I hope that I never get to the point of writing things down on my “to do” list even after I’ve done them, just so I can cross them off the list. Or enjoying combining multiple “to do” lists into a master list, although (maybe) I’m already there. Many people in our industry wish the CFPB, or someone, would add “clear up mortgage loan officer compensation issues” on their list. We don’t want borrowers steered, but is there a loophole being exploited? If a broker has a set comp plan with Wholesaler A at 1.75% and Wholesaler B at .75%, and steers less sophisticated borrowers to Wholesaler A, is that legal? Kosher? Is the CFPB looking at whether or not a broker has standardized comp across all wholesalers? Lots more below.
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Mortgage loan officer compensation
Given the thousands of lenders, and the tens of thousands of MLOs/LOs/brokers out there, a level, transparent comp playing field is critical, as is the need to treat all borrowers fairly and compliantly. It is clear that isn’t happening. Attorney Brian Levy addressed the issue on February 16 in this commentary.
From New Jersey Brian Benjamin writes, “The MLO Compensation Rule is simply put, Anti Small Business Regulation at its height. Where else in American industry is small business income restricted while larger institutions have unrestricted compensation on the same instrument? If the CFPB refutes this theory, have the CFPB and SBA Advocacy publish the SBREFA testimony from the MLO Compensation Rule hearing and a plane language explanation of their analysis.
“The MLO Comp Rule was based upon a fabricated FRB study that was then exacerbated by a few government employees for the benefit of no one but themselves, seeking to develop an issue where none existed. As you may recall, the FRB ignored two SBA Advocacy Letters for failure to comply with the Rule writing requirements.
“Mortgage brokerage companies have been required to disclose their compensation since the early 1990s. In the NAIHP law suit the FRB even went so far as to note that YSP and SRP are the same form of compensation through different channels of the industry. Further, as I recall, the FRB had no basis for the MLO Compensation Rule and had to try to apply the Rule to the regulation on subprime lending that was completely beyond the scope in this matter.
“Originally the FRB did a study. As I recall they interviewed 9 individuals and three decided they didn’t like their experience with Mortgage Brokers. Yet many repeatedly confused the MLO (from any channel of industry) with the Mortgage Broker Company.
“Nowhere else in TILA or RESPA is the Mortgage Brokerage Company not a creditor, except in the MLO Compensation Rule. The MLO Compensation Rule has done nothing to clarify the fees borrowers pay, but more to hide the fees charged by other channels of industry while also causing the flourishing of the net branch sector to explicitly avoid the MLO Compensation Rule. The Mortgage Brokerage Company should not be viewed separately as under SAFE the Mortgage Brokerage Company is designated separately from the mortgage loan originator not as one in the same. Both pay different fees, have different reporting and licensing requirements including often showing net worth or bond requirements.
“The MLO Compensation Rule has created numerous loop holes. Net Branches have flourished to avoid the 3% Rule. Is the consumer any safer?
“Confusion abounds around this Rule. In one of your articles a few years back you quoted the CFPB as noting it was referring to a HUD Rule banning 1099 income. Yet even to this day, many in industry continue to quote that State law allows 1099 compensation and as such it is legal. I saw this argument posted on a social media site this past week. The real irony being the MLO Comp Rule I first printed out had 1099 pages. I fully blame the MLO Compensation Rule writer for the confusion. Even in industry meetings, there were times of confusion trying to explain simple scenarios.
“There is no simple answer to the issue, short of trashing the current Rule and starting fresh. Full disclosure of compensation would be nice, but as someone that has worked in the secondary market you know this is not a practical option. In my 30+ years’ experience, no one has ever asked me how much I’m making, only, ‘What’s the rate, term, and how much is it going to cost close.’ If the rate I quoted was not to their liking, they would leave.
“Frankly, in my experience the MLO Compensation Rule has had the opposite impact on the economic group it was to protect. Smaller loan amount borrowers are forced to higher rate institutions. If the new CFPB Director wants to meet with a member of industry that is actually brokering mortgage loans, I am always available as I was for Ms. Warren and Mr. Cordray.”
