Mortgage companies nationwide received a big surprise last week when the U.S. Court of Appeals delayed the Dodd-Frank loan officer compensation rule hours before it was supposed to go in effect. It is not known when or whether the rule will take effect, and lenders are scrambling to program their computer systems back to the original way mortgage rates were priced.
In February, I expressed my frustration with the general lack of understanding of the rule by almost all in the mortgage industry. I have a better understanding of it now, and will try to explain how it may affect the consumer - if it ever becomes a reality.
Under the new rule, mortgage originators, including loan officers who work for banks and mortgage brokers, must be compensated according to a predetermined percentage of the loan amount.
For example, I, as owner of PMC Mortgage Corp., a licensed mortgage broker, must enter into an agreement with each licensed loan originator employed by PMC as to the amount of compensation he or she will receive. If the agreement says 0.5 percent of the loan amount, so be it. If 0.75 percent is agreed upon, so be it. This, as I understand it, is the same for loan originators who are employed by federally chartered banks.
Licensed mortgage brokers, such as PMC, must enter into a similar agreement with each of its investors. The so-called “lender compensation” plan requires mortgage brokers to establish a fixed percentage for all loans delivered to a particular investor. PMC, for example, may enter into an agreement with Bank No. 1 that specifies a 1 percent fee on each loan. It cannot be more or less than the agreed-upon amount. An agreement with Bank No. 2 might be 1.50 percent. A third bank might be 2 percent.
Brokers may choose their compensation as either “lender-paid” or “borrower-paid.” Under the borrower-paid model, the mortgage broker agrees in writing to a specified percentage of compensation from the borrower that must be paid in cash or rolled into the loan amount. Unlike lender-paid compensation, this percentage can vary on a per-loan basis.
This is my understanding thus far. What does it mean for the consumer?
The “zero-cost” refinance program still would be available. Before the rule, a mortgage broker simply would quote a rate that carried a “yield spread premium” (YSP) that was paid by the bank to the broker. The YSP is large enough to pay the borrower’s closing costs. The broker keeps the difference as his compensation.
Under the new rule, the broker chooses a lender with the specified lender-paid fixed compensation and quotes a rate that allows the bank to pay the YSP directly to the borrower. The YSP must be enough to cover the borrower’s closing costs, which is determined by the rate quoted.
Under a borrower-paid compensation plan, the borrower agrees to pay the broker a fixed percentage of the loan amount. The broker quotes a rate that would give the borrower a YSP that might equal the closing costs, enabling the borrower to obtain a loan with only the cost of the broker fee. This would be appropriate for smaller loans where a true zero-cost loan is not possible.
For example, under the old rule, PMC Mortgage might quote a rate of 5 percent with no points. PMC receives a 1.50 percent YSP as its compensation from the lender. The borrower must pay for his transactional fees but no origination fees. Let’s assume the transactional fees - appraisal, title insurance, county recording fees, etc. - add up to $1,500.
Under the new rule, PMC might offer the same borrower a 5 percent rate with a 1.50 percent origination fee paid by the borrower. But a rate of 5 percent allows the lender to pay the borrower a $1,500 YSP, enough to cover the borrower’s transactional costs. The borrower ends up with the same deal.
To me, the now-delayed new compensation rule is akin to creating an obstacle course to get from Point A to Point B when it could be traveled in a straight line. The overthinking in the plan is remarkable. Besides the unnecessary over-complication, there are two more big problems, as I see it.
First, mortgage brokers must choose specific compensation plans from each lender. This undoubtedly will leave some borrowers out in the cold. In my 20-plus years in this business, I can tell you not all loans are created equal. Some are much harder to do than others. And some lenders are easier than others. If I have a small $100,000 loan application that I can get approved, but not without a lot of difficulty, and the only lender I know that will approve the loan is paying me a fixed YSP of 1 percent, I might forgo the opportunity. It’s not worth it.
Second, as owner of PMC, a mortgage brokerage, I am prohibited from paying variable compensation on a per-loan basis to a particular loan originator employed by PMC. As I said, not all loans are equal, and some loans deserve more compensation than others, and vice versa. The new rule prevents my loan originators from negotiating and, in many cases, being able to compete and offer the customer a better deal. That is just plain un-American.
I welcome thoughts from readers who disagree or who can clarify my understanding.
Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.
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