Magazine article Mortgage Banking

Changes to Loan Officer Pay Practices

Magazine article Mortgage Banking

Changes to Loan Officer Pay Practices

Article excerpt

New Truth in Lending Act (TILA) regulations covering loan officer compensation were scheduled to take effect on April 1, but faced some 11th-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 managers--rather 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 rate. Under the new regulations, loan originators are paid a fixed commission 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 originate 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 1 percent commission 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, Washington, 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?

Mortgage 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. …

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