Consumer Bureau Getting Feedback on Loan Officer Compensation Rule

From National Mortgage News: Mortgage brokers are complaining to the Consumer Financial Protection Bureau that the loan officer compensation rule is making it more expensive and difficult to close loans — and it appears the bureau is listening.

At a recent congressional hearing, Rep. Gary Miller, R-Calif., urged the young agency to consider changes to the LO rule that would give brokers more flexibility – in particular allowing them to use part of their compensation to cover unexpected costs that crop up at loan closings.

“This is an issue we are looking at,” CFPB director Richard Cordray said.

The bureau inherited the LO compensation rule from the Federal Reserve, and currently is in the process of drafting proposed language that includes certain provisions required by the Dodd-Frank Act. It also aims to clarify issues left unanswered by the Fed.

The proposed rule likely will be issued during the summer.

Changes to LO compensation have stirred a great deal of controversy because it up ended traditional compensation practices with a stated goal of preventing LOs from steering borrowers into higher cost and riskier loans. The rule became a compliance nightmare because the Fed provided so little guidance on how to comply with its complex features.

The rule basically prohibits loan officer compensation based on the terms and conditions of the loan or “proxies” for terms or conditions. Essentially, a LO can only be compensated based on the dollar amount of the mortgage and the volume he produces.

Once a branch manager originates one loan he/she is considered a loan officer for purposes of the rule. Therefore, they cannot receive bonuses because bonuses are considered a “proxy” for the profitability of the loans originated by the branch.

Community Mortgage Banking Project managing director Glen Corso wants the bureau to clarify branch manager compensation. He noted that independent mortgage banks usually compensate their managers based on the profitability of the branch. But that changed when the LO compensation rule went into effect in April 2011.

The American Bankers Association is concerned about the “proxy” concept, which has led bank examiners to take the position that year-end bonuses or contributions to 401-k plans violate the rule because it’s related to bank profits.

CFPB director Cordray signaled during the recent hearing that the bureau would be looking at the “unintended effects on pension arrangements.”

ABA also wants the bureau to rein in the proxy concept. “It expands the rule to unpredictable areas and unpredictable applications,” ABA senior regulatory counsel Rod Alba said. He pointed out that compensation practices that run afoul of the rule subject a lender to severe liability. In some cases, a lender might have to repurchase all the loans they originated that year.

Mortgage Bankers Association president and chief executive David Stevens noted that the CFPB is working on the LO comp and “Qualified Mortgage” rules at the same time. Both address the issue affordability and ability to repay. The LO compensation proposal prohibits lenders from steering borrowers into higher cost products to increase their compensation while the QM rule prohibits originators from steering borrowers into loans they can’t afford. 

The MBA CEO is worried the two rules could conflict unless the bureau takes a “holistic” approach and coordinates the two rulemakings, which are on separate tracks. CFPB is expected to issue the final QM rule this summer.

Meanwhile, the National Association of Independent Housing Professionals is urging the CFPB to exempt prime loans and government-backed loans from LO compensation rule. The rule should only be applied to high-cost Home Owners and Equity Protection Act loans, according to NAIHP president Marc Savitt.

Competition to originate plain vanilla prime loans and Federal Housing Administration loans will keep lender fees in check, the West Virginia mortgage broker said.


3 Responses to Consumer Bureau Getting Feedback on Loan Officer Compensation Rule

  1. Joe says:

    the real travesty here is that the Loan originators are now having their pockets picked by the company, where as a 50/50 split was common, and in my case a 10% bonus was given every month I made $12000 in revenues for the company, which was 70% of the time, I am now looking at a split that resembles a 30/70 house split. So in essense the broker, nt the originator is being overly compensated while we have no health insurance, 401Ks, paid sick or vacation time. The originators are the ones being screwed in this post Dodd-Frank enviroment, agreed?

    • davehershman says:

      I really can’t generalize–though I am sure there is some truth to your statement. The consumer is also suffering because so many banks have reacted by raising pricing across the board in order to accomodate having to cut prices to some and also to pay for more compliance on each file. If I were you I would be “checking” with other companies. It is only how much your company is paying–but how they are priced coupled with the comp plan. For example, plenty of loan officers have great benefits-but are they paid less and/or have higher pricing?

      • Joe says:

        The consumer has paid each and every time the government gets involved, HVCC costs the consumer 40% more for an appriasal now, meanwhile the banks set up AMC’s and screw the individual appraisers. With this abortion of a bill, any and all “suprises” in the file, ie extensions, lower appraised value pushing them into higner LTV bullshit risk assessment grids, must be passed onto the consumer, This is what they are “looking into”, whether the broker can absorb the “add-ons” that can happen in the file, we very most often would absorb small increases from our YSP…now we cannot.
        The broker owner or “job creators” are the ones that now thnk that they deserve more of my money while I am dealing with licensing fees & education costs, higner cellphone bills, higher gas prices, multiple trips back to the borrower due to the new compliance nightmares; this is a power play by the big banks to squash the MLO’s competition and they convinced & bought Congress to throw the MLO under the bus, another example of the corruption within the Congress and the banks in this country…. I say eff it, nationalize the banks, I’ll go work for another whore elsewhere as soon as the economy turns around

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