WASHINGTON—The Federal Reserve’s compensation rule is really putting branch managers over a barrel. They may have to decide whether they want to be a manager or a loan originator. They can’t be both under the Fed’s Truth in Lending Act rule that goes into effect April 1 and still share in the profits of their branch.
Many branch managers are the best loan producers in the shop. If they continue to originate loans their compensation will be based solely on a fixed percentage of the principal amount of each loan they originate and a fixed percentage of other loans originated by the branch.
Under the Fed’s rule, their compensation can’t be enhanced by profits the company generates through secondary market sales and other services and activities.
The Fed is taking this strict approach to prevent the steering of borrowers into higher-priced loans.
But the rule is hitting branch managers in the pocketbook.
“It really seems to be forcing those managers to make a choice,” said Kristie Kully, an attorney with K&L Gates in Washington.
The Mortgage Bankers Association has questioned the Fed about the treatment of branch managers and it didn’t like the informal verbal advice it received from Fed staffers.
According to the MBA, the Fed’s position is: “Being a loan originator subjects all compensation received by the manager to the rule, even compensation received in the manager’s capacity as manager. The manager, however, like other originators, can receive a fixed percent amount of all loans originated.”
The MBA summarized this verbal guidance in a Dec. 16 letter to the Fed while seeking written clarification on several TILA issues, including managerial compensation.
The trade group wants the Fed to ease up on the compensation rule so that managers who originate loans can still benefit from profit sharing.
The MBA has even asked the Fed for a “de minimis” exemption.
If a manager originates less than six loans, the MBA says, the Fed should take the position that “he or she is still treated as a managerial employee and is not subject to the restrictions of the rule regarding compensation.”
But it is doubtful the Fed will go alone. The compensation rule is aimed at preventing steering and any kind of incentive payments that would reward originators for charging borrowers higher interest rates or fees.
The Fed is very concerned about “slippery slopes,” Kully said. “Most of what I have heard from the Fed would lead me to believe that they wouldn’t be prepared to make such an exemption,” the K&L Gates attorney said.
She noted the compensation rule represents a “sea change” for the industry in the way lenders compete for loans and loan officers.
Company executives are concerned it could impact the entire competitive landscape. Some independent mortgage bankers are afraid their loan officers will bolt and move to a bank if they are too strict in implementing the compensation rule.
Many in the industry are waiting to see if someone will sue the Fed to stop implementation of the compensation rule.
Lenders One chief executive Scott Stern stressed that branch managers of stock brokerage firms, insurance companies and innumerable other businesses are paid based on the profits of a branch.
“Any change to compensation rules that would prohibit a branch manager from participating in the profits of a branch would be un-American among other things,” Stern said.
Mortgage banking consultant Brian Chappelle noted branch managers are generally “star” producers. The Fed rule allows lenders to pay the branch manager 80 basis points for each loan he originates (for example) and a 10 bp to 20 bp override for the other loans originated by the branch’s loan officers.
He explained there is no restriction on how much a branch manager/originator can make so long as it is based on the principal amount of the loan.
However, a manager’s compensation cannot have a “whiff” of profitability that is based on loan terms and conditions such as interest rates or prepayment penalties or “proxies” such as credit scores, Chappelle said.
The co-founder of Potomac Partners also noted there is a provision in the Dodd-Frank Act that appears to make the payment of improper compensation a defense that homeowners can use to stop a foreclosure.
The landmark bill has a “Defense to Foreclosure” section that includes a prohibition on steering and bans payments to mortgage originators that “varies based on the terms of the loan (other than the amount of the principal).”
Depending on how this provision is interpreted, Chappelle said, it might prompt Fannie Mae and Freddie Mac to issue guidelines on loan officer compensation.
The Dodd-Frank Act also contains legislative language that encouraged the Federal Reserve Board to move ahead and finalize the rule.
