Mortgage brokers are complaining to the Consumer Financial Protection Bureau that the loan officer compensation rule is making it more expensive and difficult to close loans -- and it appears the bureau is listening.
At a recent congressional hearing, Rep. Gary Miller, R-Calif., urged the young agency to consider changes to the LO rule that would give brokers more flexibility – in particular allowing them to use part of their compensation to cover unexpected costs that crop up at loan closings.
"This is an issue we are looking at," CFPB director Richard Cordray said.
The bureau inherited the LO compensation rule from the Federal Reserve, and currently is in the process of drafting proposed language that includes certain provisions required by the Dodd-Frank Act. It also aims to clarify issues left unanswered by the Fed.
The proposed rule likely will be issued during the summer.
Changes to LO compensation have stirred a great deal of controversy because it up ended traditional compensation practices with a stated goal of preventing LOs from steering borrowers into higher cost and riskier loans. The rule became a compliance nightmare because the Fed provided so little guidance on how to comply with its complex features.
The rule basically prohibits loan officer compensation based on the terms and conditions of the loan or "proxies" for terms or conditions. Essentially, a LO can only be compensated based on the dollar amount of the mortgage and the volume he produces.
Once a branch manager originates one loan he/she is considered a loan officer for purposes of the rule. Therefore, they cannot receive bonuses because bonuses are considered a "proxy" for the profitability of the loans originated by the branch.
Community Mortgage Banking Project managing director Glen Corso wants the bureau to clarify branch manager compensation. He noted that independent mortgage banks usually compensate their managers based on the profitability of the branch. But that changed when the LO compensation rule went into effect in April 2011.
The American Bankers Association is concerned about the "proxy" concept, which has led bank examiners to take the position that year-end bonuses or contributions to 401-k plans violate the rule because it's related to bank profits.
CFPB director Cordray signaled during the recent hearing that the bureau would be looking at the "unintended effects on pension arrangements."
ABA also wants the bureau to rein in the proxy concept. "It expands the rule to unpredictable areas and unpredictable applications," ABA senior regulatory counsel Rod Alba said. He pointed out that compensation practices that run afoul of the rule subject a lender to severe liability. In some cases, a lender might have to repurchase all the loans they originated that year.
Meanwhile, the industry will have to wait until the end of this year before the CFPB finalizes its LO compensation proposal. Until the new guidance, "we have asked Bureau to suspend enforcement of the rule so lenders don't get slammed during the examination process," Alba said. So far, the bureau has not responded to ABA's request.
Mortgage Bankers Association president and chief executive David Stevens noted that the CFPB is working on the LO comp and "Qualified Mortgage" rules at the same time. Both address the issue affordability and ability to repay. The LO compensation proposal prohibits lenders from steering borrowers into higher cost products to increase their compensation while the QM rule prohibits originators from steering borrowers into loans they can't afford.
The MBA CEO is worried the two rules could conflict unless the bureau takes a "holistic" approach and coordinates the two rulemakings, which are on separate tracks. CFPB is expected to issue the final QM rule this summer.
Meanwhile, the National Association of Independent Housing Professionals is urging the CFPB to exempt prime loans and government-backed loans from LO compensation rule. The rule should only be applied to high-cost Home Owners and Equity Protection Act loans, according to NAIHP president Marc Savitt.
Competition to originate plain vanilla prime loans and Federal Housing Administration loans will keep lender fees in check, the West Virginia mortgage broker said.
