February 28th, 2011 5:06 PM by Dana Bain
by Randy Johnson on 02/26/2011
One of the problems with the mortgage business is that too many regulatory fingers are in the pie. Not surprisingly, none of these entities talks with any other entity. The current issue on the table is that of compensation of loan originators, or more specifically, mortgage brokers.
It is probable that the genesis for this is the “Yield Spread Premium,” or YSP. It is no secret that in the old days many disreputable mortgage lenders – not just mortgage brokers – used YSP as a way of making more money off the customer. Even though this compensation was disclosed on the HUD-1 closing statement, most borrowers didn’t understand how to read the statement because the last regulation was poorly written.
What could and did happen is that the lender would quote a loan origination fee of 1 point but then when he locked in, the pricing would be such that in addition to getting one point from the borrowers, he would get an extra half point from the lender. He wouldn’t pass it on to the borrower.
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At its core is a stipulation that broker compensation to be either Borrower paid or Lender paid, but not both. Why not? Because the Fed does not understand that with the new rules that HUD put into effect a year ago, this change in TILA is completely unnecessary.
What it definitely does is raise the cost of borrowing to some consumers. Let me show you how. Here are some numbers from today’s rate sheet, assuming I was going to make 1 point on the transaction in accordance with the current law.
Points to Borrower
0 (1 point YSP to me)
Under the Federal Reserve Board’s new rule, the two transactions in red would not be allowed. In both those cases, part of the compensation would come from the borrower and the lender. That is prohibited. Which means that you, as a borrower, would have to choose 5% or 4.625% even though one of the other options might be best for you.
Second, lenders are requiring that I declare my compensation for all loans originated with them. That compensation must include the fee for processing which is NOW on a “dollar per loan” basis. Note that the lender is still allowed to charge a flat fee per loan for underwriting and documents regardless of size, but we brokers can’t. I have to try to compensate for that by fixing my compensation.
The Unintended Consequence
By fixing our compensation, this hurts consumers, exactly the OPPOSITE of what is intended. Legislators have not figured out that the most valuable service we provide is advice and helping people. We are not selling widgets that have common characteristics.
Let me demonstrate, assuming I say I want to make 1 point but I have to pay my processor $600, so now I need to charge 1.25 points.
Example 1 – Borrower with clean credit, W-2 income, and low LTV. This is an easy loan. He wants to borrow $500,000.
Example 2 – Borrower is like #1 above but only wants $250,000.
Example 3 – Borrower is self-employed with two different companies, he owns 4 rental properties and wants to borrow $250,000. His credit shows a tax lien he says is paid. This loan requires a lot of work. I must get two years personal tax returns, two years returns on each business. We need tax and insurance information on all rental properties and we need to work to get the lien released. This is a 2” thick file.
Example 4 – Elderly borrower needs $75,000.
I am happy with Example 1 although borrower would not be if he could figure out all the details. Note that I cannot reduce my compensation to him or legally give him back any money Example 2 is pretty much a wash.
In Example 3, I have to do a LOT more work but I can’t make any more money.
As to Example 4, frankly, I would rather take the day off rather than work on a loan for $337.50. I wonder if I can decline to work on the loan … or by some interpretation of the Equal Credit Opportunity act, I MUST accept the application.
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You can see that the Fed’s approach to this problem isn’t going to solve anything. More specifically, every originator is going to increase his compensation to make sure that they still get enough money to run their businesses.
In the last iteration of this fiasco, the Small Business Administration has told the House Finance Committee that they think that this rule will be to tough on small business and that they should reconsider.
So now we have HUD, the Fed, the SBA, and Congress with fingers in the pie. Whatever they do, it is likely that it will cost consumers more. What a mess.