The countdown clock on the Federal Reserve's rule to limit mortgage brokers' pay still has two months to go, but the shake-up is under way.
Large banks including Wells Fargo & Co. and Bank of America Corp. are still fine-tuning their pay plans for mortgage brokers and loan officers. Some loan officers and brokers are already shopping for new jobs because their pay could be slashed in half after April 1, when the Fed rule take effect.
The rule bars tying compensation to terms of the loan, such as paying more for loans with higher interest rates. It is expected to radically upend the mortgage industry's current pay model and will require far more oversight by banks of brokers and loan officers.
"What we know is YSP is dead," said Kathleen Vaughan, executive vice president and national manager at Wells Fargo Wholesale Lending. "The broker can be compensated entirely by the lender or can be paid entirely by the borrower — not both. So when the broker is paid by the lender, the broker is going to work with its lender and it will be agreed-to compensation and it will be paid on all transactions."
Most banks are expected to switch to a flat compensation model for loan officers and will have to put more management controls in place if they pay incentives based on the volume of loans produced, experts say. The controls would be necessary to ensure that such awards don't create a perverse incentive to make risky loans.
Wells and B of A are expected to announce specifics of their plans in the next few weeks. Banks also are expected to revise branch managers' compensation, because they can no longer share in the branch profits generated by mortgages.
Meanwhile, mortgage banks see an opportunity to poach high-producing loan officers or add brokers as affiliates with promises to find ways to preserve their income. But loan officers that work for banks are in a bind, since they are exempt from state licensing requirements in working for a traditional bank and would have to become licensed in individual states to join a mortgage bank.
