Nov. 8: Lowering fees for borrowers, Realtors ignoring lender RESPA constraints, and what needed from the Agencies

Unfortunately for those “playing by the rules” there seem to be those that don’t, or have a different interpretation of those same rules. It makes for an uneven playing field, creating a disadvantage for some companies in recruiting, marketing, or originating, or even for consumers. Readers are encouraged to use the anonymous CFPB’s Whistleblower site when they see violations.


The issue of not being able to change fees, even when there is an advantage to the borrower, continues to plague portions of the industry. Joe K. writes, “Let’s assume a mortgage broker takes a borrowers application and the rate will not be locked until the loan is approved. The Broker issues their initial GFE with a compensation of, let’s say 2.00 points. The compensation is borrower paid. The broker locks the loan at time of approval and, because rates have gone up, decides to lower his compensation to 1.50 points. The broker reissues the GFE with the lower compensation. Our company says this is not legal, the broker may not lower their comp except for a few rare instances, but it cannot be a routine business practice. In states where broker fee agreements are not required, many brokers do this routinely because competing wholesalers permit the broker to lower their comp at time of lock on a floating loan.


It is very important to be sure the readers know that a broker is defined as a loan originator and is obligated to follow compensation rules for loan officers.  Therefore they are not permitted to lower their fees as well. Also important are the fair lending regulations. For example: lowering the comp for a non-protected class versus not lowering for a protected class when the broker locks in the floating loan. Some lenders are ignoring this law for brokers. Who is right? Your help is greatly appreciated.”


I turned to Dave Medlin with Medlin & Hargrave who responded, “Your reader’s question raises two important Federal Consumer Financial Laws, the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”).  RESPA, of course, comes into play because the question concerns a Good Faith Estimate (“GFE”).  And, TILA is involved because the question also concerns compensation paid to a Loan Originator, as that term is defined in TILA’s Loan Originator Compensation Rule (“LO Comp Rule”).  As a general proposition information disclosed on a GFE may only be changed in the event of a ‘changed circumstance.’  However, the more immediate concern here, is the LO Comp Rule.


“As you know, the LO Comp Rule provides that in connection with a consumer credit transaction secured by a dwelling, no Loan Originator shall receive, and no person shall pay to a Loan Originator, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual Loan Originator or the terms of multiple transactions by multiple individual Loan Originators.  And, of course, the interest rate is a term of a loan transaction.  Accordingly, a Loan Originator’s compensation may not be reduced (or, for that matter increased) to reflect changes in loan terms, such as a change in the interest rate.  Indeed, the Consumer Financial Protection Bureau’s Official Interpretations directly address this issue at §36(d)(1):


  1. Effect of modification of transaction terms.  Under §1026.36(d)(1), a loan originator’s compensation may not be based on any of the terms of a credit transaction.  Thus a creditor and a loan originator may not agree to set the loan originator’s compensation at a certain level and then subsequently lower it in selective cases (such as where the consumer is able to obtain a lower rate from another creditor).  When the creditor offers to extend credit with specified terms and conditions (such as the rate and points), the amount of the originator’s compensation for that transaction is not subject to change (increase or decrease) based on whether different credit terms are negotiated.


Accordingly, your reader’s company is correct.  Except under limited circumstances (which are not applicable here), it is illegal for a loan originator’s compensation to be changed after a transaction is initiated. Therefore, changes in the terms of the loan, such as a reduction in the interest rate, may not serve as a basis for a change in the Loan Originator’s compensation, either up or down.” Thank you very much Dave and best of luck as you ease into retirement!


I continue to receive e-mails regarding referrals and agreements, and that apparently other parties in transactions tend to want to ignore the constraints that lenders are under. From a California broker comes, “I was doing business with a real estate agent in my area and we had many very satisfied clients. One day she calls me and says she is doing a mailer and would like me to ‘participate,’ which I asked her to define and she replied, “You know…pay for it.’ I said I could pay a reasonable amount for joint marketing as long as I was included on the mailer and the result was a joint marketing piece where I have a portion to tell about myself and services. About two months later she takes on another agent as part of her ‘team’ who had an existing relationship with a lender.


“About a month after that I get a call from her marketing company that prepared the previous mailer asking if I was ‘participating’ again. I said I would and sent her my blurb and art work to be included. The marketing person sent back an e-mail indicating that there was no room on the mailer for my info, to which I said I could not participate then because of RESPA. ‘AgentX said you may say this, she has another lender lined up to pay for her mailers then.’ I contacted the agent, indicated I had appreciated our working relationship but I would not put myself, company and employees at risk over RESPA violations for her mailer and if she has another lender engaged in paying for her marketing she is exposing herself to fines. She tried to back pedal but I keep getting the mailers at my house and shockingly the referrals have died. Unfortunately CAR, NAR, CFPB and others do not investigate real estate agents and brokers in almost any manner regarding marketing and RESPA issues so just like with this agent many (most?) are still leaning on affiliated services to break the rules in order to get referrals—and unfortunately too many in our industry and others are willing to do it. Level playing field? Not as long as real estate agents can continue to act with impunity and lack of accountability as they did through and after the housing bubble.”


