Regarding this letter from MBA: There is only one reason why mortgage company owners are asking the CFPB to allow loan originators to decrease their compensation — Money.
Why we have LO compensation rules
When federal regulators investigated complaints of discrimination, such as the Golden Empire Mortgage and Provident Funding cases, they found that all factors being relatively the same, minority borrowers paid higher rates and fees than similarly situated white borrowers: “Ample anecdotal evidence indicates that creditor’s loan officers engage in such pricing discretion that directly harms consumers.”
Allowing loan originators to subjectively price their loans results in unintentional discrimination. On April 5, 2011 subjective pricing ended. You’d think the world was also going to end and it didn’t. On April 6, 2011 loan originators were unusually quiet. They actually liked their new compensation package and were pleased they didn’t have to decrease their compensation to cover unexpected fees.
Due to the continued under-quoting of fees by unethical lenders on the former Good Faith Estimate, The 2015 TRID rule brought a very narrow set of circumstances in which additional fees can be passed on to the borrower once we disclose fees on the new Loan Estimate. Now mortgage companies must absorb the costs of not carefully and continuously supervising and training their LOs.
1) Change suggested by MBA: Permit voluntary reductions by LOs to their compensation in response to competition
Americans like a deal and negotiating is a sport in some cultures. There are always exceptions to the mortgage rates quoted to the general public and when a consumer asks the LO for a pricing exception in rates and/or fees to match a competitor, the mortgage company must absorb the difference. The MBA change proposes to shift that hit to the LO’s compensation. Past and current Fair Housing cases connect unintentional disparate impact against minorities with subjective pricing by loan originators.
2) Change suggested by MBA: Allow reductions in LO comp when the LO makes an error
This is already permitted in the current LO Compensation rule. See pages 35 and 36: MBA says, “…compensation is the most effective way to incent loan originator behavior.” I agree. Mortgage companies can incentivize LOs by offering a bonus for not making any errors. The carrot v. stick approach to human behavior is much more effective: reward the behavior you want to see. The LO comp rule already offers many ideas of how to structure a loan quality bonus.
3) Change suggested by MBA: Allow variable comp for housing finance agency loans
MBA says, “…the robust underwriting, tax law-related paperwork, yield restrictions, and other program requirements make HFA loans more expensive to produce.” All loans come with all of the above. Housing Finance Association loans are just one of many products. Some products are more profitable than others. Over time, mortgage companies artfully construct a way to make a profit by balancing all product profitability when they set rates every morning. There’s no reason to offer LOs a lower compensation on low profit products. Doing so only serves the profitability of the firm and does nothing to serve the consumer.
The proposed changes from the October 17th MBA letter to the CFPB are driven by company owners and not loan originators. I highly recommend the CFPB talk with some actual loan originators.
What the CFPB (and HUD) should be investigating instead.
There is always at least one top producing diva at most mortgage companies and some companies have many. These “teams” have lots of overhead such as junior LOs and assistants and the teams are very profitable for the company, unless the diva teams are asking for a significant number of pricing exceptions and by that I mean lower rates and/or fees. With regards to Fair Lending, HUD enforced Fair Housing once in 2017 and only three times during 2018.
HUD could do a paired testing like they did with Golden Empire and Provident of the loans made by the top producing LO teams that likely obtain a significant higher number of pricing exceptions from management. That’s why they’re able to close more loans than loan originators who are not on a team. Using the CFPB v. David Eghbali case, charging some consumers more and some less, David Eghbali was able to close more loans and was in violation of the LO comp rule.
Mortgage company owners want to pass the pricing exceptions on to the LOs. An examination of current pricing exceptions would show if there is current, unintentional discrimination happening right now. Mortgage company owners should be very happy to prove that this is not happening by volunteering to show their records to the CFPB. I’ll wait.
The MBA suggested LO Comp changes are a direct result of mortgage companies competing daily against low rate competitors. Some mortgage companies violate advertising laws every day in unfair, deceptive, and abusive radio ads, lead generation websites, and direct mail. The CFPB should be investigating these companies.
CFPB: Please tell those of us who are working directly with consumers where you’d like to receive these mailers and we can all mail them directly to the CFPB enforcement department. Some mortgage companies are maximizing compensation while breaking advertising laws and rules.
CFPB and HUD: Please enforce the current LO Comp rule by examining Fair Housing side by side with the Unfair, Deceptive, Abusive Acts and Practices Rule. The deceptive advertisers are able to close more loans, pulling business away from well-run companies with robust compliance departments whose rates are slightly higher to cover the cost of complying with the law.