Compensation crackdown | Mortgage brokers grapple with a new Fed rule regulating how loan originators get paid
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Mortgage broker Dick Morin says new federal rules make it tougher for loan originators to make a living, prompting independent brokers to leave their businesses and start working for banks
Retail loan officers, mortgage brokers and other loan originators have for years provided customized service to prospective homebuyers. In some cases, brokers were willing to contribute a few dollars to help buyers cover closing and other loan-related costs. They’ve also enjoyed the freedom to be flexible with terms and conditions, and pursue larger loans more aggressively.
The winds of change began blowing last August, however, when the Federal Reserve issued its final rule on loan originator compensation. Under the new rule, which went into effect on April 5, loan originators can have no financial stake in a loan’s terms and conditions. Their compensation must be predetermined for all loans, and in most cases that compensation remains the same regardless of the loan’s size, interest or any other terms.
As a broker with more than 20 years of experience in mortgage and lending, Dick Morin of Consumers First Mortgage in Kennebunk is directly affected by the new Fed rules. He also serves on the board of the Maine Association of Mortgage Professionals, and has been active in attempts to change or overturn the new rule. Mainebiz spoke with him about the changes and what they mean for brokers, lenders and consumers.
Mainebiz: What’s changed under the new rule and who does it affect?
Morin: We are all covered by the rule, but true creditors have a little more latitude than brokers and those of us who don’t fund loans from our own lines of credit or portfolios. The primary tenet of the Fed rule is that loan officers must be paid the same compensation from one loan transaction to the next, and that [compensation] can’t be based on the terms and conditions of a loan, and we’ve kind of come to that place in the industry anyway.
The challenge for the loan originator and the most significant change is that the loan originator cannot be paid from two different sources. They’re either paid by their company or the creditor or they’re paid by the consumer.
That sounds relatively simple, but what’s also built into the rule is a prohibition that the loan originator cannot contribute to a transaction in most cases. Whether it’s a last-minute inspection or they need to pump out a septic system or something like that, maybe a borrower came up a couple hundred dollars short. In the past, we’ve been allowed to contribute to cover that shortage and save the deal. Under the new rule, loan originators can’t write that check for a couple hundred dollars, which we have done time and time again to assist our borrowers or bring in a new closing. It has to come from another party, possibly a disinterested party, or the deal falls apart.
I think the biggest crime is that the consumers who need $75 or $100 or whatever it is can’t get it from the folks they trust and have been doing business with. Some of the creditors have stepped up to the plate — because a creditor can make an adjustment at the last minute — and have said they’ll consider those investments, but they’ll monitor them. The originator who’s at the well every day is probably going to be cut off, as opposed to those who are managing their business well and don’t need the last-minute adjustments.
What drove the Fed to make the changes?
This has been in the works for quite some time, and it’s part of the whole move, similar to the Dodd-Frank bill and the formation of the Consumer Finance Protection Bureau. Some will tell you this started in the 2000s when outside interested parties started to pay attention a little bit more and brought pressure to the industry and brought about successfully — and in many cases rightfully so — legislation that curbed predatory practices.
They bundled the “bad guys” and labeled them brokers. Now I’m a broker and I’ve been here for 10 years and I’ve been in this industry in excess of 25. I can tell you that I’ve helped more people into their first homes by virtue of doing their financing — and contributing to a last-minute expense in some cases — than anybody would dare believe. I know most of the folks who are in the business today share that same philosophy and that same story.
Here in Maine, we enacted predatory lending laws long before anyone thought up the term “Dodd-Frank.” So we had rules in place that essentially shut down the operations that were hurting consumers. I’m hard-pressed to think that we had a significant number of them. We were ahead of the curve, so many bad players were out of the business. And with proper enforcement of the current laws, there was no problem at all.
How has the loan-originator community responded to the changes?
We in the industry were successful in getting a stay for four days, and then that was released and the rule went into effect on April 5. The operative concept is that creditors are exempt. So there has been a mass exodus in some respects of loan originators to the banking organizations. And I don’t fault those in our industry who are making that move. It’s tough enough to make a living, for gosh sakes, so we might as well go where the likelihood is greatest that we can continue to make a living.
