Borrowers: speak now for lending choice or forever hold your peace!

The Federal Loan Officer Compensation Regulation slated to begin April 1, 2011 was delayed for April 5th review by the D. C. Court of Appeals. This 'fixed price' rule could cost consumers billions and seriously impact consumer choice.

Written Apr 04, 2011, read 2486 times since then.

A fixed Loan Officer Compensation plan sounds pretty good if you have been slicing and dicing your fees like most of us just to keep our customers happy since the Wall Street Meltdown. If you've seen the movie: "Inside Job" it's hard to miss the sickening fact that de-regulation from former eras backfired big time. Enter knee-jerk regulation - not the answer!

What's the true cost of this new rule?

Mortgage professionals argue that the unintended consequences of the new Federal LO Compensation Rule will raise interest rates and transaction costs to consumers. Further, many mortgage banks will be put out of business by creating higher costs of operation and oversight. What if only five banks are left offering mortgages?

Ask yourself: Is letting big conglomerates run things really all that great an idea for local interests?

How do consumer costs affect your business?

Consider this: if your consumer prospect is facing higher fees for their biggest expense, their home mortgage, how can they afford your service? If you think: this doesn't affect me as a business consultant you are wrong. Higher living costs are the FIRST concern of most of your clients and prospects. If they have less money left over each month from paying their mortgage they will have less disposable income for your product or service.

Do you value the choice of local professionals?

Certainly the mortgage profession has evolved dramatically since 2006. We have spent five years raising professional standards nationally. This process, in addition to a worsening market, has thinned our ranks by 75%.

Less than 25% of mortgage loan professionals are still in business. Those still standing have been background checked, fingerprinted, trained and licensed and ‘fee-ed’ out the wazoo across the country. Not one bank loan officer was fingerprinted, background checked, trained or licensed via this process.

So what's the real problem?

Essentially, setting a ‘fixed’ origination percentage is going to favor higher priced properties and their owners. Our fee cannot be changed from one loan to the next. So fewer lenders will fund low value loans. I predict a new brand of subprime loan sharks will emerge.

Price fixing seems incongruous to me. A consumer like you will have one choice: either pay my fee (for the lowest set rate on the day) or have my fee paid by the lender (for a higher rate). Either way I can no longer kick in any fees to help you or set my own pricing. For some LO’s like me who have been helping our clients when we could this will no longer be allowed.

Actually, the new plan will be good for many mortgage originators! When my banker revealed our new comp plan last week -- it looks like I may be making slightly more without having to worry about extra costs to me that may crop up during the process. Unfortunately this means either the borrower or my bank will have to absorb some costs that previously I could agree to pay out of my commission. This will run up my banker’s costs to cover our cost of doing business to cover extra things that legally we have to pay now.

Our banks are already starting to reveal their new pricing structure and it’s not pretty. One of our top correspondent banks who posted their new fee structure had considerably higher rates on Friday in comparison to other banks that had not changed their pricing to the new model.

How will this affect you, the borrower?

On larger loans you will pay a higher fee because we have to set one percentage for all loans regardless of size. Formerly if your loan involved more effort for the size of the transaction, I could set my fee to make it worth my time to do a decent job.

In many cases a larger loan amount allowed me to lower the fee I charged you. No more. One set fee suggests that loans under about $150,000 will be hard to justify for the effort takes to close that loan. So, lower priced loans may be denied. In contrast, larger loan amounts will be charged higher fees than normal and will return loan originators a higher fixed fee. This will no doubt anger the borrower who has to pay it! According to the new Rule, I can’t do anything to help take away this sting! If you don’t want to pay my fee yourself, then the lender will pay me according to a set rate structure on the day. Your rate will go up and I will not be able to price it myself (like I do now) to help you get better terms.

Will this affect getting a loan?

I am pretty sure some bankers will decide to only fund higher priced loans and set their fees for that particular loan price range. I expect many folks with modest loans will have a hard time finding a lender willing to work with them. Fact is, often smaller loans are more work for us—depending on factors like credit or property issues. Most LO’s price our loan fees for the amount of work involved.

I predict if you are seeking a loan under $150,000 you can expect very few options, thanks to this Fed rule. Was that the intent of the rule? Officially, this rule was devised to protect consumers but in reality you will pay more.

