Mortgage brokers couldn’t have been more relieved when they finally saw the Consumer Financial Protection Bureau’s new loan officer compensation rule. “It’s a major win,” said Mike Anderson, president of Essential Mortgage.
“We’ve been fighting hard for this ever since LO comp came out,” said the Louisiana mortgage broker. “It’s nice to get a win under our belt for a change.”
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The new proposal gives consumers the option to pay points and fees upfront and allows brokerage firms to pay commissions to their loan officers in consumer-paid transactions. “I applaud them for listening to us,” Anderson said.
The Louisiana mortgage broker was part of a small lender panel that met with CFPB officials in May to discuss loan officer compensation issues. Back then bureau officials were leaning toward a model that required lenders and brokers to charge a flat origination fee no matter the size of the loan. This drew opposition from industry and consumer groups alike because it limited the consumer’s option to pay upfront points and fees to lower their financing costs.
In issuing its new proposal—which is now out for public comment—the bureau said it dropped the flat fee concept to “minimize the adverse consequences” it would have on industry and consumers. However, the CFPB wants lenders and brokers to offer applicants a no-fee, no-point mortgage, which the bureau calls a “zero-zero option.”
This zero-zero option allows a borrower to see the total cost of the mortgage transaction in terms of the full interest rate and closing costs so they can compare it with other options. “Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”
This approach seems to be acceptable to the industry. The proposed rule “moves in the right direction,” said David Stevens, the president and chief executive of the Mortgage Bankers Association. He noted that the MBA has already outlined a plan to review every aspect of the 400-page proposal and how it will impact lenders and consumers. “I am hopeful we will end up with a good rule,” the MBA president said.
Dan Cutaia, vice president of risk management and capital markets at Fairway Independent Mortgage, noted that most good originators already offer the borrower a no-cost option that is similar to the zero-zero option. “It is not a particular hardship,” he said.
However, the CFPB proposal says the LO doesn’t have to offer a zero-zero option if the borrower couldn’t qualify for that loan. Then the proposal seeks comment on alternatives for those borrowers.
“It seems like an odd disconnect,” Cutaia said. “My opinion is if you are going to do zero-zero, just do a zero-zero. Don’t leave an ambiguous loophole.”
The CFPB’s loan officer compensation proposal reaffirms the basic tenets of the Federal Reserve rule and prohibits compensation that could incentivize originators to steer borrowers into a higher risk or higher cost loan.
Basically, a loan officer is expected to charge a origination fee that can be based on the loan amount but no other terms of the loan. They can receive commissions based on the number of loans originated and how long they have worked for the company.
Branch managers that engage in loan production must be compensated like other LOs. In general, they cannot be paid bonuses or participate in the company’s profit-sharing plan.
The new proposal relaxes the restrictions the Fed placed on senior managers that occasionally engage in origination activities. Under the Fed rule, a senior manager that originated even one loan would be classified as an originator.
The CFPB proposal would exempt senior managers if they originated five or fewer mortgages during the last 12 months. The comment period on the proposed rule ends Oct. 16. The bureau plans to finalize the rule in January.
The mortgage industry remains largely critical of the Fed’s loan officer compensation rule. But it has had some positive effects, according to Brian Chappelle, a consultant with Potomac Partners.
Mortgage executives have seen that their new compensation plans “turned out to be a benefit for their companies,” Chappelle said.
Management has more control of pricing: they know what they can pay their loan officers and what the fixed production costs are. Previously, loan officers had more leeway to setting loan rates and fees, the mortgage-banking consultant said.
