It’s been a long day and inputting the compensation for this mortgage loan originator is the last thing on the to-do list before the lender can close up shop for the day and head home.
The MLO enters 1.5% into the system. It’s ready to send.
Wait – that wasn’t right. The lender looks back through the records and sees this MLO should be getting comped at 2%, but somehow the compensation has been entered wrong. And to make matters worse, this was the third loan where comp was entered wrong.
The scenario above is not unheard of – it’s not even uncommon – in the lending world. The unfortunate truth, however, is that little can be done to rectify it once the mistake has been made.
That’s because mortgage loan originator compensation rules are strictly regulated by the Consumer Financial Protection Bureau. The housing industry is actively calling for a change to these regulations, asking the bureau to allow mortgage loan originators more freedom when it comes to changing their compensation.
CFPB restricts LO comp
On Jan. 10, 2014, a new rule from the CFPB went into effect that would greatly restrict the flexibility of LO comp. The Mortgage Loan Originator Compensation Requirements under the Truth in Lending Act from the CFPB states:
“The final rule implements requirements and restrictions imposed by the Dodd-Frank Act concerning loan originator compensation; qualifications of, and registration or licensing of loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single-premium credit insurance. The final rule revises or provides additional commentary on Regulation Z’s restrictions on loan originator compensation, including application of these restrictions to prohibitions on dual compensation and compensation based on a term of a transaction or a proxy for a term of a transaction, and to recordkeeping requirements. The final rule also establishes tests for when loan originators can be compensated through certain profits-based compensation arrangements.”
The goal of the rule is to protect consumers from predatory MLOs who could potentially place them into mortgages that aren’t the best fit for them.
“This final rule is designed primarily to protect consumers by reducing incentives for loan originators to steer consumers into loans with particular terms and by ensuring that loan originators are adequately qualified,” the CFPB stated.
The rule had other restrictions such as monitoring how MLOs are paid and restricting an MLO’s ability to change their comp in order to remain competitive or even to correct a mistake.
Since the rule went into effect six years ago, the impacts from the restrictions haven’t always been in favor of the consumer. For example, borrowers might have to switch lenders in the middle of the process if a lender decides the loan isn’t profitable enough. The rule prohibits MLOs from taking a cut to their comp, which also means the loan could end up being more expensive for a consumer.
In response, many in the housing industry were upset with the rule, and when President Donald Trump and his administration took over, those in the industry raised their concerns. Late in October 2018, nearly 250 senior executives came together from the nation’s largest mortgage companies to voice their concerns on MLO comp. The executives stated their case in a letter to the CFPB, asking the bureau to ease the current restrictions and allow MLOs to voluntarily reduce their comp in order to remain competitive.
CFPB considers LO comp changes
At the end of 2019, the CFPB announced it is considering some changes to the LO comp rule. Despite their requests in the letter, the announced changes weren’t everything they asked for.
The bureau called some parts of the LO comp rule “unnecessarily restrictive,” proposing two changes to the rule.
“In particular, the bureau plans to examine whether to permit adjustments to a loan originator’s compensation in connection with originating state housing finance authority loans in order to facilitate the origination of such loans,” the CFPB stated in its semiannual regulatory agenda. “The bureau also plans to examine whether to permit creditors to decrease a loan originator’s compensation due to the loan originator’s error in order to provide clearer rules of the road for regulated entities.”
But examining these rules and considering changes is far different than implementing the changes. In fact, one compliance expert says the CFPB is unlikely to implement any new changes.
Laura LaRaia, First Guaranty Mortgage Corp. chief legal officer and general counsel, speculated that the CFPB is unlikely to implement both proposed changes it laid out, but if it does do one of the two, the bureau is more likely to permit LO comp adjustments for housing finance authority loans because these housing finance authority loans tend to help lower income borrowers become homeowners.
Likelihood of changes to LO comp
In the example at the beginning, it’s easy for lenders to look for ways to compensate the MLO through a bonus or other forms of compensation. Requests often come in from a higher level to determine how the lender can make the situation right for the MLO, but given the tight regulations, there is often nothing that can be done. LaRaia warns that doing the wrong thing, even for the right reasons, can have dire consequences.
“Because the MLO Compensation rule was created in part to curb the discretion used by MLOs and lenders for loan level compensation adjustments, now MLOs and lenders have no discretion for any compensation adjustment, even if it were in the borrower’s favor,” LaRaia said. “It doesn’t do you any good to do the wrong thing for the right reason. And people don’t understand that fact.”
She said people will try to explain that they’re doing the right thing for a borrower, for their broker or whoever the affected party is, but what lenders should take into consideration is that if it violates the rule, it doesn’t matter if it’s the right thing to do because it is potentially a violation of the rule as it is written.
“In some situations, to help the borrower close on his/her home loan, the MLO or the lender would want to lower the loan level compensation amount, but the rule as it stands today does not permit MLOs nor lenders to lower the compensation amount on a loan level basis except for a few instances,” LaRaia said. “No matter how right it feels, even if everybody would agree that it’s the right thing to do, you can’t do it because the action would be a potential violation of the rule. We come up against that a lot.”
What’s even harder to explain from a compliance perspective is that the lender can’t change comp in order to benefit a borrower.
“We’d like to do the right thing for the borrower in many cases, but you can’t because that’s a violation,” LaRaia said. “And that’s really hard to make people understand.”
Top loan originators talk LO comp
While LO comp is a major topic of conversation at the compliance level or even at a lender level, MLOs don’t often share this same sentiment.
Vice President of lending at Guaranteed Rate Shant Banosian, the top producing loan originator in the U.S., explained he doesn’t focus much on LO comp discussions. In a panel at HousingWire’s engage.talent conference that included Sean Johnson, loanDepot producing branch manager, and Jennifer Micklos, Movement Mortgage branch leader, the originators explained LO comp is not one of the things they want to hear about when recruiters are trying to win them over.
When asked after the panel if Banosian would change the LO comp rule, he explained that he is not looking to change the rule as it is now.
But where top MLOs like Banosian may not be interested in reforming the system, lenders clearly want to see a change. More freedom would allow MLOs to correct mistakes, perhaps be more competitive in the market and do right by the borrower. While the freedom could allow lenders the capability to do the right thing, it could also open more doors for lenders to take advantage of borrowers and put them into high paying loans simply to make a profit.
