New Fed Loan Officer Compensation Reform Threatens Housing Market
Sweeping Federal Compensation Regulations for Loan Officers that go into effect after April 1st, 2011 are threatening any chance of Housing Recovery by limiting consumer choice and eliminating competition for the Big 4 Banks.
There is a big story that is not getting much attention. The story is that the entire Mortgage Industry is getting ready for new Federal Compensation rules that go into effect beginning on April 1st. The Federal Reserve Board has introduced a set of compensation regulations that will limit Loan Officer, Mortgage Broker, and Originator compensation. That is actually a very understated description of what will be going on after April 1st. The compensation laws prohibit any Originator from receiving compensation that is based on the terms of the loan. Now on the surface that sounds like it’s not so bad, however when you start really looking at what these new regulations say, it essentially will eliminate most if not all of the wholesale lending channel. The way that it is written now, if I am a Broker who employs a Loan Officer, I would only be able to receive compensation from either the lender or the borrower, but not both. Splitting compensation between both has been a tool we have used for decades to price loans more attractively for borrowers who may be cash poor, but still want to have reasonably lower interest rates, with reduced closing costs. For those borrowers closing costs can be offset by slightly increasing the rate, and then reducing the closing cost by a correlating amount. After April 1st this will become illegal. Also, compensation from lenders will be limited as the Fed has not clarified or enough guidance for the entire industry to be able to comply. Because of this lack of proper guidance, we have an entire industry that is scratching their head not knowing what to do after April 1st. In addition to this, regardless of how we were to take any compensation it will be illegal to pay a Loan Officer any commission. So effectively any Loan Officer who chooses to remain at the post after April 1st will have to become an hourly or salary employee. The Loan Officer is a essentially a sales job, we charge them with going out selling loans for a living. We will now have a sales job, which has no means of rewarding sales productions, on the convers side we will also have to way of disseminating poor performance. Under the new rule once compensation is set, it is set for all loans going into the future and is only allowed to change periodically. So you were an LO, and your compensation is set now, it would stay the same going into the future. This holds true regardless of what a lousy job you do.
To further complicate the problem this new regulation also prohibits a Loan Originator from paying for the borrowers closing costs, or giving any credit to the borrower from their compensation. Many times of the last few decades, Loan Officers have used their compensation to give a borrower credit towards closing in order to limit the amount of cash a borrower needed at the time of closing. I myself use this as a crucial tool to get hundreds of First Time Homebuyers into the their first home who may be cash poor, but otherwise qualify and are low to moderate credit risks. After April 1st, this will no longer be an option for anyone, regardless of circumstances. That means, that those several hundred people I have helped get into their first home, who incidentally are still performing and paying on their home loans would have never been afforded the opportunity to own their home. This rule does nothing to help protect the consumer, in fact it does the complete opposite. It will simply divert the flow of money from the ground level of Origination to the secondary level of the Big Banks. It actually will have the miss intended consequence of raising the cost to the consumer, limiting consumer choice, and in effect eliminating the competition to the Big 4 Banks. We have an entire industry that is at risk, which has been issued zero compliance guidance and is now unwilling to take on the mitigating risks associated with this new rule. This is the biggest sweeping change to the Mortgage business in decades, and is one of the biggest contributing factors to why the market is pricing itself with higher loan rates, and higher fees. It’s become a big grab for small and large investors, lenders, and banks alike because the future has not only become uncertain it has actually become impossible to predict or plan for. This new rule is scarred with dozens of ill intended consequences and none of them will be good for the consumer, the industry, or free markets. Think about this example; After April 1st, a $70,000 loan amount, closed with a lender paid compensation option will at best now yield only 2% or about $1,400.00 dollars to the Originating Broker, or Mortgage Banker. Sounds pretty good right? Wrong, not when you consider that out of that $1,400.00 the loan officer will have to be paid in some fashion (not sure how, but right now it’s looking like a salary or hourly wage since that is all that will be legal after April 1st) Then pay for the processor, then the lights, then the rent, then the electric, the insurances, the licensing, the phone bill, etc. etc. What will effectively be left is a negative -$286.82. I may not know much, but I do not that no business will survive a -$286.82, it will wipe out thousands of small businesses that are small to mid-cap Mortgage Brokers, Mortgage Bankers, Originators etc. The only ones left will be the Big 4 Banks, and that leaves the consumer having no chance in heck at free choice, of free markets. It also puts the entire country at the mercy of Big Banks, who let’s face it have not exactly been a model of good will for consumers as of late. This story should be headline news across the country, however it has not been covered much if at all by anyone. My guess is probably because of the complexity of the new regulation, not many people in the general populous understand what it really means to them nor the adverse impact it will have on the lending world, the cost to the consumer, and ultimately the entire Real Estate industry. This will do nothing but jeopardize any fragile housing recovery we are seeing, and will limit the availability of credit to consumers going forward after April 1st 2011. I urge you to please do your own research and come to your own conclusions. Interview as many people in the industry as you can, from small Brokers to medium size Mortgage Bankers, the entire industry is at risk, and at a loss of what to do after April 1st. Please feel free to contact me should you have any questions. I urge you to please cover this, and let the public know the true ramifications of this new regulation.
Allied Home Mortgage Capital
4117 Mariner Blvd.
Spring Hill Fl, 34609