DID THE FEDERAL RESERVE BOARD JUST QUIETLY ELIMINATE MORTGAGE BROKERAGE FIRMS EFFECTIVE APRIL 1, 2011?
The Federal Reserve Board's new final rules amending Regulation Z appear to have major implications on the real estate industry effective April 1, 2011 if the final rule isn't amended quickly. The new Fed Rule slipped in language that re-defines mortgage brokerage firms into the classification of "loan originators." Currently mortgage brokerage firms can collect an origination fee, in-direct compensation (i.e. Yield Spread Premium), and processing fees. However the re-classification of a mortgage brokerage firm into the "loan originator" classification means that mortgage brokerage firms starting on April 1, 2011 are now prohibited from collecting both origination fee and in-direction compensation in the same transaction. The mortgage brokerage firms will only be allowed to collect processing fees and either an origination fee or in-direct compensation not both.
Creditors (i.e. lenders who fund loans in their own name) can still receive an origination fee, in-direct compensation (YSP or SRP), underwriting fees, processing fees, document prep fees, and funding fees.
So what is the issue? If you look at the operating costs for a Creditor the costs typically involve office space/rent, support staff, insurance, federal & state taxes, loan originator compensation, technology, telephone & communications and advertising. The operating costs for a mortgage brokerage firm include the same but add in National Mortgage Licensing System (NMLS) fees and continuing education expenses per the SAFE Act.
What the Fed has done effectively is significantly reduced the income that mortgage brokerage firms can receive while at the same time they will continue to have the same operating costs to manage to keep their operations in business. The 70,000 plus mortgage brokerage firms across the United States won't be able to compete against banks who fund loans in their own name because they won't be able to bring in enough operating capital to keep their operations afloat.
The new Fed rule will have an impact on credit unions, small bank, and mortgage brokerages across the United States who have typically third party originated (TPO) their loans. It will have an impact on TPO warehouse lines who relied on the TPO business model and on state bond loan programs who have traditionally relied on mortgage brokerage firms, credit unions, and small banks to market their bond loan programs to consumers.
One question that we have is has the Federal Reserve Board overstepped its authority in re-classifying a mortgage brokerage firm as a "loan originator" when the Secure and Fair Enforcement Act for Mortgage Licensing Act clearly defines what a mortgage brokerage firm and loan originator both are. It should be interesting to see if the Federal Reserve Board is sued over this new re-classification..
At issue is language that was buried on the bottom of page 34 and on page 35 with regards to loan compensation.
"Furthermore, the definition of "loan originator" in Sec. 226.36(a)(1) is consistent with new TILA Section 103(cc)(2), as enacted in Section 1401 of the Reform Act, which defines "mortgage originator" to include employees of a creditor, individual brokers and mortgage brokerage firms, including entities that close loans in their own names that are table funded by a third party. Consistent with Section 1401 of the Reform Act, the Board does not purport to address transactions that occur between creditors and secondary market purchasers, to which consumers are not a direct party, and appropriately does not extend the rule to compensation earned by entities on those transactions.
Existing Section 226.36(a) defining mortgage broker is revised and re-designated as new Section 226.36(a)(2). Comments 36(a)-1 and -2 regarding the meaning of loan originator and mortgage broker, respectively are adopted substantially as proposed. However, comment 36(a)-1 regarding the meaning of loan originator is amended to clarify when table funding occurs. For example, a table funded transaction does not occur if a creditor provides the funds for the transaction at consummation out of its own resources, such as by drawing on a bona fide warehouse line of credit, or out of its deposits. In addition, comment 36(a)-1 is also amended to clarify that the definition of "loan originator" does not apply to a loan servicer when the servicer modifies an existing loan on behalf of the current owner of the loan. This final rule only applies to extensions of consumer credit and does not apply if a modification of an existing obligation's terms does not constitute a refinancing under Section 226.20(a).
Under existing Section 226.2(a)(17)(i)(B), a person to whom the obligation is initially payable on its face generally is a "creditor." However, as noted the definition of "loan originator" in Section 226.36(a)(1) provides that if a creditor closes a loan transaction in its own name using table funding by a third party, that creditor is also deemed a "loan originator" for purposes of Section 226.36. Thus, new comment 36(a)-3 clarifies that for purposes of Section 226.36(d) and (e), the provisions that refer to a "creditor" exclude those creditor that are also deemed "loan originators" under Section 226.36(a)(1) because they table funded the credit transaction (i.e. do not provide the funds for the transaction consummation out of their own resources). New comment 36(a)-4 clarifies that for purposes of Section 226.36, managers, administrative staff, and similar individuals whose compensation is not based on whether a particular loan is originated are not loan originators."
