The mortgage industry is filled with smart business people who just want to know “the rules of the game” rather than the uncertainty that seems to exist in many areas. For example, CG from Wisconsin writes, “I own a small mortgage brokerage that, for a plethora of obvious reasons, is attempting to make the conversion over to become a mortgage banker. I’m doing my best to follow the ever changing LO comp rules as they seem to change on a daily basis; and I know that I will need to somewhat revamp my compensation plan for this new origination structure. It is pretty apparent that I will be forced to compensate my loan officers on a ‘vanilla’ basis point compensation plan (ensuring that their compensation is not commensurate to the terms of the loan in any shape of fashion). So here is an idea that might change this ‘vanilla’ compensation plan in to a ‘banana split with two scoops of vanilla, one scoop of chocolate, caramel and chocolate sauce but no nuts, and three cherries but only if they are green’ compensation plan…….’. My business has been built primarily on referrals, and I expect my loan officers to build ‘their businesses in a similar fashion. What I am proposing (in its infantile stage at this point) is some sort of compensation model that would pay the loan originator differently depending on the source of the new business. So imagine this general concept: I will pay the loan originator, ‘X’ number of basis points on files that THEY bring in the door, however I will pay them ‘Y’ basis points on loans that are provided ‘by the house’. I don’t see this being a violation of LO comp as the final terms to the client will not be any different, and the difference in originators pay will not be related to ANYTHING related to the terms of the loan. Can I do this? Any thoughts that you, or your readers have would be appreciated.”
A couple weeks back one reader wrote in to comment on “Fannie Mae’s DO/DU systems are issuing Refer/Eligible findings for proposed VA transactions that would normally receive Approve/Eligible findings.” EB, a long time government underwriter, wrote, “Rob, I am an FHA and VA underwriter for over 30 years. The VA DU system issuing refer/eligible has been the case for well over a year now. This is very old news. All investors that I know of allow a manual underwrite. We have not lost any loans so the guy that says he is a hero for saving a deal is to say the least very uninformed. The VA situation with DU has existed since the fall of 2011. Of course when you get a refer on VA and do a manual underwrite you need to stay within a ratio of about 43% and look for compensating factors so LP might be useful in some cases but overall the AUS isn’t really even that helpful on VA loan underwriting.”
EB went on. “Now, earlier this spring FHA tweaked the total scorecard with DU and a few cases are now getting a refer (FICO 640 – 660 and high front or back end ratio) that used to get an approval. So far we haven’t had experience with our investors on buying these FHA/DU refers because these are usually loans that will not meet the manual underwriting guidelines, so overall FHA and VA differ greatly on this. The VA loans that get a refer almost always meet manual underwriting guidelines but it just takes an underwriter to sign off and a little bit more documentation. The FHA loans that get a refer normally do not meet manual underwriting guidelines and the refer would be a deal killer – so it would be worthwhile to try LP.”
Regarding the debate, at least in the press, about mortgage interest deductibility, I received this note from Todd, a former Realtor and mortgage banker and whose wife is a full time, professional real estate agent. “I’m all for housing but I think NAR is nothing but a self-serving lobby that pumps out tripe for data and their unwavering cheerleading of MID of borderline criminal in my opinion for the very reason it’s not based on any facts. (And I’m surprised the NAR hasn’t been called out for what it is, a forced union, but that’s a rant for another day.) I’m sorry but I’m calling baloney on this whole MID debate and its supposed benefit to homeowners, particularly affordability. Last I checked the mortgage interest deduction is claimed by just over 21 percent of filers because most people do not itemize. Additionally, most Americans don’t pay enough (or any) tax for the deduction to matter. Furthermore, and I think research in other countries has shown (but I can’t recall exactly where, I think Canada) home ownership not affected whatsoever by the availability of a tax write-off. Bottom line, people need a roof over their heads and buyers will buy based on the opportunity cost of renting versus owning, and a deduction has little if any real influence on that decision.”
Talk of LO and other compensation schemes continues, and I received this very comprehensive note from Tom MacArthur in Washington concerning explaining the April 2011 changes (two years gone by already) to broker compensation. “With regards to the lender paid compensation versus broker paid compensation and the specifics, I believe that folks could use an explanation of what appears to be industry standard, and, as such, the way CFPB, the Fed, and FHFA want it to be – but, again, I think the intention had unintended consequences, making the bankers more money, costing the borrowers more money, and giving the borrower no more ‘protection’. This reform seems to have only ‘helped’ regulators – brokers and borrowers certainly didn’t benefit. It is also worth noting that different lenders have different interpretations. Some allow BPC, some don’t allow BPC; some allow the broker to set their LPC plan as a low as .75% as high as 3.500% (I believe), others don’t; some allow LPC to have a minimum (floor), a maximum (cap), and a “set” fee (i.e. $295, $395, etc.), others don’t; some set the comp for you, most don’t. So there are certainly variables in how lenders are interpreting/defining Loan Originator Compensation.