Changing tracks, the debate continues about what is needed for the housing and mortgage industry’s continued rebound. After the Washington Post posted an article about the changes the FHFA proposed to put in place, I received, “Even the Washington Post agrees with my position. And Dave Stevens had to respond to the above in a letter to the editor. The major flaw in any current argument about LTV is that they don’t seem to understand systemic risk. Mortgage insurance does not remove risk from the system: it only moves it around (AIG taught us that). When the market crashes again, Fannie and Freddie won’t be saved because of the loans covered by mortgage insurance. I’m glad to the MBA on their back heels. A 97% LTV mortgage is by definition not a responsible mortgage. What other institution or asset class gets to lever itself 32 to 1? Now if 60 Minutes would just pick up this story…”


And Penn Johnson, president of Stamford Mortgage, contributes, “It makes me crazy that the government officials know so little of what happens on the front lines and don’t take the opportunity to learn what would be more effective policy changes that will help the housing market. I read the reader’s comments last Saturday about the FHA and agree that FHA does not need to loosen its standards as they are already quite liberal. I completely agree with the comment about FHA cost as it is prohibitive. If FHA were not so much more expensive than conventional then it would be a better alternative for those high LTV with low to mid 600’s credit that are not FNMA eligible due to DU findings. I don’t understand why those setting the rules allow lower credit scores at higher LTV ratios when FHA is providing the mortgage insurance than they do in a FNMA loan where we obtain Private Mortgage Insurance. FHA is also not a good option for condo buyers as there are so few condos that are FHA approved. I would really like to see two things: the FHA’s cost reduced, and a resumption of the old FHA spot approval for condos. And from FNMA & FHLMC I would really like to see loosening up DU & LP on borrowers with 620 to 660 credit and also some flexibility when reviewing condo budgets. I also agree about some form of no verification or no ratio loan for self-employed borrowers with good credit, down payment and reserves.  These borrowers were never a problem; it was those that had poor credit or low down payment. These are the areas that if adjusted would get the housing market going again!”




An unemployed man is desperate to support his family. His wife watches TV all day and his three teenage kids have dropped out of high school to hang around with the local toughs. He applies for a janitor’s job at a large firm and easily passes an aptitude test.

The human resources manager tells him, “You will be hired at minimum wage of $5.15 an hour. Let me have your e-mail address so that we can get you in the loop. Our system will automatically e-mail you all the forms and advise you when to start and where to report on your first day.”

Taken aback, the man protests that he is poor and has neither a computer nor an e-mail address. To this the manager replies, “You must understand that to a company like ours that means that you virtually do not exist. Without an e-mail address you can hardly expect to be employed by a high-tech firm. Goodbye and good luck.”

Stunned, the man leaves. Not knowing where to turn and having $10 in his wallet, he walks past a farmers’ market and sees a stand selling 25 pound crates of beautiful red tomatoes. He buys a crate, carries it to a busy corner and displays the tomatoes. In less than 2 hours he sells all the tomatoes and makes 100% profit. Repeating the process several times more that day, he ends up with almost $100 and arrives home that night with several bags of groceries for his family.

During the night he decides to repeat the tomato business the next day. By the end of the week he is getting up early every day and working into the night. He multiplies his profits quickly. Early in the second week he acquires a cart to transport several boxes of tomatoes at a time, and before a month is up he sells the cart to buy a broken-down pickup truck.

At the end of a year he owns three old trucks. His two sons have left their neighborhood gangs to help him with the tomato business, his wife is buying the tomatoes, and his daughter is taking night courses at the community college so she can keep books for him. By the end of the second year he has a dozen very nice used trucks and employs fifteen previously unemployed people, all selling tomatoes. He continues to work hard.

Time passes and at the end of the fifth year he owns a fleet of nice trucks and a warehouse which his wife supervises, plus two tomato farms that his sons manage. The tomato company’s payroll has put hundreds of homeless and jobless people to work. His daughter reports that the business has grossed a million dollars.

Planning for the future, he decides to buy some life insurance. Consulting with an insurance adviser, he picks an insurance plan to fit his new circumstances. Then the adviser asks him for his e-mail address in order to send the final documents electronically.

When the man replies that he doesn’t have time to mess with a computer and has no e-mail address, the insurance man is stunned. “What, you don’t have e-mail? No computer?  No Internet?  Just think where you would be today if you’d had all of that five years ago!”

“Ha!” snorts the man. “If I’d had e-mail five years ago I would be sweeping floors at Microsoft and making $5.15 an hour.”

Which brings us to the moral: since you got this story by e-mail, you’re probably closer to being a janitor than a millionaire.

(Sadly, I received it also.)





(Copyright 2014 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.)

Rob Chrisman