LOAN OFFICER COMPENSATION RULING TO TAKE PLACE APRIL 01, 2011 - WILL IT STAND?
THIS WEEK WE HAVE SEEN A LAWSUIT BY NAIHP TO IMPOSE A TEMPORARY RESTRAINING ORDER ON THE APRIL 01, 2011 IMPLEMENTATION OF THE FEDERAL RESERVE BOARD'S LOAN OFFICER COMPENSATION RULING. NAMB IS WORKING ON ONE AS WELL.
One of the reasons of the request is a failure on the part of the Federal Reserve Board to prove that loan originator YSP (yield spread premium) is "unfair" to the consumer.
The loan officer compensation ruling affects all loan originators, even those working at banks as well as brokerages. In effect if sets the income an originator can earn as a constant percentage per loan. The percentage earned cannot be changed from one loan to another. If one loan takes more work, the income cannot be greater. If a borrower is short funds to close, the loan originator cannot share any of the pre disclosed YSP to help with that cause.
One big problem with the loan officer compensation ruling is that lenders who originate loans (vs brokers) will still have the ability to charge consumers interest rates at above "par rates" as long as they do not alter the compensation to the loan originator. As a matter of fact the lender can even alter the rate charged up to 1/4 percentage to recoup the compensation paid to the loan originator.
Envision the scenario that the money still flows to the lender, the person who produced the loan is not the benefactor of as much of it. The theory is that a loan originator has too much at stake to give a fair deal to a borrower. However, with the ruling the bank would still receive the income.
Now, envision if this loan officer compensation ruling can stand in the mortgage loan business, what about the person who goes to purchase a vehicle. Should they be entitled to get that vehicle at the same price as anyone else. I believe generally car sale people are paid commission. If they bring more money into the dealership they would engage in some share of that extra income.
Envision the real estate agent who has a transaction that they really want to close, but they need to give up some of their commission to make that happen. What if that could no longer be?
For some time brokers have had to disclose the amount of money they can make on a transaction. The states set a limit as to what that can be as well as each individual lender has a maximum they will allow. There is already a lot of clarity about the fact that the broker can receive payment from a lender for the loan. Now the feds wanting to regulate that income per transaction is a bit far reaching.
Lenders will still receive SRP (service release premium) on the loans they sell to the secondary market. Banks are not required to disclose the SRP they will receive on a loan; brokers for some time now have had to disclose the YSP they are being paid by the lender. When a broker receives YSP that goes to pay the operating costs of the brokerage as well as the loan originator. Similarly banks receive SRP at the end of the loan, which they use to compensate loan originators, CEO'S, and operating costs.
By excluding SRP from the discussion the banks who committed a substantial amount of predatory lending leading to the housing collapse would be exempt in this ruling if they were in business today! When you look at the above it does lead one to consider both YSP and SRP if indeed income is the root of the problem.
The Small Business Administration is concerned about the effect of the loan officer compensation ruling on small businesses. As an owner of a small business I expect to see income diminish as a result of this ruling.
I think we can safely say the majority of us are in agreement that imposing a set loan officer compensation plan is not in the best interest of the consumer. We have seen many changes over the last few years, the national licensing of loan originators who work at brokerages, the SAFE Act, HVCC/AIR, TILA changes, etc. While these have perhaps been annoying to navigate, they have not really impacted the consumer as much as the latest loan officer compensation ruling will. Many of them have increased the cost to the consumer.
While all the changes were in the name of "protecting the consumer" often the consumer ends up more confused. We went from a one page good faith estimate to a four pages with less clarity. The loan officer compensation ruling will not reduce costs to the consumer. It will give him fewer choices and increase costs. It will not drive down interest rates, instead it will likely drive up interest rates. It will no longer be possible to offer a lower rate to get a deal done.
So, I'll be watching the progress of this suit, along with everyone else in my industry. Changes such as this add to the cost of doing business. At some point it would be nice to see a carefully thought out change that really benefited the consumer. We'll have to wait and see if the ruling stands!