What do the new rules mean for borrowers?
The consumer sees that this guy they used to do business with now works at this bank over here and decides to give him a call. Now I can go up and down the Maine coast with all of the great banks who have done a wonderful job of serving their clients over the years, but have done so at a higher price. It costs more to do business with the banks directly. We’re dealing with wholesale numbers as a broker community, and our offering is typically less expensive. Combine that with what we’re all living with, and that’s tougher underwriting guidelines, pummeled credit scores, lower loan-to-value-requirements and more consumers not able to qualify, and when they do, they’re paying more for the same product. And that’s the end result. It’s the consumer who’s being punished. Not to mention the many small businesses who are now wondering how they’re going to stay in business.
However, this is all consumer-based. What consumers have to face is that there are going to be fewer people doing what I’m doing in this business. I’m still here because I’m a one-person shop, and I can get away with a little bit because I’m a one-person shop. I have to adhere to the rule, but I’m not as restricted as a multi-person shop.
Will some types of originators be affected more than others?
The guys who are going to have trouble are the ones who have multiple loan officers in their shop. And here’s the reason why: A brokerage firm can only pay its employees a salary or an hourly wage in a consumer-paid transaction, because if they’re paying anything that’s related to the loan, that would mean both parties are contributing, which they can’t do. This industry is premised on commission-based employees, so it’s going to throw a curveball to those who have commission-based employees because they can’t receive their commission and be paid by the consumer as well. The other loan officer that’s going to be harmed is the one who’s doing most of their business varying their payment or fees based on the size of the loan — not the rate of the loan but the size — maybe showing some leniency on the higher end and being more conservative on the lower end. That’s now prohibited.
What preparations did brokers need to make in advance of the rule’s implementation?
We actually had to set up our margin, if you want to call it that, at the onset of doing business, so by April 1, everybody had submitted their margin to all of their lenders. I know today, based on how the rates are moving, that I’m going to get paid the same thing whether I do a tough deal or an easy deal. And I’m going to get paid the same thing across the board. It doesn’t matter. I don’t have to worry about pricing. I just pull the number off a sheet and there it is because I had to make that determination. I can change it periodically, depending on the lender, so that’s where the consumer’s being punished again because we’re not able to make adjustments. We can’t treat a larger loan any differently than a smaller one, and vice versa.
When it announced the changes last year, the Fed acknowledged further changes would be coming. Has it provided any further guidance?
They’ve issued this whole elaborately written rule, but would not and will not and have yet to answer any questions in writing, provide any guidance to both creditors and brokers, and for that reason, creditors are being very cautious and sticking to the basics. So we may be playing by a set of rules that’s far more stringently adhered to than we need to because of a lack of guidance.
How do you see the new rule changing the way mortgage brokers do business?
Who knows what the outcome will be? I can tell you there’s going to be less business done because it’ll be more difficult to do the business and therefore people shy away from those kinds of situations.
We’re in a new world order, and the Fed has been so tight-lipped and so reluctant to issue written guidelines. Because of the lack of guidance, everyone is very narrowly interpreting the rule, so we’re playing by very, very tight guidelines. If we can live through mid-July, when the Consumer Finance Protection Bureau takes over this whole operation — that being consumer credit across the country; good, bad or indifferent — there may be a different look-see at this. As we are examined and as lenders pass audits and reviews, they may find that the rules they’ve implemented are more strict than they need to be. And as brokers do more business, they may find that it’s not quite as much of an impediment as they thought it might be.
So I think it’s not doom and gloom. In my world, I told my lenders how much I want to make on each loan, it’s exactly what my target has been all along, and for all intents and purposes, I don’t do business any differently. Now again, I’m a sole provider, a one-person shop, so I don’t have the obligation to pay people, thereby inhibiting their receiving a payment from me and a payment from the consumer. At the end of the day, whatever the company makes, I make. It makes life a little easier for the smaller shops than the bigger shops in that regard.
Derek Rice, a writer based in Saco, can be reached at editorial@mainebiz.biz.
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