“There are institutions that skirt, or try to, the letter of the law. That’s the great thing about the TPO space now (and why I wish it would be more inviting to originators again). You have a lender (big brother) looking over your shoulder. It’s a lot more difficult to circumvent the letter of the law, but some shops will have differing comp plans with different lenders – which some would argue is skirting the law. In Washington, we allow LOs to have dual affiliation, so, you could be NMLS registered with PDQ Mortgage working with a wholesale lender on a 1.500% comp plan; and, simultaneously, be originating with Mortgage 123 working with a large investor on a 2.000% comp plan – is that skirting the law? I’ve heard rumors that with LPC deals, in which the broker wanted to assist with closing costs, but couldn’t, that there may be some under the table, after the fact ‘concessions’ (but, I can’t definitively say). And there are other rumors of shops allowing commissioned originators to flip deals from LPC to BPC to assist with closing costs, extension fees, etc. In these cases, it’s impossible for the lender to police this action (plus, again, it’s debatable as to whether it’s ‘wrong’), so, the lender defaults to state regulators to monitor that compliance. I believe, and I think it may have been in your commentary back in Jan/Feb, or possibly a link, that the new “guidelines” scheduled for June and January – WILL allow for (or at least is considering allowing for) LPC deal to allow a reduction to the benefit of the borrower and/or BPC deals to allow payment to a commissioned originator. (Why doesn’t the industry just follow the VA’s policy, “…what is in the best interest of the vet?” That seems to work for them!)
As of April 2011 the Federal Reserve Board redefined how brokers could be compensated on mortgage transaction (read MORE). Effective 4/1/2011 the mortgage broker could choose, on each transaction, to opt for either Lender Paid Compensation or Borrower Paid Compensation. So, in layman’s/woman’s terms, what does that mean? How does it benefit the consumer? And, how does it affect the broker/originator?
“With Lender Paid Compensation (LPC), the broker is required predetermine/declare with each lender in which they do business (usually quarterly) exactly what their compensation will be on each deal. With LPC the broker HAS to earn that predetermined compensation, and the Lender “collects” it at closing through: Rate Credit (formerly known as YSP or Rebate or Prince), as a Financed Charge (financed into the loan), via Seller Contributions, or Out-Of-Pocket; the fees are then identified as ‘Lender Fees’ on the Settlement Statement and disbursed to the Broker as Lender Paid compensation at funding. This is really just a new way of describing the old broker compensation process; the only difference now is that the broker HAS to earn their full compensation. As a result, per my discussions with brokers in field, most shops are actually earning more, per loan, under the new LPC rules, as LPC has taken any compensation “negotiation” off the table. With LPC there really is no ‘new’ regulatory benefit to the borrower, and, in fact, because the broker is now required to earn that full compensation, there is often times a financial hardship to the borrower, if, for example, there is a shortage of funds to close and/or a cost to extend the rate – neither of which can be “eaten” (credited) at closing by the broker under current LPC rules. In other words, if the lender and/or the broker create a delay resulting the lock needing to be extended, under the current LPC model, it’s the borrower that pays for the extension (and as a result, those delays). The upside to LPC is that all of the Rate Credit can be used for all of the Closing Costs/Prepaids.
“With Borrower Paid Compensation (BPC), the broker is not required to predetermine/declare their compensation on a deal (they can determine compensation on a per deal basis) and they are able reduce the originally disclosed compensation, at their discretion, to assist with funds to close, extension costs, etc. The confusion/challenges with BPC usually come from the fact that no part of the broker compensation can be covered by the Rate Credit; the Rate Credit can only be used for block 3 to 11 fees and any/all lender fees. The Borrower “pays” the compensation at closing as a Financed Charge (financed into the loan), via Seller Contributions, or Out-Of-Pocket; the fees are then identified as Borrower Fees on the Settlement Statement and disbursed to the Broker as compensation at funding. With BPC there really is no ‘new’ regulatory benefit to the borrower, as the broker can still charge whatever they would like (like previous compensation allowances), though, there is certainly a potential financial benefit to the borrower with BPC, if the broker is using the BPC plan to reduce their normal compensation and/or assist with funds to close, extension costs, etc. Also, if the deal is ‘out of tolerance’ (if blocks 3 to 7 were under-disclosed by 10%) BPC is the only way the broker can ‘cure’ the variance.
“Not to mention, the large amount of legal and regulatory grey area with LPC vs. BPC. One grey frequently debated is whether a broker shop can select different LPC levels with different lenders. For example, setting LPC at 1.000% with their primary lender, 1.500% with their #2 lender, and 2.000% with a “niche” lender. Another hotly contested grey area, is the type of pay structured allowed under each of the comp plans – the broad interpretation seems to be – any ‘type’ of NMLS registered originator can earn a commission under the LPC guidelines, however, under the BPC guidelines only a salaried originator or a principal of the originating company can earn a commission (meaning a 100% commissioned originator cannot use BPC to assist a borrower with closing cost, extension fees, etc.). Again, both of these ‘grey areas’ (and others) are actively being debated as the industry anxiously waits for additional guidance in June.
“So, while the Compensation Plan reform in April 2011 was implemented as part of the sweeping financial reform to ‘protect the consumer’, it seems to this humble mortgage professional, all reform has really done with LPC is tie our hands and back-the-deal into the corner no flexible options (almost always at a cost to the consumer) and under the BPC plan continues to provide the broker with the same flexibilities as pre-April 2011 compensation allowances without the ability to use Rate Credit to offset said compensation (again, often times at a cost to the consumer). It appears the ‘Loan Originator Compensation Amendment to Regulation Z’ created established benchmarks for the regulators (yay for them), tied the hands of the brokers/originators, and didn’t create any real protection for the consumer.” Tom, thank you very much, and if you’d like to reach Tom, he can be found at Tom.MacArthur@impacmail.com.