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.