(From the CFPB’s perspective, “Loan originator compensation must comply with the requirements in 12 CFR 1026.36(d) and (e). Those constraints govern how compensation may be determined but not how the services of a loan originator on behalf of a creditor may be structured. One can contact HUD directly regarding the current status of the Department’s referenced 2006-30 Mortgagee letter, as the Bureau cannot speak on behalf of HUD. The CFPB is deferring to the HUD Rule regarding compensation for Mortgage Brokers and Mortgage Bankers in determining whether Loan Officers are to be paid via 1099 or W-2. One can always take a look at the FAQ from HUD, page 4, where it discusses compensation.)
Organizations are aware of the issues. Pete Mills, SVP, Residential Policy and Member Engagement at the Mortgage Bankers Association, addressed the questions raised in the first paragraph of today’s commentary. “The first, ‘Is it okay for a mortgage broker company to have different comp plans with different wholesale lenders?’ The answer is probably yes. (Obviously with anything LO Comp related, the final answer depends on the individual facts.) The second, ‘Is it okay for a broker to steer a borrower to a lender with a higher cost comp plan, the answer is most likely ‘no.’
Pete sent along a more detailed explanation from the MBA’s Managing Regulatory Counsel Justin Wiseman. “In addition to its originator compensation requirements, the LO Comp Rule includes a prohibition on steering, a practice defined as directing consumer to a loan that is not in the consumer’s best interest based on the fact that the loan originator will receive greater compensation for that loan than for other loans the originator could have offered, unless the loan is in the consumers interest.
“This is not clearly defined, so the Rule creates two safe-harbors to satisfy the steering prohibition. First, in circumstances where the originator is an employee of the creditor, the anti-steering provision is satisfied if the originator complies with the compensation requirements—i.e. the prohibition on compensation based on loan terms or proxies for loan terms. This safe harbor is not available for originators who are not employees of the creditor. For these originators, typically mortgage brokers, the Rule’s compensation requirements and its anti-steering provision must be independently satisfied.
“Fortunately, the Rule provides an optional safe harbor, which if followed, satisfies the prohibition on steering. To qualify for the anti-steering safe harbor, an originator must present the consumer with loan options from a significant number of creditors with which the originator regularly does business. The originator must have a good faith belief (the Rule includes significant detail on what constitutes a good faith belief) that the options presented are loans for which the consumer likely qualifies. Loan options must be presented for each loan type for which the consumer expresses interest. For purposes of the safe harbor, there are three loan types: a loan with an annual percentage rate that cannot increase after consummation, a loan with an annual percentage rate that may increase after consummation, and a reverse mortgage loan.
“For each loan type requested, the originator must present three specific loan options: the loan with the lowest interest rate, the loan with the lowest interest rate without certain enumerated risky features (such as prepayment penalties, negative amortization, or a balloon payment in the first seven years), and the loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees).
“The Rule allows the originator to present less than three options if the options presented satisfy the loan option criteria (e.g. a loan option is the lowest rate and the lowest rate without risky features) and the originator otherwise meets the safe harbor requirements.”
Treasury rates are back down to January levels, and they are helping retail mortgage origination volumes. Rates fell on the back of disappointing economic data, namely the Empire State Manufacturing Survey falling to its lowest level since last May while the Industrial Production report for February showed the second consecutive monthly decline in manufacturing output. In international news, China specified fiscal measures that will prevent the country’s budget deficit from increasing rapidly, the Bank of Japan made no changes to its policy stance, and British Prime Minister Theresa May made the rounds to garner support for her Brexit deal that will be voted on this week in order to avoid a lengthy extension of Article 50. The French President’s office indicated that the EU would agree to a short extension that was approved by British MPs only if the British parliament votes in favor of Prime Minister May’s deal.
Turning to this week, the highlight will be the FOMC meeting tomorrow afternoon through Wednesday midday followed with the Statement and updated dot plot and the post-meeting press conference with Chair Powell. Today kicks off with the NAHB Housing Market Index for March at 9:00am ET, which is expected to increase modestly. Tomorrow brings January Factory Orders, Wednesday we receive the usual Weekly MBA Mortgage Index, Thursday sees Jobless claims, the March Philadelphia Fed Survey and February Leading Indicators. The week closes with February Existing Home Sales. We begin the week with agency MBS worse a tad and the 10-year yielding 2.60% after it closed Friday at 2.59%.
She leaned over and whispered, “They’re behind you.”
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Changes in the role of the LO and Their Compensation.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are hundreds of mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2019 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)