On August 26, 2009, the Board published a proposed rule to prohibit certain compensation payments to loan originators and steering consumers to loans not in their interest (74 FR 43232). In response to this proposal the Board received approximately 6,000 comments from creditors, mortgage brokers, trade associations, consumer groups, federal agencies, state regulators and attorneys general, individual consumers and members of Congress.
Today the Federal Reserve Board announced the final rule on loan originator compensation practices. The final rules are effective April 1, 2011, to provide lenders and originators time to develop new business models, implement necessary changes to their systems, and train personnel.
The final rules, which apply to closed-end loans secured by a consumer’s dwelling, will:
- Prohibit payments to the loan originator that are based on the loan’s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted.
- Prohibit a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.
- Prohibit a mortgage broker or loan officer from “steering” a consumer to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation.
- Provide a safe harbor to facilitate compliance with the anti-steering rule.
The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans (e.g., loan officers). Thus, creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non-depository mortgage company, but employees of such entities are loan originators.
The rule requires creditors and other persons who compensate loan originators to retain records for at least two years after a mortgage transaction is consummated.
Originator compensation can't vary based on terms of the loan like a higher ARM margin but loan level risk-based price adjusters are still in play. This prohibition does not apply to payments that consumers make directly to a loan originator (origination fee). However, if the loan originator receives payments directly from the consumer, the loan originator is prohibited from also receiving compensation from any other party in connection with that transaction. To me that says a loan originator can earn rebate (yield spread) as long as they aren't being paid and origination fee.
Plain and Simple: Am I missing something or is this pretty much the same way brokers do business right now? Direct lenders (bankers) appear to be heading in that direction now too. I'm just not sure how they'll be policed. They don't have to show rebate on the HUD and high-cost compliance is kept by the back office and double checked before closing. Overage caps maybe? I smell lots of lender credits!
THERE IS A "SAFE HARBOR" FOR ORIGINATORS: A loan originator is deemed to comply with the anti-steering prohibition if the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and the loan options presented to the consumer include the following:
- the lowest interest rate
- no risky features, such as a prepayment penalty or negative amortization or a balloon payment in the first seven years;
- the lowest total dollar amount for origination points or fees and discount point
IMPORTANT: While many of the provisions announced in the final rules are similar to the proposed compensation rules outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act, certain practices concerning loan originator compensation were not covered by the final rules released today.
Among other provisions, Section 1403 of the Reform Act (PAGE 781) creates new TILA Section 129B(c). The Board intends to implement Section 129B(c) in a future rulemaking after notice and opportunity for further public comment. Here are a few discrepancies...
- The Reform Bill gets a bit more specific with the definition of "steering, but the final rules issued today already impose restrictions preventing the originator from steering borrower into loans that are not in their best interest.
- The final rule issued today does not include a provision in the Reform Bill (TILA Section 129B(c)(2)) that says the borrower may not make any payment upfront to the lender for points or fees on the loan other than certain bona fide third-party charges. Make sure you read that closely, it says UPFRONT for any fees besides legit third party expenses. Some lenders charge an appraisal fee disguised an "application fee" and will not refund it if the borrower goes with another lender before the home inspection is completed. This regulation eliminates the borrower paying an "application fee" right after they are issued the GFE.
- It is unclear whether or not the Reform Bill's revisions will affect HELOCs as well because they are not considered "Closed End Credit".
The Obama Administration is set to begin serious conversation on Housing Finance Reform. With our future still up in the air, how can the industry be expected to interpret and implement these new reforms?
Complicating the issue further are all the different definitions of fees and a lack of transparency between the origination channels. No one does business the same way these days...
Net branchers and retail shops often times have a larger mark-up in their loan pricing while quotes offered by brokers and smaller independent bankers are more reflective of the competitiveness of the market. This can lead a consumer to believe one originator is "ripping them off" when in reality the "creditor" who built the pricing is withholding their own margins.
There is no standardization of terminology used to describe fees. Some lenders charge more third party closing costs than others and generally don't call them the same thing. This can lead a consumer to wonder what fees are acceptable when one lender is charging an application fee while another is charging an underwriting fee.
Brokers have to show "yield spread" on the HUD while bankers don't share their "rebate" with the consumer...yet yield spread is the exact same thing as rebate! All loan pricing is built on the same two pillars: a base price (plus delivery incentives) and servicing. Sometimes that servicing premium is paid upfront and other times it isn't. No matter what, all loan pricing comes from the same source, we are just calling it by different names.
Why do we do this? Right out the gate we're confusing consumers with different terminologies for fees and methods of paying an originator. Not only are we confusing borrowers, we are confusing ourselves! Consumers need to be on the same page from the get go when it comes to who is writing their loan (broker or banker), what fees they are being charged, and how the loan officer is getting paid.
Maybe housing finance reform should start with simplifying closing cost terminology and standardizing the manner in which an originator gets paid? I'm not talking huge changes here, just some consolidation of outdated terms and practices.