WASHINGTON—The Conference of State Bank Supervisors has begun development of uniform state examination procedures for the loan originator compensation rule.
The first draft will be published in early August so it can be discussed at the American Association of Residential Mortgage Regulators annual conference (Aug. 9-12) in San Francisco.
Final examination procedures will be issued in September so the industry can review them, according to CSBS vice president Chuck Cross.
Although the LO compensation is complicated, Cross said in an interview, there are “three bright line tests” that examiners can use to gauge compliance.
First, the loan originator cannot be compensated based on the terms and conditions of the loan. So examiners can look to see if LOs are paid more for loans with higher interest rates.
Second, the originator can't be paid by both the creditor and the borrower. If the originator is paid by the wholesaler, the LO should not be pocketing any fees from the borrower.
The third test involves the anti-steering provisions in the LO compensation rule. Examiners will be looking to see if borrowers are steered into loans that are not in their interest.
The CSBS vice president for mortgage regulatory policy said, “There are a lot of idiosyncrasies within the rule” which are difficult to address in an examination procedure.
The state regulators are going to wait for the new Consumer Financial Protection Bureau to address those aspects of the rule.
The principal drafter of the LO compensation rule was the Federal Reserve Board. The Fed issued the final rule last August and compliance became mandatory in early April this year.
The mortgage industry had been looking for written guidance ever since. But the Fed ignored those requests. This frustrated many and forced lenders and brokers to take a very conservative approach toward implementation.
In hindsight it appears the Fed was reluctant to issue guidance when it was about to hand off regulatory responsibility for the compensation rule to the CFPB on July 21. Some suggest the Fed didn't want to tie the bureau's hands and then walk away.
Requests for guidance must now be addressed to the CFPB, which has the authority to interpret the LO compensation rule. The new bureau also has the authority to take enforcement actions against lenders and brokers that violate the rule.
But it is unclear when the bureau will turn its attention to the LO compensation rule.
Meanwhile, mortgage brokers are taking their complaints about the LO compensation rule to Congress.
The Fed's rulemaking has had a “devastating” impact on the mortgage broker community, according to Marc Savitt, who recently testified on behalf of the National Association of Independent Housing Professionals.
He told a House Financial Services panel that the Fed has failed to provide adequate guidance to the broker community. “We are not sure if we are doing things right or not,” he said.
Savitt is the president of The Mortgage Center, Martinsburg, W.Va., and also noted the Fed has rebuffed state regulators' requests for guidance.
Maryland deputy commissioner of financial regulation, Anne Norton, testified that state regulators support the intent of the Fed's LO compensation rule but they have been unable to obtain guidance from the Fed.
“Official guidance from either the Federal Reserve or CFPB is needed to provide direction to regulators and clarity to the industry,” Norton said.
Mike Anderson, vice president of the National Association of Mortgage Brokers, testified that the LO compensation rule is hurting the mortgage broker's ability to compete with banks.
The rule prohibits mortgage brokers from adjusting the rate and other fees once it is disclosed on the good-faith estimate form. This means that once an applicant takes the broker's GFE to a bank and obtains a better rate, the broker cannot make a counter offer.
“I know we lost five loans last week because the bank next door” cut their rate, said Anderson. “Or they give the buyers 25 basis points upfront towards closing costs because they can adjust their price and I can't,” he said in interview.
This lack of flexibility in pricing also is hurting brokers when it comes to helping borrowers who run into any unexpected expenses at the closing table. It used to be customary for brokers to cover unexpected costs but all that changed with the implementation of the Fed's LO compensation rule. “If a consumer finds he is short $200 due to circumstances beyond his control, I cannot reduce my profit to help the consumer,” Anderson said at the hearing.
Rep. Gary Miller, R-Calif., has introduced a bill that would allow brokers to reduce their compensation by 30% to help consumers who run into a shortfall at closing.
Loan brokers welcomed the congressman's initiative, but are concerned the legislative proposal only addresses the problem at the closing table.
“I don't need 30% leeway at the end. I need 30% in the beginning so I can compete with the banks,” the NAMB vice president said.
Anderson is president of Essential Mortgage, a subsidiary of New Orleans-based Latter & Blum.