Here’s a current loan pricing example:

I recently refinanced a ‘streamline’ FHA refinance which requires the borrower to pay all their closing costs. The advantage to the borrower was that no appraisal was required. The actual costs to close the loan came to $10,000. Since he was getting a great reduction on his loan payment, he was willing to pay $5,000 toward costs. So we made a deal: I raised his interest rate slightly to pay the other $5,000 from my commission.

This particular loan was bogged down in underwriting so I kept the loan proceeding and I pounced on the best rate to close in time. Happy client!

What is the true downside?

Under the new Rule: There is no buy-in from the Loan Officer to critically price your loan or worry about timing. We get paid regardless of good or bad service.

Under the new Rule: I will not be allowed to pay for your lock extension fees, appraisal fees, and my own mistakes on Good Faith Estimate tolerances, re-inspection fees, or reduce my commission to help you close your loan on time. Nada.

What other loan costs will be affected?

To compensate for this, Mortgage Banks like my company will be factoring a higher cost of doing business into how they price loan interest rates. Our administration fees must cover greater legal compliance costs.

The flip side: Mortgage Loan Originators will have less duty to perform because there will be no repercussions for bad behavior. Of course, bad originators who make mistakes will probably lose their jobs due to extra costs assumed by their employers. So fewer staff. Dwindling business. Can "Out of Business" be far behind?

Will consumer choice be affected?

Just ask yourself: how will you feel when you walk into a mortgage banker like me and all we can tell you is “here is the ‘pay my fee’ rate and here is ‘lender pays my fee’ rate”? And how will you feel when both of those rates are half a percent higher than they were yesterday? Consumers will be paying for the costs of additional governance and oversight from their own pockets. It's just that simple.

UPDATE: On March 30th we got word the D.C. Court of Appeals issued a stay until April 5, 2011. Please write your representative: www.congress.org.

Susan Templeton 360.220.2997 susan@loannetter.com

Learn more about the author, Susan Templeton.

Posted by Paul McFadden, Bellevue, Washington | Apr 04, 2011

Susan: Thanks! It's good news for quite a few LO's including me. I will be paid more than I was making before. Plus, the consumer won't be paying as much in closing costs. The bad news is every LO will be scrutinized not only for production but also for how they run their business. I understand this isn't necessarily a bad thing; it's just that most loan officers like to run their business their way. Also, rates will go up to cover company costs. Thanks again!
Posted by Michael Paredes, Friday Harbor, Washington | Apr 04, 2011

Susan: Thank you for your clarity. We, in related fields have been hearing quite a buzz about these upcoming rule changes, with little or no explanation, from the federal puppeteers, as to how or why, and the effect upon the future of the housing industry. I feel that enforcement of the previously existing laws would have made more sense than creating these recent tripwires. Again, Susan, thanks for the clear explanation of things to come.
Posted by Susan Templeton, Bellingham, Washington | Apr 04, 2011

Hi Paul, Yes, I suppose that the 'good news' for loan officers is just not going to be appreciated by our clients when they see the new rate sheet. Passing on regulatory costs is a fact of life in our industry. My only beef is that these regulations are focused on non bank financing and our colleagues at the big banks are immune. I'll miss the ablity to assist clients.

Onward and upward!
Posted by Susan Templeton, Bellingham, Washington | Apr 04, 2011

Hi Michael, Love your 'tripwires' analogy. That's certainly how it feels! It will be interesting to observe how this unfolds at such a fragile time for the housing industry. Thanks for commenting. Susan
Posted by Randal DeHart, PMP, QPA, Lynnwood, Washington | Apr 05, 2011

Susan,

Thank you for the update on this.

Warm Regards,

Randal

Contractors Accounting And Bookkeeping Services
Posted by Susan Templeton, Bellingham, Washington | Apr 05, 2011

Hi Randal - I appreciate your interest! Susan
Posted by Susan Templeton, Bellingham, Washington | Apr 06, 2011

UPDATE: The appeal by mortgage professionals was denied in DC. Federal Court today, April 5th. The new loan prcing structure lands tomorrow. Watch out!
Posted by Susan Templeton, Bellingham, Washington | Apr 06, 2011

See my tweet on this for video link
Posted by Susan Templeton, Bellingham, Washington | Apr 06, 2011

Update April 6: Is it Over til it's Over?

