The Fed Clear As Mud on LO Compensation
On Thursday, March 17, the Federal Reserve held a conference call to talk about the upcoming, April 1, 2011 changes to Reg. Z affecting Loan Officer Compensation. When I first got into the business in 1996 I thought how cool it would be to be able to tell a consumer this is what are fee is and there is no negotiation. Little did I know that thought would become a reality in just 15 years. As expected demand to get in on the webinar and call far exceed the capacity. Which says a lot considering that this was the first day of March Madness. There were over 1000 questions sent between the announcement of the webinar and the start. There is still major confusion in the industry based on the sheer number of questions sent and the fact that the implementation date is only 15 days away. I don’t feel that there was any information given during the call or anything clarified; however, it was fun hearing some seemingly contradictory statements. Leading the call were Paul Mondor and Nikita Pastor, both Attorney’s with the Federal Reserve. Having heard Mr. Mondor present in the past I went into the call with a preconceived notion, since he comes off as extremely confrontational and unwilling to listen or explain complicated legalese. While for the most part the rule is straightforward, the problem comes in with all the outside forces and agencies. The biggest problem in determining how to compensate your loan officer comes from the recent reversal of the DOL of how mortgage loan originators must be compensated. Namely paying overtime based off the commission received factored for an hourly rate, which obviously does not sit with the Fed mantra of pay the same thing on every loan. As a mortgage broker, the rule allows for us to receive payment in one of two ways; however, only one way per loan. The creditor may pay the mortgage broker, or the consumer may pay the mortgage broker. However, the creditor is responsible for determining compliance with the rule and thus the lenders that we deal with ultimately determine how we will be compensated. To date all the loan officer compensation agreements I’ve received from lenders have all been Lender paid. This will lead to less options for the consumer, and further loan officer specialization, as someone doing $80,000 loans will not be able to use the same lender for a Jumbo loan. 5 major takeaways: Construction Loans are covered Safe Harbor is not a disclosure requirement, but if you want to prove it you might want to document it The Lowest rate portion of the Safe Harbor includes a loan with discount points The Loan Officer cannot have their commission lowered to cover GFE Tolerance violations or lock extensions The Fed uses 6 months as an example of how often the loan officer compensation may be modified Paul Mondor comes off with I don’t care attitude when answering who will enforce the rule and what are the penalties, Not us…, for the most part. And when I say us, I mean the board and the Federal Reserve System… Going back to examiners historically, that is where people who are not depositories tune out because they don’t get examined, but going forward starting pretty soon all the authority transfers to the new Consumer Financial Protection Bureau which lo and behold from then on has the authority to examine non-depository institutions even individual mortgage broker companies. So one day soon everyone is going to be examined at least in theory. I’m sure many state examiners for mortgage brokers and mortgage bankers would disagree with Mr. Mondor. While a Bank Exam may be more thorough, that’s up in the air given the sheer number of Banks that failed, mortgage brokers and mortgage bankers are examined more often and on a more concentrated basis. Previously I was Vice President of Quality Control and Compliance for a large Mortgage Broker/Banker licensed in 46 States and we had on average 2 State Audits per month. If you were unable to attend a participant has posted a recording of the webinar. Also, you can view the slides (under Loan Originator Compensation) while listening to the webinar. Don’t forget there are more changes to come after the Reg. Z. LO Compensation changes, namely the changes brought forth under Dodd-Frank, and what Elizabeth Warren decides to do with The Consumer Financial Protection Bureau. Both sides of the Webinar can be summed up with the following quote, “I thoroughly believe I have succeeded in answering all of your questions. However, some of the answers only led to more questions. To sum it all up, I feel I am more confused than ever, but about more important issues, and on a higher plain.” Jeremiah Wean is an Indiana USDA Loan Expert and is co-owner and manager of Lakewood Lending Group.