WASHINGTON—The Federal Reserve’s new rules on loan officer compensation are expected to force mortgage companies to review the way they conduct business and compensate their employees.
“It’s going to make a lot of people restructure their mortgage departments,” according to Elizabeth Deal, executive vice president of a mortgage subsidiary controlled by the Independent Community Bankers of America.
Lenders will have to rewrite the job descriptions of their LOs and compensation packages, “which could really impact their way of life,” she said in an interview with ON.
The Fed compensation rule allows lenders to pay a loan officer or mortgage broker a flat fee or a percentage of the loan amount.
ICBA Mortgage provides community banks with access to the secondary market. Several community banks pay their loan officers a base salary with many LOs receiving a bonus at yearend based on their mortgage production volume.
“Probably, this rule change doesn’t affect a majority of our members,” she said, “but it does affect some.”
Scott Stern, CEO of Lenders One, a mortgage cooperative with 155 member firms, said there is much confusion about the Fed’s compensation rule among his affiliates.
“They are concerned about possible limits on company compensation and loan officer compensation,” he said.
The Lenders One CEO stressed that he supports one key objective of the Fed rule, which is to ban compensation practices that encourage LOs to steer borrowers into riskier and higher-priced loans, including nonprime mortgages that carry teaser rates and prepayment penalties.
“However, the rule should empower LOs to earn a living based on the volume of loans they originate—and the loan amount, with no cap on income,” he said. Stern believes this would allow the mortgage industry “to continue to recruit the best and the brightest from the financial services world.”
American Bankers Association senior regulatory counsel Rod Alba said he is not aware of any cap on LO compensation in the rule.
The Fed is “not setting the rate that is ultimately charged to the consumer,” the ABA vice president said. And the Fed is “not capping how much you can pay the broker or the loan officer,” he added.
However, the Fed is not the only government entity forcing the mortgage industry to adjust its loan officer compensation rules.
Back in March, the Department of Labor issued an interruptive rule saying that LOs who work primarily inside the office are entitled to overtime pay.
The ABA regulatory counsel said it is unclear how the Fed’s compensation rule is going to interact with the DOL’s position on overtime pay.
“With the Fed tightening up on compensation to LOs, and the companies facing so much risk from the overtime rule,” he said, the “pure commission-based compensation system is probably a thing of the past.”
The ABA vice president suggested that companies may end up paying LOs a set a salary to work 9 to 5 and a bonus at the end of the year if they originated 100 loans.
The ICBA mortgage executive noted that LOs generally have multiple duties at a community bank. They are salaried employees who will work overtime to help borrowers. But that kind of flexibility might have to change under the overtime rule.
Meanwhile, LOs that originate commercial real estate loans are not affected by these compensation changes.
