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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2014

Rising Above Industry Challenges

Getting a warehouse line can provide brokers with a number of benefits

The architect Frank Lloyd Wright was said to have received a phone call one night concerning a home he had recently built. The roof was leaking and the basement was filling with water, he was told, to which Wright reportedly responded, “Try to rise above it.”

This is probably good advice for the mortgage industry, which has faced a downright hostile regulatory environment in recent years. Mortgage brokers and originators still can level the playing field, however, allowing themselves to compete even in such a stringently regulated industry. In today’s environment, mortgage brokers at least should consider whether a warehouse line is right for them, although this decision should be made with care and thorough education. Let’s dig in a little deeper.

QM’s effect

If you’re weighing the pros and cons of a warehouse line, begin by first considering the new qualified mortgage (QM) regulations from the Consumer Financial Protection Bureau. The rules mandate that QMs limit points and fees to 3 percent of the total loan amount on loans $100,000 or greater. Lender-paid compensation paid to mortgage brokers is included in the points and fees calculation.

Let’s compare an identical transaction closed by a broker versus a creditor, each of whom have loan officers being paid 100 basis points. In this case, let’s say that the rates paid by the borrowers are identical — 4.5 percent. The broker’s compensation plan with the wholesaler is 2.5 percent on all deals. Under the rules effective this past January, compensation paid to the employee of a creditor is not included in the points and fees test. The broker, on the other hand, will be required to include the entire 2.5 percent against the cap. In short, brokers include the identical amount they pay to their loan officers, but in addition, must include the amount for the entity’s overhead.

Now, if that in itself is not enough to make mortgage brokers consider a warehouse line, consider three other reasons — namely, those that pertain to Truth in Lending Act rules dealing with loan-originator compensation. The rules contain three prohibitions with which every mortgage professional should be familiar:

  • Rule No. 1 prohibits a loan originator from obtaining any compensation based on a loan term. In short, loan originators can’t get paid for higher interest rate loans.
  • Rule No. 2 prohibits a loan originator from receiving compensation directly from the consumer while simultaneously receiving compensation from another person. In other words, the rule prohibits brokers from receiving both front-end and back-end compensation.
  • Rule No. 3 prohibits a loan originator from steering a borrower to a creditor with less favorable terms based on the loan originator’s compensation.

Let’s take a closer look at each of these three rules, but first start with a question: Who is a “loan originator”?

Prohibitions

All three of the aforementioned prohibitions apply only to “loan originators.” For a brokerage using table funding to close its loans, both its loan officers and its broker entity are “loan originators” subject to the rule. As a mini correspondent, however — that is, when you’re using a bona fide warehouse line — your loan officers are still “loan originators,” but your entity (i.e., your company or legal organization) is not a loan originator. So, the entity is not subject to the rules.

With this definition outlined, let’s take a look at each of the three rules. Again, rule No. 1 prohibits payment to a loan originator based on a loan term. So, as a mortgage broker, banker or mini correspondent, you’re prohibited from paying your loan officers based upon the interest rate on your loan. In other words, you can’t pay them differently for loans with different interest rates, and as a broker, your entity can’t get paid differently based on the interest rate. Wholesalers must pay you the same on each loan. As a mini correspondent, however, your entity is not a loan originator, and therefore the rule does not apply. As a practical matter, your entity is treated just like the other large retail lenders out there. Like JPMorgan Chase or Wells Fargo & Co., your entity can be compensated based upon the interest rate of the loan.

Now let’s look at rule No. 2. This rule prohibits a loan originator from receiving payments directly from the consumer while also receiving back-end compensation. For a mortgage brokerage, this rule will apply to both its entity and its loan officers. If you look at the golden years of wholesale lending — a time when brokers accounted for as much as 70 percent of the business — in almost every deal the broker got some front-end compensation from the consumer as well as some back-end compensation from the wholesaler in the form of the yield-spread premium, something that simply can’t be done under today’s rules. As a mini correspondent, however, your entity is not a “loan originator,” so the rule doesn’t apply to your entity. Your entity will be able to receive money from the consumer up front, and at the same time, will be able to receive back-end compensation in the form of a secondary market gain on sale. Again, the net result is greater profitability for the entity.

Rule No. 3 prohibits loan originators from steering a consumer to a creditor offering less favorable terms in order to get more compensation for themselves. That rule doesn’t apply to mini correspondents, however, as they’re not regarded as loan originators. It also doesn’t apply to a mini correspondent’s loan officers because they are not referring loans to creditors; they are originating loans for the company itself.

Beyond these motivators, mortgage brokers who are considering a warehouse line should consider the benefits that they can gain relating to their Good Faith Estimate (GFE) disclosures. Brokers are required to include their lender compensation as an origination charge in block one of the form, although the credit shows in block two. The net result is that a broker’s origination fee appears to be significantly greater than that of a mortgage banker on the exact same deal. If you use a bona fide warehouse line as a creditor, your back-end compensation doesn’t need to be shown on line one of the GFE.

•  •  •

In considering whether or not to get a warehouse line, mortgage brokers should bear several considerations in mind. First, warehouse lines can enable your entity to even its secondary market returns while also improving its profitability due to the prohibition against sharing that back-end compensation with your loan officers. In being allowed to get both front-end and back-end compensation, warehouse lines can put your entity in a market similar to that time when many industry deals consisted partly of front-end compensation from the consumer and back-end compensation from the creditor.

Further, having a warehouse line means that your organization doesn’t have to concern itself with steering issues, as your company’s loan officers would not be steering loans to any creditors other than your own company. Finally, in an exact transaction, a bona fide warehouse line means that only your true origination fee will show on your GFEs. With all of this in mind, if your brokerage feels as if its roof is leaking and its basement is flooding, obtaining a warehouse line may prove to be a highly effective way to rise above some of the hurdles in today’s mortgage environment.  



 


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