The Federal Reserve Board late last week handed down a new interpretation that places tough compensation restrictions on transactions where the borrower agrees to pay the loan officer of a mortgage brokerage firm directly.
In this new interpretation, the Fed says all borrower paid compensation has to go through the broker owner. And the broker owner can only pay the employee based on a salary or hourly wage.
The Fed's overall compensation rule, which goes into effect April 1, generally allows loan officers to be paid based on a set percentage of the loan amount. In cases where the consumer agrees to pay the LO directly, the LO cannot receive compensation from other sources -- the wholesaler or its employer.
It was understood that LOs could charge a higher commission if the borrower agrees to pay them directly. This approach would likely involve a refinancing transaction where the compensation could be rolled into the mortgage.
But the Fed has thrown cold water on this notion. In a new interpretation, the Fed says an LO employed by a mortgage brokerage firm can only be compensated in the form of a salary or hourly wage (in instances where the borrower agrees to pay the LO directly.)
"It surprised everyone," said Brian Chappelle, a mortgage banking consultant, who alerted the industry to this new interpretation. He noted that some industry attorneys disagree with the Fed's interpretation.
