Mortgage brokers are complaining to Congress that the Federal Reserve’s loan officer compensation rule is tying their hands, hurting their ability to compete with banks.
The Fed’s Truth in Lending Act rule that went into effect April 1 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 provide a counter offer.
“I know we lost five loans last week because the bank next door” cut their rate, said Mike Anderson, vice president of the National Association of Mortgage Brokers. “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 a recent House Financial Services subcommittee hearing.
At the hearing, Rep. Gary Miller, R-Calif., said he is introducing a bill allowing 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 a problem at the closing table and not elsewhere.
“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 told National Mortgage News.
Anderson is president of Essential Mortgage, a subsidiary of New Orleans-based Latter & Blum.
The Miller bill also allows brokerage firms to pay their loan officers a commission in a consumer-paid transaction, which is prohibited under the Fed rule. Commissions are only permissible when the wholesaler directly pays the mortgage broker a percentage of the loan amount.
Fed consumer affairs director Sandra Braunstein testified that a mortgage broker can pay an “incentive fee” to an employee in transactions where the consumer pays origination fees directly to the brokerage firm.
An incentive fee, for example, can be a bonus for exceeding a certain number of loans in a specified period, according to her testimony.
But an incentive fee is not the same as a commission.
Just before the Fed issued the final LO comp rule, Rep. Barney Frank, D-Mass., requested two major changes.
The lawmaker noted that restrictions on commissions in consumer-paid transactions “unnecessarily” interfere with the borrower’s ability to obtain loans from mortgage brokers.
In a letter to the Fed, he noted the Dodd-Frank Act prohibits mortgage brokers from being compensated by the wholesaler and the consumer to prevent “double dipping.”
However, the Fed rule is “more restrictive,” Frank said in the March 24 letter, because it prevents brokers from sharing compensation with their employees.
The ranking Democrat on the House Financial Services Committee urged the Fed to act “expeditiously” to revise the rule. But the Fed has not made any changes.
The Fed also ignored Frank’s request to allow brokers to reduce their fee at the request of a borrower who has run into an unexpected expensive at closing. The Fed has not made this change either.
On July 21, the new Consumer Financial Protection Bureau takes over rulemaking for TILA and the LO compensation rule from the Fed. Brokers and others are hoping the CFPB will be more responsive to industry concerns.
The Fed’s rulemaking has been “devastating” to the brokerage industry, said Marc Savitt, president of the National Association of Independent Housing Professionals. He noted 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.
The president of Mortgage Center, Martinsburg, W.Va., 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 provide field examiners with guidance on how to evaluate industry compliance. As a result, some states are not enforcing the new rule.
“Official guidance from either the Federal Reserve or CFPB is needed to provide direction to regulators and clarity to the industry,” Norton said.
