Oldbe: This is a post for regulatory geeks, an attempt to understand the comment in a previous post about the Fed reportedly saying that under the new compensation rule if a broker business receives its compensation from the borrower (not the lender) then the broker must pay his individual loan officer involved with that transaction a salary. That apparently means the individual LO cannot be paid any amount that is tied to the specific transaction, including a percentage of the loan amount or a per loan fee.
The rule says that “if any loan originator receives compensation directly from the consumer” then “no loan originator shall receive compensation...from any person other than the consumer in connection with the transaction.”
I believe that is the provision on which the Fed is basing the salary requirement. If the mortgage broker firm (a loan originator) receives payment direct from the consumer then a loan originator working for the brokerage company cannot receive a payment from the brokerage company in connection with the same transaction. A salary is arguably not paid in connection with any single, specific transaction, so a salary would be allowed under that reading of the rule, but no other transaction specific payment would be permitted.
So why does the Fed care about this? Why restrict the individual LO to a salary in that situation? I think the Fed is doing that to close what would otherwise be a major loophole in their rule. Note that the regulation specifically says that the prohibition on payments to loan originators based on loan terms or conditions does not apply to any transaction in which a loan originator is compensated directly by the consumer. Thus, if a mortgage broker firm is compensated directly by the consumer then the broker firm would not be prohibited from compensating their loan originators based on the terms of the loan for that transaction. The Fed's position requiring that the individual LO only can be paid a salary in this situation is their attempt to close that loophole.
Anyone else geeky enough to want to comment? This is pretty tortured logic, but lately the Fed has shown that it is more than up to that task.
Deep River: Keep in mind that the rules are being promulgated by people whose knowledge of the industry is largely based upon anecdotal reports from the media and advocacy groups. So applying a veneer of logic on top of the options currently being considered is difficult.
That being said, I think it's best to go back to Congress' original complaint and try to work forward from there:
• Consumers were sold improper loans because the loan originator was influenced by commissions rather than consumer benefit.
• Consumers were not informed about how the originator's compensation influenced the options provided to the consumer.
• Congress and the regulators' solutions to those issues were to disclose compensation and eliminate the influence of compensation tied to product.
I think their entire approach is misguided; a redesigned Truth-in-Lending form that disclosed the worst case scenario on payment increases for variable rate loans and allowing market forces to determine originator compensation would have solved the problems and been more beneficial to consumers' decision making.
I think regulators are now struggling with the legislation Congress has handed them to arrive at Congress' original intent. It will be sloppy and fail to close loopholes. Dictating employee pay plans is overreaching at minimum and will reduce competition and consumer benefit. In the end it will not accomplish Congress' intent.
One thing that will change is that if the hourly/salary rule is passed, it will finally close the loophole on independent contractor status for loan originator employees of mortgage brokerage businesses.
The loophole had always been to avoid paying benefits (one of the eight requirements for a common law employee) or avoiding a written employment contract (one of the three requirements for a statutory nonemployee). The statutory employee designation applies only to salespeople selling to businesses, even though employee originators are required under law to work for a single brokerage business at a time (single employer being one of the eight conditions required for statutory employee).
In addition to the burden of sufficient revenues to meet payroll commitments, mortgage brokerage businesses will also have to pay employer contributions to Social Security and FICA. Additionally, larger mortgage brokerage businesses will fall under the requirements to provide an employee health care plan beginning in 2014. Costs will rise and third party originations will decline.
Oldbe: As you mentioned, a decent TILA disclosure covering worst case and other relevant issues would take care of the issue, provided the consumer has a brain and is willing to use it instead of relying on what may be faulty advice from his lender and/or broker. However, Congress and regulators have obviously decided that consumers are incapable of that task. Given that premise, whether or not one agrees with it, the problem then becomes how to protect consumers from themselves, since they increasingly rely on the nanny state to do their thinking for them. Which gets us back to these ugly laws and rules.
Generally Congress gives regulators a lot of latitude for writing regulations that implement the laws, so even though the law may be a mess, a rational regulator can generally craft a meaningful regulation. Unfortunately both the Congress and the regulators are irrational.
Deep River: Cutting away all of the dross of blame, mistakes, and impact on the economy, I wonder how regulating employee compensation for TPOs will prevent another housing bubble. Since that is the root of the problem Congress and regulators should be addressing.
Mortgagechat: Some wholesalers do not agree with this interpretation and will move forward with their previous plans on borrower paid compensation. Many Fed officials have commented individually to different trade organizations, law firms, consulting firms, mortgage companies, etc. If they have their own confirmation from the Fed they will continue down the road they were planning. The Fed as a whole does not have their stuff together. There is no global understanding by the House, Senate, HUD, Fed, etc. This is pure socialistic and the consumer will pay in the end.
Deep River: A good background of regulators' thinking can be found in the Fed proposed rulemaking. What I found interesting is the summation of public commentary used by the Fed to develop the definition of a loan originator.
Banks and credit unions made numerous arguments about why their employees should be excluded from the definition. A few counter arguments made by mortgage broker advocates were all found to be unsustainable by the Fed.
While the Fed found that yield-spread premium is not detrimental to consumers, it is only beneficial if the YSP payment is applied wholly to consumers’ closing costs apart from broker compensation. Regarding hourly or salary for employees of brokers, the Fed decided to "adopt one of the public comments substantially as proposed with some clarifications.
"The final rule also clarifies that, in this instance (a broker receiving payments from more sources than the borrower), if any loan originator receives compensation directly from the consumer in connection with a specific credit transaction, no other loan originator, such as the mortgage broker company or another employee of the mortgage broker company, can receive compensation from the creditor in connection with that particular credit transaction."
Oldbe: Mortgagechat, absolutely correct. The Congress and the regulators insist on attempting to micro-manage the industry without the requisite knowledge, and then ignore the glaring mistakes and inaccuracies that the industry brings to their attention.
I have been reading and attempting to implement mortgage-related rules from the Fed for over 30 years. Previously their rules have been reasonably well written and logical, even if one did not agree with the content or methods. However, rules written during the last 18 to 24 months have stood out as paragons of inconsistency and inaccuracy.
Sorry about the rant. Guess we agree that the rule is a mess.