The professional organizations for mortgage professionals are taking this discussion to the new Consumer Protection Agency director, Elizabeth Warren to further the conversation. Meanwhile our pricing engines have switched to the new compensation structure as outlined by the new Federal Rule. Rates are predictably up today. Expect some delays as the mortgage industry implements this change.

Hey Biznik, thanks for publishing this today!
Posted by Brian Willoughby, Bellevue, Washington | Apr 07, 2011

In a free market, loan officers and clients would be free to come up with creative ways to save money on fees. As long as both are happy, and neither is using force or fraud to gain advantage, then the free market option would be best.

Government is coming in with one of two possible goals: Either they think they know what's best for home buyers, and they're forcing the same rules on everyone; or, they actually don't care about home buyers and are trying to give the big banks an unfair advantage in a market that is tightly controlled. The problem is that neither of these potentials look good to me. Obviously, giving the big banks an advantage is no more attractive to the average Joe than another big bank bailout. But even the other possibility is bad, because the central planners in government do not have access to all of the information or creative ideas that lenders on the street have. There is no good reason to force everyone to pay the exact same percentage, especially not when the big banks are not required to follow the same rules.

That said, there are actually a lot of things about the process of buying and selling a home that are over-legislated. Tax incentives, Fed rates, and all manner of intervention from DC is what caused the bubble in the first place.
Posted by Susan Templeton, Bellingham, Washington | Apr 07, 2011

Hi Brian, You hit a nerve. We've not been in a 'free market' economy for some time. The only unfettered freedoms have been practiced by a few who took extreme advantage of their inside positions of power.

What we are witnessing is the price of consumer denial. By allowing our elected officials to take big bank and big pharma and big oil and big you name it lobby money while pretending to represent constituents. I think you can guess what the real motives were behind congressional decisions. Keeping the status quo, in control and cozy. We must be the change. Get wise. Voice our concerns.

It's a shame because our creative boots on the ground energy could be put to more constructive use. Many many pages of testimony were given attempting to offer our ideas from dedicated professionals in my field. It didn't even make the news. So now when consumers experience the higher prices at the mortgage pump they will wonder what happend. Is it too late?

As the Dalai Lama said when asked if he thought the Chinese would ever let Tibetans return to their ancestral land; he, smiling broadly said: I always have hope!"

Thanks for caring! Susan http://realestatemarbles.com/loannetter
Posted by Brian Willoughby, Bellevue, Washington | Apr 07, 2011

Yes, I realize that it is a deep topic, and I know very little about the details of the mortgage market.

The core of the economy, though, is the unfortunate power that the federal government has to print money any time they want, and also to lend money without even printing it, at any interest rate that they see fit. Those issues touch every aspect of our economy, and they represent far too much power. Even when the big banks are not being bailed out, the fact that they get to the feeding trough first places them at an advantage over everyone else. Meanwhile, the average Joe suffers as savings (if they exist at all) become less valuable over time, and wages buy fewer and fewer goods every day.

Although standing up for sane mortgage legislation is a battle worth continuing, despite current setbacks, we really need to come together across all markets in the U.S. (and world) economy to put an end to fiat currency, or at least make it vastly more accountable than it is now.
Posted by Susan Templeton, Bellingham, Washington | Apr 07, 2011

Brian, I couldn't agree more. The printing of fiat currency by our Fed is disgraceful. This practice devalues our dollar in the face of staggering national debt.

We spend more money than we take in taxes every day. Businesses would fail. That's why our congress is freaking out. Citizens want elected officials to behave like a business legally must and balance our books. imagine!

Have you seen recent revelations that many foreign banks got access to our Federal reserve discount window to the tune of many many Billions? All to keep the money spinning. Heads must roll.
Posted by Brian Willoughby, Bellevue, Washington | Apr 07, 2011

Yes, Congressman Ron Paul pointed out that the Fed's recent 29,000 page FOIA response shows quite a bit of money going to the Arab Banking Corp. and Libyan Central Bank, among others. In all, 70% of the 2008 bailout loans went to foreign banks! Unfortunately, the Fed blanked out the information showing whether each foreign bank got the Primary Discount, Secondary Discount, or "Other." Not only that, but the numbers do not all add up. Several billions are missing!

