The Consumer Financial Protection Bureau’s first crack at refining loan officer compensation rules put a major scare into the industry. But some industry groups now hope the young agency will drop its flat fee proposal and loosen several restrictions on LO compensation that the Federal Reserve first put into place.
As originally designed, the Fed’s compensation rule tried to ensure that LOs didn’t have any monetary incentives to steer borrowers into high-cost loans.
The original language mandated that any compensation paid to an originator could not be based on the terms or conditions of a loan. The mortgage company can pay the LO a salary or hourly wage, but any other compensation can only be based on the dollar amount of the loan. Profit sharing is prohibited.
In the case of branch managers, the Fed declared they cannot receive a bonus or participate in profit sharing if they originate any loans. Once the manager originates one loan, they must be compensated like any other loan officer.
In a new letter, four industry groups suggest that the CFPB should take a more practical approach than the Federal Reserve when it comes to compensation issues, and the agency should stick to the basic tenet of the Dodd Frank Act, which is to protect consumers from steering.
Paying commissions based solely on loan volume does not run afoul of the Dodd-Frank Act, according to the American Bankers Association, American Financial Services Association, Consumer Mortgage Coalition and Independent Community Bankers of America.
“A creditor or brokerage paying its employees a commission that does not vary by loan terms other than principal does not create an incentive to steer consumers into more costly loans,” the July 23 letter says. It also adheres to congressional intent to ban yield-spread premiums.
The CFPB is expected to issue its proposed rule in August. The measure will update and modify the Fed’s LO compensation that was issued in April 2011. It appears the trade groups want to put their concerns and suggestions in front of the bureau before officials complete work on the proposed rule.
“The CFPB has indicated some willingness to move the loan originator compensation rules back toward their fundamental purpose, which is to prevent loan originators from steering borrowers based on compensation,” said Kris Kully, an attorney at K&L Gates.
In the case of senior LOs and branch managers, the trade groups note that it is an “important consumer protection” for those individuals to be involved in originations from time to time. And they should be exempt from the compensation rule when it comes to profit sharing. (The joint letter also addresses the flat origination fee concept that the CFPB floated a few months ago.)
In wholesale or broker transactions where the consumer pays upfront discount points and fees, the originator can also be compensated by the creditor.
The CFPB wants to stop this “dual compensation” and require the lender to charge the consumer a flat fee. Any back-end payments by the creditor would be prohibited.
Instead of charging a fee based on 1% of the loan amount, the lender would have to set a specific dollar amount for the fee. Since the flat fee would include fixed costs, it would make it difficult for a mortgage brokerage firm or bank that brokers loans to pay their LOs a commission.
The joint comment letter points out several ways consumers would be “disadvantaged” by flat fees, including the fact that they are not tax deductible.
“Overall, the many disadvantages of flat origination fees far outweigh any possible advantage,” the trade groups say. The trade groups suggest that any consumer confusion over discount points should be addressed through consumer education and better mortgage disclosures.
One mortgage expert told National Mortgage News that the CFPB’s LO compensation proposal will prohibit compensation based on the terms of the loan, which should deter abuses. “So what is the point of having a flat origination fee,” the expert said.
