Posts Tagged loan officer

6 consequences of the Federal Reserve’s rule on loan officer compensation

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:

  1. 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.
  2. 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.
  3. The borrower loses options resulting in higher rates and/or fees.
  4. 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.
  5. 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.
  6. 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.

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The reality of loan officer compensation

The Federal Reserve’s new loan officer compensation rules were to take affect yesterday, April 1, 2011. However after a lawsuit was filed by the National Association of Mortgage Professionals (NAMB) and the National Association of Independent Housing Professionals (NAIHP) that was shot down by a Federal judge the United States Court of Appeal put a stay on the implementation of the new regulations until they could more closely be examined.

Of course, at the basis of the issue is the fact that the Federal Reserve pushed-through this law without due process of law, and it just gets worse from there.

The Federal Reserve’s loan officer compensation rules will increase borrower’s costs and reduce their ability to shop around for the best rate and lowest fees.

The basis of the law is just: Protect the consumer from being ripped-off when buying a home or refinancing. The Fed feels that independent mortgage loan officers make too much money, and have done so through screwing home owners by steering them into loan products that pay the loan officer more, such a subprime loans. This of course ignores the fact that the majority of subprime mortgages were originated directly by the big banks and lenders such as Countrywide, not the independent loan officers working at small brokerages.

Of course, on top of that those types of loans are now gone and are no longer an issue.

The truth is that 90% of Utah mortgage loan officers make less than $54,000 a year. They are not the millionaires the big banks would have you believe (as channeled through the Federal Reserve and to the media). In fact the median income for a mortgage loan officer in Utah is $45,000.

Under the new Fed rule that dictates how mortgage loan officers at independent mortgage companies can be paid that figure would be cut by 35% to 50% while loan officers at the big banks are being paid along the same compensation plans they always have.

Also, under the new Fed rule the loan officer is no longer able to pay all or part of the borrower’s closing costs, so lender credits to make it so the borrower doesn’t have to bring in any additional money at closing, no-fee loans and streamline refinances is a thing of the past.

You as a borrower will have to pay for any additional charges that come-up at closing like credit supplements, credit repair fees or higher than anticipated pay-offs of your current mortgage or when a Realtor doesn’t negotiate enough seller concessions. For instance I  recently paid $800 of a borrowers closing costs out of my commission so they would only have to bring their down payment to the closing table.

Overall the Fed rule is a case of those making the rules have no idea about what they are making rules for.

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Mortgage Steering

Have you ever seen a real estate listing say something to the effect of:

Buyer must be approved for a mortgage loan through the or seller’s or agent’s lender.

Or a real estate agent may require that the buyer also be approved through their lender or loan officer for an offer to be placed on a home, even if the buyers are already preapproved through their lender.  They may even say something along the lines of:  “Just so we have a back-up in-case something goes wrong with your lender.”

When buying a newly constructed home from a builder the builder may offer upgrades or other incentives if the buyer uses their in-house lender.

All this sounds reasonable, but it’s not.  This is called Mortgage Steering and make no bones about it, these scenarios are illegal under the Real Estate Settlement Procedures Act (RESPA).

Mortgage steering occurs when an Realtor for the buyer or seller, or a builder’s agent strongly encourages the buyer to use the mortgage company of their choice, sometimes offering upgrade incentives on new homes or better terms such as extended closing dates, etc.  Many times the mortgage company the agent is steering the buyer towards is connected in one manner or another with the agent’s office.  In many cases the real estate agent or their office is receiving compensation in one manner or another for the referrals.

Sometimes the compensation or kick-backs for the Realtor’s or builder’s referrals are paid in cash (which is hard to trace), but more often or not they are paid through gray areas such as overpaying for space within the Realtor’s office.  Renting office space is legal, but paying over fair market value for that space is not.  For the real estate company this is a fantastic deal though, because their “in-house” lender is picking-up a good portion of the total lease on the space.

Sometimes these kick-backs to the Realtor or the agent’s office is in the manner of paying for their advertising, such as in those listing magazines you see as you walk into grocery stores.  Splitting advertising costs for co-marketing with a Realtor or real estate company is legal as long as the amount paid is equivalent to the square inches of the ad used by the loan officer.  But usually the loan officer or the lender is paying for the whole ad by over paying for the space they occupy, which is usually relegated to a lower corner in a “Financing available through…” and a picture of the loan officer.

At first glance, as a consumer you may say “So what? As long as I get the home I want than what does it matter to me what happens behind the scenes?”

Well, the reason this is illegal is that steering results in less favorable terms and interest rates for the borrower and less equity being passed-on to the seller.

A higher interest rate being sold to the borrower means the loan officer is receiving more compensation from the bank/lender, which they need in order to compensate the real estate agent or their office in one manner or another for the referral.

For the seller, they receive less money from the sell of their home since the agent’s lender will more than likely push the origination and lender fees to the maximum amount of concessions agreed upon on the Real Estate Purchase Contract (REPC) in order to compensate the real estate agent or their office in one manner or another.

Unfortunately mortgage steering isn’t strongly investigated because it is difficult to prove with the compensation falling into these gray areas.  Rather the powers that be seem to depend on the borrowers to do the policing for them by filing a complaint against the Realtor and the lender if they feel they are or have been steered to use a particular lender over another.  The offending Realtors and loan officers feel safe because very few, if any, buyers ever take the time and actually file the complaint.  They are just happy they got into the house they wanted so badly.   Most just don’t ever use that Realtor, loan officer or lender again.

However, steering is punishable under Section 8 of the Real Estate Settlement Procedures Act (RESPA).  Violations of the Section 8’s anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties.  In a criminal case a person who violates Section 8 may be fined up to $10,000 and serve up to a year in prison.  In a private law suit the real estate agent or loan officer (or both) who violates Section 8 may be liable to the person charged for the settlement services an amount equal to three times the amount of the charge paid for those services.

It is okay for a real estate agent to recommend a mortgage loan officer or company if the borrower has not been preapproved for a mortgage loan yet.  Many are legitimate referrals, and in most cases the loan officer has worked hard to provide a level of service that makes the Realtor confidant in referring clients to them.  But, if that recommendation turns to pressure, or incentives for using a certain mortgage company are offered, or you are told that your current preapproval letter isn’t sufficient and you need to apply through your agent or the seller’s agent’s loan officer “as a back-up”, than you are being steered, and chances are you are not going to get as good a deal as you would through some other mortgage company or loan officer.

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