Halloween was a couple weeks ago, but the unburied ghosts of the mortgage boom may still be rising from their graves to plague the mortgage industry – in the form of loan originator compensation rules.
Passed by the Fed in 2010 in response to the housing crash, the new rules were intended to make sure consumers weren’t being pushed into risky, high-cost mortgages by loan originators. After the Dodd-Frank Act created the Consumer Financial Protection Bureau, the CFPB took over oversight of the rules, further refining them. The latest revisions were announced this spring and are set to take effect in January.
The rules require that loan originators’ pay not be tied to the terms of the loans. But applying that simple principle to actual transactions left room for ambiguity. While simply offering loan originators bonuses for closing higher-rate loans was clearly prohibited, it was less clear what types of incentives would be allowed. With many loan originators reliant on commissions and bonuses for a big chunk of their pay, mortgage bankers and brokers experimented with various incentive models that they hoped would help drive closings while remaining within the law.
Those new models are now being put to the test – and it seems the CFPB is taking a hard line when it comes to enforcing the law.
“The CFPB interprets the scope of ‘loan originator’ broadly – in fact, broadly enough that lenders and brokers should review their existing operations to ensure they are not caught off guard,” warned Washington law firm K&L Gates, which specializes in analyzing federal regulations.
The law’s penalties can apply not only to the firm itself, but to the individual originator, warned the firm – and a case settled earlier this month shows just how steep they can be. Earlier this month, the agency settled an enforcement action against Castle & Cooke, a Utah-based lender which serves approximately 22 states, for $13 million. The agency cited the lender for violations of the original loan originator compensation law dating back to 2011.
Following The Law
The steep fines being handed out for improper loan originator procedures ought to send a shiver up the spines of mortgage bankers, given the current recruiting practices in the industry, said Jerami Marshal, chair of the Massachusetts Mortgage Bankers Association and a senior vice president at Santander Bank.
“There’s a lot of recruiting going on right now with, shall we say, questionable compensation packages, that should not be going on. People should be following the law,” said Marshal. “It can be hard to figure out what you should be doing. But [some of the recruiting packages out there] frustrate me. You’re not above the law.”
But mortgage lenders are caught between a rock and a hard place. As the boom in refinances has ebbed, loan volumes are in decline across the industry. If mortgage lenders stay on the safe side of the regulation by paying their loan originators a fixed fee per loan, their own profit margins are squeezed.
“LO’s get paid the same amount no matter what. You can’t cut their comp. But the competition has been greater, so everybody’s forced to reduce their rates,” said Amy Tierce, vice president of Fairway Mortgage in Needham. “If I’m out at four and a quarter, and somebody else is offering four and an eighth, I’m going to match that to make sure my [loan originator] gets that loan. Now we’ve just lost X number of basis points on that loan – but the LO still gets paid.”
While the booming market earlier in the year may have left many firms with cash to spare, with rates likely to climb even higher in 2014 the margin squeeze may help nudge the industry toward further consolidation, Tierce suggested.
Otherwise, the competition to recruit and retain productive originators in a low-volume environment may put firms at risk.
“Desperate people do desperate things,” said Marshal.
Email: csullivan@thewarrengroup.com
