Unless the implementation of the Federal Reserve’s rule on loan officer compensation is upended by last-minute court action, it went live last Friday and lenders should comply with it.
The Fed is pointing to inclusion of many of the same provisions into law by Congress as a sign of being on the right side of the angels on this one, no matter how vehemently lenders and mortgage brokers disagree.
The Fed’s LO rule comes out of Truth in Lending Act reform it has been conducting and specifically its authority to curb deceptive and unfair practices. There are a million particulars but here are the “Big 3” of its prohibitions.
The first is lenders can’t base compensation on a loan’s terms or conditions. (Dollar amount, however, can be used.) The second is lending officers cannot get paid by both the borrower and another party. And thirdly, there can be no steering borrowers to loans where the LO can receive greater compensation from one funding source than another.
Compounding the difficulty of this new rule is involvement by at least two other federal sources. The new Consumer Financial Protection Bureau will be taking over the job of TILA reform from the Fed once it gets going. And, the Dodd-Frank Reform Act passed by Congress has many similar provisions in it. However, while Dodd-Frank is the law of the land, the rules to put it into effect have not yet been promulgated.
The fact that the Fed is acting to curb what it calls deceptive and unfair practices tips us off to the punitive nature of the rule. This is to correct what the Fed and Congress have interpreted as bad ways to compensate brokers or lending officers for getting a mortgage done. Especially in mind is the yield-spread premium, where a broker or LO gets paid more to get the consumer to agree to a higher interest rate. And the practice of getting paid twice, by consumers on the front end and lenders on the back end, has also been deemed a bad way of doing things.
Though a bitter pill, it is time to bid the YSP goodbye. There were occasions when it was actually good for a consumer (if the borrower had little or no money to put down on the mortgage), but the perception of it as unfair will never change outside the industry.
Also, the time of the zero-down mortgage is past. And the defaults on those kinds of mortgages have been large.
How should loan originators get paid? The rule makes a murky situation a little clearer. It will be either from the borrower or another party. At a webinar on this topic we ran for SourceMedia recently, a question on this came up. Our panelists seemed to agree: the payment should come from the lender.
