The Federal Reserve’s rules limiting independent loan originatior’s compensation (but not the compensation of big banks) will hurt the consumer in these six critical areas:
- The loan officer can not lower their compensation to help the consumer, so the consumer will pay more when unexpected costs or situations occur during the loan process. These can be items like a title insurance policy actually being $100 more than expected or some other costs that come-up at the closing table. It is common practice for the loan officer to cover these overages out of their compensation.
- The lender will have to pay for the unexpected expenses from #1, thus they will have to increase underwriting and processing fees to build-up a slush fund to pay for the overages when the come-up.
- The borrower loses options resulting in higher rates and/or fees.
- Service level will decrease because many smaller companies will exit the business, creating a monopoly for the big banks who then can price-fix fees and rates to their advantage. Reduced competition equates to increased costs to the consumer.
- Rural areas will suffer with few or no lenders in the areas where bigger banks don’t set-up offices. These are the areas that smaller lenders and brokers excel in service.
- Lower income borrowers will suffer because lower loan amounts will not be available. We are already seeing many larger lenders increasing the minimum loan amount they are willing to fund. Smaller lenders and brokers again excel in these underserved markets.Minorities will also be vastly underserved. An independent study done by George Washington University evaluating over 2.2 million mortgages originated by both big banks and mortgage brokers found that those loans originated by big banks for minorities averaged nearly 2% more in APR than those originated by mortgage brokers: 2.93% APR less to African American borrowers, 1.182% less to Hispanic borrowers and 2.296% less to lower income borrowers of all ethnic backgrounds.The savings on second mortgages were even greater. Overall, independent mortgage loan originators serve minorities and lower income borrowers much better than big banks do.
Watch the video below for a great explanation of how independent mortgage loan originators save you money and how the new Federal Reserve rules will harm you.