Regulate the banks from allowing favored realtors from being awarded (yes awarded) such large inventories of foreclosure listings. Why is it that the same real estate agents are handling larger and larger inventories while other agents are locked out from the REO inventories to represent these?

    Can you really think of a good reason with thousands of real estate agents in areas like Los Angeles ,San Francisco, San Diego as Ca examples that any agent should be awarded more than 1 or 2 listings from a bank at once? Measure the graft there!

    11) Prevent real estate agents and banks from short window marketing where you must get your offer in by 3 days or 5 days after the listing hit the market or from selling any bank owned property inhouse prior to full market exposure. This scam is big in the Los Angeles and San Diego areas. How fair is that to the public or in reality the bank? Yet the banks go along with it because they have “a relationship with the realtor”.

    The list goes on but 11 is as far as I’m going!

49. Hi James,

    Wow! A lot to digest here. First of all, you’re right. Processing and underwriting fees are not junk fees if there was actual work performed. A junk fee would be a fee that’s charged to the borrower where no work was performed and these fees would definitely be subject to challenge.

    You are making some extremely good points and I very much appreciate your bringing IDEAS to the table instead of just attacking my position. Thank you.

    I agree that RESPA reform is way past due as it relates to affiliated business arrangements. There are way too many kickbacks going on disguised as affiliated business arrangements. Maybe after Elizabeth Warren is all settled in at the new Consumer Financial Protection Bureau and we have Dodd-Frank Rulemaking behind us, she can start attacking these sham affiliated business arrangements. That’s something I can get behind.

50. Hi again Jillayne,

    Thought I would get back after attending the Federal Reserve Webinar as well as a couple of webinars put on by wholesale lenders on the current reforms due to roll out April 1st.

    * The Fed sure picked a great date for the roll out of this law! April Fools Day for a law that should be called Consumer Fools Day!

    If you or any of us are actually concerned about consumer protections and full and proper disclosure then I’m going to point out concerns about this rule/law and how it can affect the copetitive loan pricing for the consumer and problems for lenders.

    This rule/law does not apply equally to all lenders!

    In the wisdom or ignorance of those that wrote this law on lender compensation they chose to exclude loans that are sold under the name of a company that funds on their own banking line as long as they meet certain requirements such as having a 5% reserve of the amount funded. * This was info stated in a question and answer session and I’m not quoting off of written material yet.

    There are no specific requirement for Mortgage Bankers to even service the loan for a given period of time so they can just do what they have been doing all along which is sell an actual Chase wholesale price loan to a consumer under their Company Name using a credit line and then sell the loan to Chase off their line in a 30 day window (or any period of time) to open up that line and the Mortgage Banker does not have to abide by the same Lender Compensation Rules that the Mortgage Broker does!

    The lender compensation rule limits lenders affected from being able to offer a borrower a rate that is paid in part by the lender and in part by the borrower. So no 1/2 point origination fee cost interest rates or 1/4 point origination fee options etc.

    Question #1- How is this protection much less equal protection for the consumer? Why should the consumer not be allowed that choice?

    Question #2- How is any of this Lender Compensation Law actually any benefit at all for a consumer??

    This law actually limits options for borrowers.

    The Fed has actually acknowledged that with law creates a conflit between RESPA and TILA and their official statement is that they are O.K. with that! LOL

    Jillayne and others,

    This law is a problem for borrowers as well as lenders.

    It is very important that even though late in the process we need to make sure that the public as well as Mortgage Brokers get a voice about this.

    The result of the new law is going to be a detriment to the consumer with less choices of where to go to compare a mortgage offer as well as less overall choices.

    Think of this like OPEC choking off the supply of oil so they can drive the price up. In the end it is the consumer that pays.

    *People/the public may not realize the issues with this until later down the road but the time to become aware and raise a voice is now.

    **If Elizabeth Warren is going to be worth anything at all and not just worthless lip service this will be the first thing she will address and cut thru the bull. Not holding my breath.

    * Would it not make sense that what ever the requirments are for Lenders that “All” lending that is tied in any way to institutional lending for owner occupied 1-4 unit properties is treated exactly the same.

    Jillayne, what do you think about this?

    This law of lender compensation actaully prevents a Mortgage Broker from giving the borrower a lower cost than they are contractually obligated to with each Bank during each contract period. If you are contracted for 1% rebate pricing, etc. that is all you can offer the consumer/borrower through that lending source/bank! No flexiblility to offer the borrower a lower rate there.

    Given that this law does not require a Mortgage Banker to fully disclose upfront to the consumer all money paid to them in connection with a particular loan.

    Keep in mind that a Mortgage Banking Company is not in any way like a bank but use the term of “Banker” because they fund a loan in their own name and use funds from a credit line to do so. There is no servicing requirement or portfolio requirement even.

    Does this smell like a legit deal for the consumer?

    Keep in mind that the biggest violations of ethics were from the unlicensed loan reps that worked for Mortgage Bankers. YSP was hidden etc. The Mortgage Broker could not hide YSP for over a decade!

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