LOAN OFFICER COMPENSATION RULE - WHERE WILL IT LEAD?
This is the question many of us are asking. On April 01, the Federal Reserve's rule for loan officer compensation went into effect. While the majority of originators are getting used to a different way of doing business, there are some who say it is business as usual.
For me, I'm still pondering how the loan officer compensation rule will affect lending overall in the long run. Will there be fewer souces and fewer choices for consumers? Logic would say this would be one effect of the rule.
Our industry has withstood many changes over the last two years in the name of "consumer protection" and yet I just read an article in Origination Pro saying fraud has increased.
The brunt of the changes have been aimed at the third party mortgage broker originator, the same person who has been blamed for the housing downfall. With all the changes we've endured, broker originators are not in a position to order an appraisal directly, do not underwrite loans, have to be licensed, and according to some responsible for a measely 10% of all originations. Yet fraud is increasing. Logic would say mortgage brokers could not be overwhelmingly blamed for this.
The loan officer compensation rule is applied across the board to any originator no matter where they work. Gone are the days of offering someone a better rate by taking a cut in pay, or lowering closing costs by taking a cut in pay, or closing the gap on funds short to close by the loan originator. Originators now must set up a fee with their employer and they must be paid that percentage on every loan and cannot make less than that.
If the fee is set too high, then the loan originator will not be able to compete; set too low, the originator will not be able to make a living. If loan originators cannot make a living, then logic would say they will exit the industry and the really good ones will do something else, like selling insurance, or become Realtors, where they can control the amount of income they make. Will we see a drain of the best producers?
Will lending institutions simply put order takers in the place of orignators and pay them hourly? Will more loan originators leave the bigger institutions and start their own brokerages where they have more control over the process? Will there be fewer loan programs available?
There are a lot of questions about the new loan officer compensation rule. Most likely it will not settle back into business as usual in any fashion because the changes will keep on coming until housing gets on a more stable path. The most troublesome part of the rule is that it price fixes which results in higher costs to the consumer. If this were not understood simply on the merits of this rule, it is underscored with the results of every single change that has been made in our industry. We have seen closing costs increase (lenders need to pay for the new programs/oversight), higher appraisal fees (appraisal management companies take a chunk of the appraisal fee) and less competition (wholesalers have left the market, smaller brokerages may close their doors).
One thing is very clear to me, the loan officer compensation rule will NOT be beneficial to recovery of housing or our economy. The right solution to the housing collapse would have been to punish the guilty parties vs punishing the public. The loan officer compensation rule punishes the public.
