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Flat Origination Fees: Will It or Won't It Happen

JUN 8, 2012 2:56pm ET
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The question most people seem to be asking is whether the flat origination fee proposal is going to become law. While I do not have a crystal ball, here is my take on it: 

The CFPB is seeking to ingratiate itself to the public (most importantly consumer rights activists, and advocates for affordable housing) without unnecessarily alienating the industry. Hence, in looking at its policy positions it will certainly err in favor of certain consumer groups over the industry, but won't do so when there is little to gain.

Once people really examine the flat origination fee concept, I cannot identify who will support it. Obviously the industry does not like it. But would consumer groups? After all, the effect of a flat origination fee will simply raise the fee of what some borrowers would otherwise have paid and lower the fee of others. Notably, those whose fees would currently be lower than a hypothetical flat fee are the groups that consumer advocates tend to be most concerned with protecting. Thus, a flat origination fee will increase their borrowing cost and reduce the borrowing cost of the "rich." I don't see many consumer groups backing a plan that would have such a result.

Some have argued that a flat origination fee would cause such fees to disappear altogether as a result of competition. I disagree. Origination fees are already disclosed and competition has not eradicated them. Moreover, an origination fee of one or two points isn't terribly difficult to calculate. Even if it was difficult, the exact dollar amount already needs to be disclosed.

Still, such disclosures have not brought origination fees to an end. I don't think further simplifying an already simple fee structure is going to have sufficient market impact to end the practice of origination fees, especially when such fees can just be added into a 30 year note that borrowers are unlikely to "feel."

Going back to the beginning premise, while I anticipate strong industry opposition, I am not able to identify any particular group that will strongly support the proposal.  In fact, I could see some consumer groups and advocates for lower income borrowers strongly opposing the proposal due to the fact it will benefit wealthier borrowers at the expense of lower income borrowers. As such, I do not believe the flat origination fee proposal will become law. Of course, I do not have a crystal ball...

Comments (6)
I suggest that we eliminate ALL lender fees and just have an interest rate with 0 pts, .250 pts, .500 points or 1.00 points. This would allow the consumer to better compare lenders. Have all the lender fees come out of the points, YSP or SRP. In addition, eliminate the LO compensation rule. CFPB is trying to micro manange the process and are so concerned about one area (i.e. loan officer compensation) that they inadvertantly and adversly affect the consumer in another. KISS...Keep it Simple Stupid.
Posted by BEN V | Friday, June 08 2012 at 3:34PM ET
the suggestion by Ben would not work. If the max rebate, per Bens suggestion was a point that one point would not even cover all the lender fees. Plus what about borrowers who need title fees paid, guess not. I suppose you could say that All fees must be paid out of rebates including title costs--that of course would most likely increase title fees; such a move would be tandamount to medical insurance. If the fees are paid by somebody else, like medical costs the fees go up. The same would happen in the loan industry. Again the lower end borrowers would be hit with higher rates because they would need a really large rebate to cover the fees. Of course by contast the larger loan amounts would require a much smaller rebate to cover the fees.
Posted by | Friday, June 08 2012 at 4:15PM ET
The lunacy of this approach can be seen when applied in other fields. E.g., attorneys can only make a flat fee for trusts/lawsuits, surgeons only flat fee for heart surgery, etc. This approach mistakenly assumes that all loans require the same amount of work, a huge fallacy. A flat fee approach will favor direct lenders who will lowball fees (and LO competence, since there is no fiduciary duty), making loans even more of comodities than they are today. The loser will be the consumer.
Posted by | Friday, June 08 2012 at 5:43PM ET
When is the Director of CFPB going to step down for allowing a policy of disparate impact be proposed by his agency? Just in April 2012, his agency sent out a very stern warning that the CFPB was coming after lenders, with the full force of the U.S. Justice Department,that had policies that have disparate impact.

When will the names of the CFPB members that wrote the flat fee policy be exposed to the public and what will be the accountability for their pushing a National Policy that would have tremendous DISPARATE IMPACT?

I can assure you there will be no accountability for the Director or his policy making hengepeople.
Posted by | Sunday, June 10 2012 at 10:48AM ET
How does the flat fee effect last's year LO compensation plan where if collect origination fees you can't collect YSP? I see the Flat fee being a big issue for Brokers and non-bank originations
Posted by | Monday, June 11 2012 at 8:05AM ET
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