Attempts at Relief and Reform

Frank Dodd Mortgage Broker Comp

Posted on Monday, December 20, 2010

There is enough confusion and uncertainty out there about compensation that the
> Mortgage Bankers Association has written to Federal Reserve Board of Governors asking
> for written guidance to assist the mortgage industry's compliance with the Board's
> final rule on loan originator compensation and steering (the Rule) published on
> September 24, 2010.2
> "Specifically, the Rule prohibits: (1) basing compensation to a loan originator
> on a loan's terms or conditions, subject to a limited exception for loan amount;
> (2) compensation to a loan originator from both the consumer and a party other
> than consumer for the same The Rule is far-reaching and requires major changes to
> long-operating compensation practices that heretofore have been both legal and prevalent.
> Unfortunately, in our view, the Rule does not definitively address many matters
> of particular importance, and has engendered numerous questions from creditors and
> loan originators seeking to comply. Notwithstanding, it requires compliance by April
> 1, 2011." "Unfortunately verbal guidance in itself is insufficient."
> The MBA's letter points out that "there are several differences between the Rule
> and the Dodd-Frank Act. Examples include that Dodd-Frank prohibits several specific
> types of steering, including steering a consumer from a favorable loan to a less
> favorable loan regardless of the compensation of the loan originator or creditor.
> The Fed rule, however, takes a different view of steering, first by restricting
> steering based on compensation and then by interpreting its compensation rules as
> an anti-steering rule. Also, while Dodd-Frank prohibits compensation that varies
> based on the terms of the loan, it allows compensation to vary based on the principal
> amount of the loan without any conditions. In contrast, the Fed rule only permits
> the use of fixed percentage of the loan amount, subject to optional minimum and
> maximum dollar amounts that also must be fixed."
> I have heard from several folks (please see note at top of e-mail), saying that
> originators would be better off focusing on their existing pipelines and on obtaining
> new business than on how their compensation will be structured in 4 months. There
> will be a lot of misinformation and confusion until questions are cleared up by
> either the government, or by the top 3-4 investors. But compensation confusion has
> not stopped mid-sized lenders from weighing in on their policies and procedures.
> Yesterday I mentioned a letter from 360 Mortgage in Texas. Sierra Pacific, in California,
> also sent out its take on the April changes. "Effective on applications received
> on or after April 1, 2011 a loan originator (LO) cannot receive compensation that
> is based on the terms or conditions of the loan. This includes interest rate, product
> type, etc. The only exception is compensation based on a percentage of the loan
> amount. Sierra Pacific goes on. "If the LO receives their compensation directly from the
> consumer (paid at closing or financed into the loan) in a wholesale transaction,
> the LO may negotiate those fees with the consumer and the fees may vary from transaction
> to transaction. Therefore, it will be more advantageous for LOs to structure their
> deals with the consumer paying the origination fees. In these transactions, a lender
> credit (YSP) may still be present but must be applied to all other closing costs
> such that the closing costs are sufficient to use up the entire YSP credit and
> there is no cash back to the consumer or surplus YSP paid to the LO. If the LO receives
> compensation directly from the consumer (paid at closing or financed into the loan),
> the LO may not receive any additional compensation directly or indirectly from any
> other person, including the lender, in connection with that transaction. LOs may
> not receive both consumer paid origination fees and lender credits (YSP) on the
> same transaction. Any lender credit (YSP) must be applied to closing costs other
> than the origination fees. The LO and consumer may agree to have the LO origination
> fees paid through a lender credit (YSP). In those instances, the LO (brokerage
> company) must contractually agree with the lender in advance to the amount of compensation
> they want to earn on all transactions they conduct with that lender on which they
> are paid by lender credit. (This can be adjusted/reviewed periodically.) The origination
> fees in a lender paid wholesale transaction include all broker fees including processing,
> broker administration, etc. Bona Fide third party charges are not included in the
> LO origination fees. On wholesale transactions where a broker is being contractually
> paid by a pre-determined lender credit, their origination fees cannot be raised
> or lowered on a specific transaction by the originator or the lender for any reason.
> Surplus YSP may exist (over and above the contractually pre-determined amount)
> but must be applied to other closing costs. This will preclude LOs from paying
> for borrower fee's such as appraisal, or extension fees or reducing their origination
> charges for competitive reasons in cases where their compensation is being derived
> from a lender credit. It will also preclude LOs from earning any lender credit
> greater than the contractually pre-determined amount.
> "LOs are prohibited from steering consumers to any residential mortgage loan wherein
> the LO will receive greater compensation from that loan than they would from another
> loan, unless the consummated loan transaction is documented to be in the consumer's
> best interest. The LO in a wholesale transaction must meet a safe harbor requirement
> which gives the consumer three examples from lenders that the LO normally does business
> with. The examples must represent loans the LO has determined the consumer is qualified
> for and will include the lowest rate option and the lowest fee option. The consumer
> does not have to choose the option with the lowest rate or fees, but a justification
> for the choice must be documented, such as quicker turn times, underwriting criteria,
> etc."

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