Example of how the definition will effect compensation:
Creditors rates & fees: (Today)
FHA --4.125% loan at 0 points plus 1 percent loan origination fee
Conventional 4.25% at 0 points plus 1 percent loan origination fee
Estimated Revenue on a $200,000.00 loan
1% origination = $2,000.00
In-direct compensation =$2,000.00
Total for creditor = $4,000.00
Beginning on April 1, 2011 the total compensation for creditor will be the same
Mortgage Brokerage Firm rates & fees (Today)
FHA 4.125% loan at 0 points plus 1 percent loan origination fee
Conventional 4.25% at 0 points plus 1 percent loan origination fee
Estimated Revenue on a $200,000.00 loan
1% origination = $2,000.00
In-direct compensation = $2,000.00
Total for mortgage brokerage firm = $4,000.00
Beginning on April 1, 2011 the total compensation for a mortgage brokerage firm will be:
1% origination fee =$2,000.00
In-direct compensation = $0.00
Total for mortgage brokerage firm = $2,000.00
A mortgage brokerage firm would have to charge a 2% origination fee to earn the same as a creditor with the same expenses.
Comments
Who else are they going to control on compensation? Plumbers, Electricians, car salesman, furniture salesman, Realtors? Who's next? Why are'nt they controlling the compensation of the wall street firms that got us in this mess to begin with and the CEO's of the Banks we bailed out! Where is this country heading
Posted by: Consumer watch dog | August 23, 2010 4:15 PM
It seems clear that banks in the back room have been licking their wounds after Realtors prevented them from owning real estate companies so they could conveyor belt loans into their operations.. Their well paid lobbyists have successfully set up an end run around Realtors and put real estate brokers with mortgage brokerage operations out of business UNLESS they joint venture with them. Independent Mortgage Brokerage operations will be out of business ... plain and simple. A totally unlevel playing field and a tremendous opportunity for mischief by Banks. A Bank can earn $4,000 originating a loan and a Mortgage Brokerage will only only earn $2,000 on the same loan? Funny thing is that most real estate brokerages and mortgage brokerages are clueless that they will be out of business April 1... and that ain't no joke!
Posted by: Another Unemployment Stat. | August 23, 2010 10:38 PM
This final rule is going to drive up the prices for consumers, make rural and small communities difficult to finance, and stop the working class from financing any property less than 100k because no one will loan money on anything less than that amount. Didn't HUD just say that mortgage brokers were good for the business so why are they allowing the federal reserve board to operate like this?
Posted by: Where are the trade associations? | August 24, 2010 12:54 PM
Thank you for the article. I just spoke to my trade association and they confirmed the buried language. This will put our credit union out of business.
Posted by: Midwestern Credit Union | August 24, 2010 1:38 PM
This is a great step taken by The Federal Reserve Board's to eliminate mortgage brokerage...
Posted by: cflawoffices | August 27, 2010 2:25 AM
Thanks sir to provide this whole statistics as m in interested in mortgage laws..
Posted by: Stacy | September 16, 2010 2:48 AM
I have been in the mortgage field for over sixteen years and I am appauld at all the changes. I understand we needed reform and rightfully so but this is going way too far. There are many loop holes in the revamping for mortgage brokers that do not benefit the customer. One example is the third party appraisal companies we are required to use. First of all they charge the customer more money than a local guy and the banks make it very difficult to transfer the appraisal to another lender. How does this benefit the customer to have to pay for another appraisal because the majority of banks will not release it. The disadvantage to the customer is the additonal cost and wait time which could reflect in the higher rate they get. Why not have a universal appraisal accepted by all the lenders? I can go on with other problems that gouge the customer. I am sick and tired of getting blamed for the mortgage meltdown by our legislators. I understand we all need to accept some blame but to make it so difficult to make money and put local small companies out of business doesn't make sense to me. To be honest there is a lot of headache involved to get a mortgage loan approved and closed these days. We should make significant compensation for all of our hard work! As long as we are benefitting the customer and disclosing properly with the end result the customer is being happy with the transaction who should cares how much we make???
Posted by: Pam | November 11, 2010 9:12 AM
Perhaps we need to figure out ways to minimize our fixed and variable expenses.Wouldn't that help us?..any suggestions?
Posted by: Vincent | December 3, 2010 3:34 PM
My ongoing issue is why are not all of us that originate loans classified the same. Ther general thought process is that the banks are regulated more than a broker so they are not considered in who has the best interest of the borrower in mind. With the yearly education and testing that brokers are now obligated to participate in it is apparent to me that with this educational background and regulation, I, as a broker know more and am way more regulated than an originator in a bank. I have an obligation to make sure that my client recieves the best care possible as I will be scrutinized by all kinds of government entities.
Posted by: Dan | December 16, 2010 12:57 PM
Won't more people trust brokers now?
Marx Sterbcow answers:
If the rule goes through there won't be any mortgage brokerage companies to trust. They will all be out of business leaving consumers with higher costs and few options to shop around.
Posted by: Anthony | February 25, 2011 1:34 PM
I have been in the mortgage business since 1986, and I have witnessed a lot of changes, and the ups, and downs. And during that time mortgage brokers have always discussed the possibility that banks would one day eliminate the mortgage brokers.Now with the help of the Federal Reserve Board, and the board of Governors they have finaly gotten thier wish.
Posted by: George Colacicco | March 1, 2011 9:22 PM