Loan Officer Compensation and Anti-Steering Rules... Higher Rates and costs will be the norm?

The Regulatory Rule - Loan Officer Compensation and Anti-Steering Rules
The Federal Reserve Board's final rule was issued on August 16, 2010 which amends the Truth in Lending Act (TILA) regulation (Regulation Z) by adding three new rules:

1. Basing loan officer compensation on loan terms or conditions other than the loan amount is prohibited.

2. Compensation of the loan originator by both the consumer and any other party (i.e. lender) for the same transaction is prohibited. Compensation can be paid only by a single source (e.g. generally either the consumer or the Lender). This is commonly referred to as the "Dual Compensation Rule".

3. Steering the consumer to a loan product or feature based on the ability of loan originator to receive greater compensation is prohibited.

How will this affect rates? The flat fee loan and higher closing costs will dominate the market. Here are the items and ideas that mortgage companies and banks are considering and rolling out.

1. Some examples of Mortgage Loan Officer Compensation plans that may be permissible under the new regulations include:

• Compensation based on a fixed percentage of the final loan amount

• Compensation based on a fixed hourly rate of pay for the actual number of hours worked

• Compensation based on a fixed dollar amount for every closed loan

• Compensation based on performance of the applicable loan(s)

• Compensation based on the quality of the applicable loan(s) (i.e. complete file, pull through, final documents, error rates, etc.)

1. Mortgage Loan Officer Compensation plans may have a minimum and maximum dollar threshold per loan. When utilizing such thresholds, careful attention must be given to meeting all Federal, State and Local laws, rules, and regulations related to permissible fees and fair lending considerations.

2. Mortgage Loan Officer Compensation plans may vary from one loan officer to another loan officer employed by the same employer.

3. Any Mortgage Loan Officer Compensation plan that includes factors based on the terms or conditions of the underlying loan is prohibited. Some examples of such terms or conditions include:

• Interest Rate

• Annual Percentage Rate

• Loan-to-value ratios

• Credit Scores

• Existence of a prepayment penalty

• Revenue or profit

• Loan program type or program feature

• Fees collected

• Profit-based incentives for producing branch managers who meet the definition of Mortgage Loan Originator

1. Mortgage Loan Officer Compensation may not increase or decrease based on prohibited loan terms or conditions, or for any factor that is a proxy for prohibited loan terms and conditions.

2. Mortgage Loan Officer Compensation may not be set at a certain level and then subsequently lowered in selective cases.

3. Mortgage Loan Officer Compensation may not be a fixed percentage that varies with different levels or tiers of loan amounts.

4. Mortgage Loan Officer Compensation may not be a fixed percentage that varies by the geographic location of the subject property.

You can bet rates will rise and FLAT fees will go up because most banks and small lenders will switch to flat fees per loan.

All Mortgage Loan Originators are subject to the new compensation and steering rules, including depository institutions, correspondent mortgage bankers, and firms who utilize table-funding services. All firms active in the primary lending marketplace must be Regulation Z compliant by having the required loan officer compensation plans in place for all loans originated on or after April 1, 2011. This new rule applies to everyone and how they compensate anyone meeting the definition of a Mortgage Loan Originator.