Welcome To The New World Order! The Real Effect of New Federal Loan Officer Compensation Rules
Steve Fingerman has nailed it correctly with his blog. In my humble opinion, Realtor's commissions are next. The banks want more of it and for you to have less of it. They've limited your commissions on short sales, etc. If they can do it permanently, they will. We all need to stick together.
When you hear the government say it's "to protect the consumer" follow the money. You'll see the fallacay of this statement.
CONSEQUENCES OF THE NEW FEDERAL RESERVE BOARD LOAN OFFICER COMPENSATION REGULATIONS
Boy, Where to begin on all this mess?
The Fed Rule On Loan Officer Compensation has prevailed. The NAIHP which is the National Association Of Independent Housing Professionals and The NAMB, or National Association Of Mortgage Brokers has lost their battle against the Federal Reserve Board. What that means is that the Temporary Injunction against this rule has been lifted, and as of this morning your world and my world has changed significantly. Now I understand that many people were not involved in this fight, probably because you really did not know what this means to anyone other than it was about some rotten mortgage broker getting paid more than they should be, or some loan officer hidden away in a deep dark place making too much. Well I can tell you that is only a small part of it, actually that is the part that the Federal Reserve and Big Banks would have you think and believe. Because of a lack of media coverage, that is what it appears like on the surface and my guess is why many of you out there did not get involved. Besides, I understand that it is difficult to get involved in someone else's fight. The truth is that was all our fight, this was about free enterprise, it was about what has made America great, and what will make it not so great. This was about the consumer first and foremost, all of us are really secondary. Here is a little synopsis of what you are waking up today. So wake up sleepy head and LISTEN UP VERY CAREFULLY, yup that was my Internet text version of RAISING MY VOICE. CAN YOU HEAR ME NOW? OK good, just checking...So here below is a just a brief synopsis for you as to what the New World has in store for you and your consumers.
CONSEQUENCES OF THE NEW FEDERAL RESERVE LOAN OFFICER COMPENSATION RULES
1) Loan Originators or Mortgage Brokers are no longer allowed to give a credit to the consumer after the loan is disclosed - Sounds good right? I no longer have to worry about having to give up any money, yipee! Ok wait a minute, not so fast. What this really means is, that when you get to closing and have an issue that causes a buyer to be short by a few hundred dollars due to a paving assessment, or added cost of something unforeseen, normally I would have issued a credit to offset that unexpected cost. Normally I would have absorbed that money out of my fee and the borrower would have closed with out needing more money. Now under the new rule, that is no longer allowed. So if your buyer only had $1,500 verified assets, and we find out that you need more than $1,500 at or just before closing...guess what? You are not closing! That's right, I can no longer cut or reduce my fee in order to help you close your loan. Does that make sense to anyone? Oh, I guess the Realtor Is allowed to give their money up, but only if there is not already a seller concession of 6%. See unlike a credit from a seller or Realtor which is limited to 3%-6% of the purchase price, my fee could have been reduced rather than credited which always allowed a closing to take place. This is no longer possible under the new Federal Reserve Board Compensation Rule.
2) Loan Originators Working For A Mortgage Brokerage Business- If you happen to be working for Mortgage Broker and are brokering a deal where the consumer pays the fee and it is not lender paid, It is now illegal to pay that person a commission. Under the new rules that Loan Officer or Broker can only be paid a hourly or salary. That poses a big problem not just for the originator but also for the small business who they have been working for. How do you put a commissioned person on a salary? How do you figure out a salary to pay them? and How do you keep paying someone a Salary when they don't produce? Also how hard will that person work for you or your clients knowing that they only can make a set amount regardless of how hard they work or how much effort they put into their job?
3) Safe Harbor- What does that mean? Well in a nut shell, borrowers have to offered the lowest possible rate between all lenders that are available to a broker/originator regardless of price or money earned. Sounds good right? Well not really, often times the there is a difference between rate and price, and often times the rate is not the most important aspect of a loan. Factors such as cash to close, different conditions requirements, closing costs, time of processing, etc may make getting the lowest rate not in the best interest of the borrower. That's now thrown out the window. So now the originator becomes personally liable if safe harbor is not met. Also the added bonus here, is that violating this give a borrower the right to contest a foreclosure. Also sounds good? Not really, here is why. If any lender knows that the right to take property back in the event of a default has been watered down, or reduced, or recourse comes with added liability then the effect is higher risk based pricing. The direct result is higher costs to the consumer. Look for higher rates and fees from lenders as they start building "slush funds" to cover the added expense of cures and future litigation and regulator costs. Folks, this directly results in the consumer paying more and not less for their transaction.
4) Low Loan Amounts a Thing of the Past? Well the truth is the answer is, probably yes! Think about it, if you limit the capacity to earn enough money on a small loan amount to even cover the cost of doing the loan and paying the staff, utilities, rent, etc. Then why on earth would anyone want to do a low loan amount any more? We are already seeing lender's put minimum loan amount requirements on all their products, expect this to get worse as these new rules progress through the market place. You could very well see many lenders come out with minimum loan amounts above $75k or even $100k. The other alternative would be that lenders will charge higher amounts across the board so that the people who really qualify or have a high enough loan amount will absorb the cost of doing business with the people who don't. After all, someone has to pay the cost and price of all these changes, why not make it the people who really qualify or can afford to pay for the people that don't. Remember, if compensation is limited and has to be the same across the board now, the only way to off sett the deals that don't make enough money, is to charge more across the board so that the higher loan amount deals make even more in order to cover the losses from the lower loan amounts that don't make enough. Just a another version of re-distribution of wealth isn't it?
5) Limitation Of Broker Participation - Now I have not brokered many loans, and I am fortunate to be workign for a direct lender, however brokers play an important role. They provide more consumer choice and create a more competetive environment for the lending arena. Even though I can beat most offers out there 99% of the time, it's the competetion that keeps the pricing low. Under the new rules, as they are written brokers will more than likely be precluded from transactions where the seller pays closing costs under certain circumstances. That's right, they will not be able to do those loans under the current rules. This limits competition, limists the ability of a small origination shop to stay in business and limits consumer choice. Limiting consumer choice is bad. It's bad for housing, its bad for consumers, its bad for any recovery effort. This creates an unfair advantage for the big 4 banks in the short term. In the long term it actually eliminates their competition which paves the way once again for higher pricing across the board once the Big 4 Banks control even more of the market. Too big too Fail? Well this just made the even bigger.
There are many other problems with this new Rule, but these are just a few that stick out in my mind right now. As I get more information, I will do my best to keep everyone more informed. In the interim, I encourage everyone from consumers to Housing Professionals and Agents to get involved with protesting and reaching out to your elected officials. Good Luck, and Welcome to the New World. It's a little sadder than it was a few days ago, and its going to be a harder place to work in as well.
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