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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2011

Facing Down Changes Could Prove Pivotal

Stay ahead of compensation rules by remaining vigilant and voicing insightful ideas

As the saying goes, change is the only constant, and mortgage brokers, lenders and loan originators certainly understand that dictum. Right now, we are witnessing a cascade of responses to several unprecedented years of turmoil in mortgage lending. We already have seen the U.S. Department of Housing and Urban Development's expanded good-faith estimate (GFE). In addition, strict, mandatory licensing protocols have taken effect. And coming soon — April 1, if things remain as planned — is the implementation of Federal Reserve Board regulations governing loan-originator compensation.

But the story doesn't end there. Changes in response to provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act are sure to follow.

Mortgage professionals must understand the new requirements and interpret the uncertainties that will undoubtedly arise. Moreover, we should consider our responses and plans for continued success no matter what comes our way.

Guidance limited

The sweeping changes called for in the Dodd-Frank Act include those named in Title XIV, aka the Mortgage Reform and Anti-Predatory Lending Act. Section 1403 addresses loan-officer compensation specifically with its prohibition on steering incentives. With respect to compensation, it states:

"For any residential mortgage loan, no mortgage originator shall receive from any person and no person shall pay to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal)."

As with most legislation, federal regulators will be responsible for filling in the blanks. In this case, they must create the actual rules that will guide originator actions and enforce the legislation's intent. The most important regulator with authority over the Dodd-Frank Act, however, isn't yet functional: The Consumer Financial Protection Bureau (CFPB) is set to assume authority under the act's provisions no later than July 21.

Putting aside that less-than-minor detail, the concept behind loan-originator-compensation regulations appears simple: A loan originator's compensation shouldn't vary according to a loan's terms and conditions. The implementation of that concept, however, is proving complex.

As of press time, the Federal Reserve had provided limited written guidance on its regulation. This could be harmful to consumers and problematic to the mortgage industry as a whole.

Chilling impacts

Overall, we can expect the Dodd-Frank Act and the penalties it supports to have a further chilling impact on an already drastically contracted mortgage-lending industry. If the final regulations don't allow loan originators to reduce their compensation voluntarily to cover borrowers' costs or fees at closing, as has been common, mortgage costs likely will increase. Ultimately, the loss of wiggle room will mean consumers must bring more cash to closing.

Furthermore, the idea that retail loan officers, mortgage brokerages and mortgage brokers' loan originators will be treated equally under the act sounds good but may create many difficulties in practice. Brokers and their originators have been given financial incentives for the extra work and value of shopping loans in borrowers' best interests — and in navigating more-complex transactions.

Going forward, it looks as if it will be more difficult to compensate broker-affiliated originators based on the complete economics of a transaction. Yield-spread premiums, for example, can give consumers benefits associated with origination and closing.

As compensation is commoditized, low-volume originators and branches could find it difficult to survive. In many cases, these businesses represent some of the most consumer-oriented and quality lending operations.

Needed clarification

As most brokers realize, every mortgage origination involves a complicated and sophisticated process, and consumers benefit from the relationships and work of the originator. More use of consumer-direct payments to loan originators could help consumers and the market, provided the Federal Reserve clarifies certain issues.

One area needing elucidation pertains to branch-office managers. It seems logical that consumers and the industry would be better served if a mortgage shop's managers also were allowed to be licensed to close individual loans.

Some of the best community branches have a producing manager, someone who also writes loans. This is an important path for business formation and job growth at the community level. It seems completely off base that the Federal Reserve should prohibit profit-based compensation to managers simply because they also originate loans.

How can the mortgage industry be the only business in America that can't compensate its employees based on profitability?

As it stands, when the Dodd-Frank Act's provisions giving consumers a defense to foreclosure for violations of these regulations kick in along with anti-steering provisions, wholesale lenders will be forced to police their mortgage brokers' and correspondents' compensation and steering practices.

•  •  •

Considering the intricacy of the Dodd-Frank Act's new rules and the announced implementation of the Federal Reserve's compensation rule, it seems logical that their timing, at the least, should coordinate. In other words, the Federal Reserve would be wise to postpone its compensation mandate from April 1 to July 21.

This would allow for a more orderly transition and line up with the established operational date of the CFPB. Given the opportunity via public comment sessions, the mortgage industry should provide input requesting this postponement along with further allowances as mentioned.

It's up to us to do what's best for consumers — and we are — but we must protect our livelihoods at the same time. Brokers and branch managers who remain watchful and speak up can stay one step ahead of the change that never stops.


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