Large banks could end up pocketing higher profit margins on residential mortgages this year because of a rule from the Federal Reserve that restricts the pay of brokers and loan officers.
The rule also could cull the ranks of wholesale mortgage brokers — some lenders predict by up to 20% — particularly if brokers end up earning a flat fee or set amount per loan. Such a shift could drive small producers out of the industry and lower overall compensation, though many are still trying to understand the rule's final impact.
"Everyone is scratching their head, waiting to figure out how to apply this and what it will mean," said Brian Koss, the managing partner at Mortgage Network Inc., a privately held lender in Danvers, Mass.
Under the Fed rule, brokers and loan officers cannot be paid based on the interest rate or any term or condition of the loan. That eliminates the payment of yield-spread premiums, a form of hidden compensation that consumer groups have long tried to eradicate.
"The Fed's rules are in favor of the consumer and the result will be less compensation for mortgage brokers," said James Deitch, the chief operating officer of the $1.14 billion-asset First Chester County Corp. in West Chester, Pa., and managing director of its American Home Bank mortgage division.
The rule was created to eliminate the "steering" or "upselling" of loans, a widespread predatory practice in the boom years. The rule seeks to bar the practice of brokers or loan officers selling consumers high-cost loans to receive the fattest commissions. Most lenders are waiting for further guidance from the Fed on how to structure compensation for the wholesale channel before the rule takes effect April 1.
