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Publication: Mortgage Banking
Author: Schneider, Howard
Date published: April 1, 2011

New Truth in Lending Act (TILA) regulations covering loan officer compensation were scheduled to take effect on April i, but faced some ? ith-hour legal challenges as of press time. Lenders were dealing with "a number of unanswered questions" as they prepared to implement the sweeping revisions, says Mitchel Kider, a founding member and chairman of Weiner Brodsky Sidman Kider PC, Washington, D.C. "A fair amount of confusion" throughout the industry was the result, he says.

But that's not surprising, because the new rules are "a dramatic change from industry practice," according to Kider. Yet mortgage industry managersrather than originators - may feel the greatest effect from the Federal Reserve Board's amendment to TILA 's Regulation Z, Kider adds. What the Fed seeks to accomplish is to "change the incentives loan officers have," he explains.

In the past, loan officer compensation could increase if a borrower opted for a mortgage with a higher rale. Under the new regu lations, loan originators are paid a fixed com mission that is established in "employment agreements" with lenders, according to Kider. Their earnings can't be boosted because of a mortgage's terms or conditions.

Mortgage bankers, retail lenders and brokers all must have compensation agreements with each of their loan officers. Wholesale lenders are required to have similar agreements with brokers.

One concern resulting from confining loan officer pay to set commissions is that there now is less incentive to origi nate smaller loans. Previously, higher fees often were charged on a low-balance mortgage, because a normal commission wouldn't cover the originator's costs. However, the Fed rules state that per-loan commissions can be subject to specific minimum and maximum amounts, says Kider. For instance, an originator could be paid a ? percent commis sion on closed business, with a minimum payment of $1,000 per loan.

Commission schedules can vary between originators, Kider adds, although payment differences can't be due to the types of mortgages those loan officers are producing. Originators also can be compensated with a flat per-loan fee, an hourly wage or a fixed salary.

The lack of clarity, or bright lines, regarding permissible practices is troubling to many in the industry, says Robert Lotstein, managing attorney for LotsteinLegal PLLC, Wash ington, D.C. "Other than the three cornerstones of the final rule - no compensation based on the terms of the loan other than the amount financed; no dual compensation; and an anti-steering provision - the Federal Reserve only provided examples of what might be acceptable compensation," he says. Unfortunately, the burden is on the lender or broker to demonstrate that its practices satisfy the rule when challenged by an examiner or court. Both industry and consumers benefit when laws have bright-line tests so that a lender and broker clearly understand what is a permissible practice, says Lotstein. Deferring to an examiner or court places huge burdens and costs on the industry.

Who's paying?

Mortgiige brokers can receive funds either from the borrower or the lender. Consumers retain the option of paying higher rates to cover loan fees. However, the resulting yield-spread premium must be credited to those customers. And brokers still would be paid by the lender under the guidelines laid out in their employment agreements.

"The treatment of yield-spread premiums is the opposite of the Real Estate Settlement Procedures Act (RESPA) - a really surprising outcome," says Lotstein. The final rule characterizes yield-spread premiums as lender-paid compensation, which is just the opposite of RESPA, he says.

Brokers seeking to receive payments just from consumers can do so by asking for cash from the borrowers or by increasing the loan balance to raise the needed funds. However, in February the Fed ruled that brokerage loan officers who did that couldn't be paid a commission from the mortgage broker, says Kider. Instead, they would be compensated only through a salary or hourly wage, he explains.

Mortgage brokers also are required to present potential borrowers several loan offers they qualify for within each mortgage type the consumer is interested in. These presentations must show available loans offering the lowest rate, best rate without "exotic features" such as a prepayment penalty, and the least points and fees.

Kider notes this provision is designed to keep originators from steering borrowers to the lender offering the highest loan officer compensation. Retail originators are exempt from this requirement, adds Kider, who contends the new regulations "disfavor mortgage brokers as opposed to retail" loan officers.

New dilemmas

It's too early to tell whether average compensation for loan originators will drop under the new regulatory structure, Kider says. But the impetus for loan officers will be to boost their volume rather than following the earlier practice of increasing loan profitability.

In the past, originators could reduce their professional fee if that was needed to make a transaction work. But having set loan officer compensation plans means those competitive issues will be faced solely by managers, Kider explains. If a potential borrower says another lender is offering a better deal, the loan officer no longer will have the leeway to cut his or her compensation. Instead, company managers will have to decide if they're willing to reduce profits in order to do that loan.

Some managers will allow originators limited discretion to grant "underages" to gain business, says Kider. Others may require a manager's approval before cutting fees, and some lenders will choose to never discount their loans, he adds.

Managers of net branches are in a unique situation because they're used to being compensated on overall profits. That practice can continue if the manager doesn't originate loans, says Kider. But a manager who is also a producer must be paid simply on a commission basis from the lender.

"The limitation on an originating branch manager is one of the huge changes in the final rule, and will change the industry since branch managers who originate loans will no longer be entitled to get paid based on the productivity [or] profitability of the branch," says Lotstein.

However, it's possible to give managers a production override after subtracting fixed expenses, Kider notes. Loan officers also can receive bonuses based on criteria such as total production, loan quality and pull through rates.

Author affiliation:

Howard Schneider is a freelance writer based in Ojai. California. He can be reached at howard@mmnl.net.

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