FEDERAL RESERVE BOARD: WALL STREET REFORM ACT'S LOAN OFFICER COMPENSATION RULE IMPACT
The Federal Reserve Board ("FRB") introduction of the Loan Officer Compensation Rule in August 2010 is moving closer to it's projected April 1, 2011 implementation date. The FRB recently announced they would delay the implementation of three other proposed rules related to mortgage disclosures but the loan officer compensation rule was not included in the delay.
The problem that the Small Business Administration, National Association of Mortgage Brokers (NAMB), and others have with the Loan Officer Compensation Rule is the language included in the rule harms mortgage companies who do not have a warehouse line unfairly.
The controversial language in question:
“Payments by persons other than consumer. If any loan originator receives compensation directly from a consumer in a consumer credit transaction secured by a dwelling: (i) No loan originator shall receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction; (Federal Register, Volume 75, No. 185, pg 58534, (d)(2).)
The result of this language is that mortgage brokerage firms who do not fund their own loans Will have to pay their employees a salary or hourly rate when a consumer pays their own loan fees. A loan originator for a mortgage brokerage company would not be able to be compensated for the origination of the loan. The loan originator would only be entitled to a set salary or hourly wage.
A consumer will only be allowed to pay compensation to the actual mortgage broker or mortgage brokerage company. The new language also declares that a mortgage broker company is now defined as a loan originator under the new FRB rule. What this means is that because the mortgage brokerage company received compensation for the loan directly from the consumer that "no loan originator shall receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction." The only way a employee non-broker loan officer can be compensated is by a set salary or hourly rate now.
What this means is that once a consumer pays compensation directly to the mortgage broker that the money is not allowed to be transferred to the loan officer who originated or produced the loan. The LO Rule only allows one defined loan originator to receive the compensation.
The end result, unless the FRB delays this rule, is mortgage brokerage companies who do not fund their own loans will lose their experienced loan officers to lenders or large mortgage brokerage companies that fund their own loans. Most mortgage brokerage operations who do third party origination (TPO) work won't be able to operate under this proposal which is why the Small Business Administration and others are trying to delay this rule before the implementation date. The SBA has expressed concern over significant job losses and lack of competition for consumers in the mortgage industry if the rule is implemented.
Comments
This is going to put my company out of business. We have 300 employees and this will substantially affect our operations this happens. Who do we call because April 1 is coming up on us fast.
Posted by: Warehouse lender from CA | February 16, 2011 3:28 PM
If you are a mortgage broker I don’t think you will go out of business. See HR 4173-64; Section 1403 (Prohibition on Steering Incentives)
1. Brokers who do not fund their own loans will still be able to earn compensation from Lender paid fees. Brokers would no longer collect upfront points or processing/application fees and rely on lender paid compensation only.
‘‘(B) EXCEPTION.—Notwithstanding subparagraph (A), a mortgage originator may receive from a person other than the consumer an origination fee or charge, and a person other than the consumer may pay a mortgage originator an origination fee or charge, if—
‘‘(i) the mortgage originator does not receive any compensation directly from the consumer; and
‘‘(ii) the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate of the creditor or originator);
In other words, as long as the Consumer does not pay – the originator can be paid by the lender. No variance based on rates and terms.
2. In addition, the rule allows for compensation variance to the LO based on amount of the loan. The following tells you what cannot be done...then at the end in parenthesis – notice…"other than the amount of the principal")
‘‘(4) RULES OF CONSTRUCTION.—No provision of this subsection shall be construed as— ‘‘(A) permitting any yield spread premium or other similar compensation that would, for any residential mortgage loan, permit the total amount of direct and indirect compensation from all sources permitted to a mortgage originator to vary based on the terms of the loan (other than the amount of the principal);
3. Loan Originators can be paid a volume bonus even after the initial origination compensation – that was never even a possibility prior.
‘‘4) RULES OF CONSTRUCTION.—No provision of this subsection shall be construed as— (D) prohibiting incentive payments to a mortgage originator based on the number of residential mortgage loans originated within a specified period of time.
Wendy Bernard
Posted by: Wendy Bernard | February 16, 2011 9:19 PM
As a Correspondent lender, meeting the definition of a "creditor", can we pay our Loan Officer employees a percentage of the loan amount drawn from our profits, and still charge the consumer a Loan Origination fee?
Posted by: Steve Daley | March 3, 2011 10:30 PM