(I'm running out of exclamation points, because nearly every sentence above deserves one)

For more information, see: http://www.ronpaul.com/2011-04-05/ron-paul-the-fed-is-stealing-the-peoples-money/
Posted by Nobby Kleinman, Melbourne, Victoria Australia | Apr 07, 2011

Good story with Passion Susan. I find it amazing that the big banks financially cripple your economy with sly (subversive?) practices, and the government now seems to be handing them even more power. It is obvious that the government is not For the people at all! Who holds the government fiscally responsible? But that is beyond this thread. Just an observation from outside.
Posted by Nancy Grant, Bellingham, Washington | Apr 07, 2011

Thank you for this insightful article Susan. I appreciate the depth you went into to help us understand this issue.

It's unfortunate that we all too often see these knee-jerk reactions with unintended consequences to follow.

On another note, Bellingham is one of my favorite places! I have friends there and visit several times a year.
Posted by Susan Templeton, Bellingham, Washington | Apr 07, 2011

Brian, yes I read the tell-all in Daily Finance. I did not learn why exactly a bank in Brussels or Paris justifies a $300 Billionloan while our own banks are being shut down? Apparently our international relationships are more important than those of our citizens.

G'Day Nobby! I've lived in Australia and enjoyed the open verbal jousing of politicians in Parliament -- which is more open than ours by a mile. Americans (I'll speak for myself also) have become a lulled consumer driven super size me mass of wallets to our governing powers. The only way to manage our fiscal obesity is a crash diet. Just the ticket and what fun we are having now! Your observations and ideas are welcome here. Did you ever read the little New Zealand gem, "SPIN" about the political scene? A riot and dead on (I lived in Auckland when it was publsihed). Satire is one way to attack our demons. Thank goodness for our documentarians!

Nancy, It's our role to shine the light into the recesses at a local level and hold our officials accountable. Bellingham is a vibrant local economy attempting to engage more citizens. Just yesterday a long established individual was exposed for real estate securities fraud right under the noses of many who trusted them. There will always be jackals!

As Bizniks, have important messages about the 'real world' that our politicians only glimpse on their official visits like tourists. We an choose to become better nformed about and particpate in these conversations. We can VOTE and engage our congressional representatives to do OUR job not theirs!

Off soapbox. Thanks for reading!
Posted by Susan Templeton, Bellingham, Washington | Apr 07, 2011

Brian, yes I read the tell-all in Daily Finance. I did not learn why exactly a bank in Brussels or Paris justifies a $300 Billionloan while our own banks are being shut down? Apparently our international relationships are more important than those of our citizens.

G'Day Nobby! I've lived in Australia and enjoyed the open verbal jousing of politicians in Parliament -- which is more open than ours by a mile. Americans (I'll speak for myself also) have become a lulled consumer driven super size me mass of wallets to our governing powers. The only way to manage our fiscal obesity is a crash diet. Just the ticket and what fun we are having now! Your observations and ideas are welcome here. Did you ever read the little New Zealand gem, "SPIN" about the political scene? A riot and dead on (I lived in Auckland when it was publsihed). Satire is one way to attack our demons. Thank goodness for our documentarians!

Nancy, It's our role to shine the light into the recesses at a local level and hold our officials accountable. Bellingham is a vibrant local economy attempting to engage more citizens. Just yesterday a long established individual was exposed for real estate securities fraud right under the noses of many who trusted them. There will always be jackals!

As Bizniks, have important messages about the 'real world' that our politicians only glimpse on their official visits like tourists. We an choose to become better nformed about and particpate in these conversations. We can VOTE and engage our congressional representatives to do OUR job not theirs!

Off soapbox. Thanks for reading!
Posted by Susan Templeton, Bellingham, Washington | Apr 07, 2011

Sorry for typos above...my server froze and saved them for posterity!
Posted by Johnson Smith, London, London United Kingdom | Apr 21, 2011

Loan officers and clients come up with creative ways to save money on fees. If they both are happy, and not using force or fraud to gain advantage, then the free market option is best. Payday cash advance