Fed Issues Rule to Prevent Abusive Loan Originator Compensation Practices

The Federal Reserve Board published a final rule that prohibits mortgage originators from receiving compensation based on the interest rate or other loan terms on Monday.  The rule is meant to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.

”This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points,” said the Fed in a statement. “Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.”

Loan originators are also prohibited from receiving compensation directly from both the consumer and the lender or another party.  During consumer testing, the Fed found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer’s total loan cost.  The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.

Advertisement

Additionally, the final rule prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation. The rule will preserve consumer choice by ensuring that consumers can choose from loan options that include the loan with the lowest rate and the loan with the least amount of points and origination fees, rather than the loans that maximize the originator’s compensation.

The new rules apply to reverse mortgage mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.  According to the Fed, the final rules are effective April 1, 2011, to provide lenders and originators time to develop new business models, implement necessary changes to their systems, and train personnel.

Join the Conversation (132)

see all

This is a professional community. Please use discretion when posting a comment.

  • >>The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate.rnrnHow does it work for consumers who don’t want to pay the originator directly? Most consumers I’ve met want me to pay all their fees. I haven’t met very many that want to pay the originator directly.rnrn>>This will prevent loan originators from increasing their own compensation by raising the consumersu2019 loan costs, such as by increasing the interest rate or points,u201drnrnIf a Lender only offered one interest rate, Originators wouldn’t be able to increase the rate, inhibiting them from increasing their own compensation. That sounds like a good solution to me – only offer one program with one interest rate and rn originators won’t receive compensation based on the interest rate. The only compensation received will be paid by the Lender (and disclosed to the homeowners – by all Lenders – not just Brokers).

  • Michael,rnrnPlease — SAFE did no such thing. It just gives a significant advantage to nationally chartered entities over others. All those who could sell but could not pass the exam or did not want to test, well there are homes among those that are nationally chartered.rnrnrnrn

  • Guest,nnInteresting, I took a look at the bill and it does reference open ended transactions, but only mentions HELOCs and time share transactions.nnThese are exempt, if I’m missing it let me know.

  • That’s nice, Reg Z now limits ways in which a loan originator can be compensated. It’s the “dumbing down” of an industry and proves the SAFE ACT was just another waste of time. I don’t see how anyone would want this job anymore, license or no license, now that compensation is limited. I’d like to hear some ideas from employers of loan officers and how they plan to modify compensation to implement the new laws. Can pricing power still be used to pass on premiums to borrowers? I’d like to think so but this law removes the opportunity for the borrower to choose that option over something else. Will a new generation of flat fee loans emerge? If so, what will create competition between lenders and therefore, better pricing for consumers? I think this is another instance of throwing the baby out with the bathwater. The SAFE ACT was necessary, until now and it did a good job cleaning up the industry. It’s not perfect but I think it addressed the right side of the issue which was to require qualified ethical loan officers, not 10 cents a dozen loan officers. And then there is the additional regulation of third party services management. Without pulling credit and opening escrow (and of course not ordering appraisals) the loan officer position just became one of the worst telemarketing jobs in the country.

  • Good day,rnrnMany may disagree with me. However, I feel this is the first rule and regulation I have seen done right in a long time. We never had the right to play with interest rates for self gain in the past. It was a good preventive measure against gauging, which is being done in our industry daily today.rnrnAlso, in past years, we never received a portion of the gain on sale premium. We worked off of a percentage of the origination fee, simple and sweet. We did volume, we had great customer relations and we did what was right for our senior. Consequently, we did more business and made more money because of it.rnrnSome may think the gravy train is over with this new rule, well maybe it is. However, this is the best rule so far that I have seen put in place to help reduce predatory lending. The new rule may also get rid of some loan originators and companies that do not belong in the reverse mortgage industry. If we do our job the way we are supposed to do and always do what is right for our seniors, we that are hear to stay will always do well in making a living.rnrnThank you,rnrnJohn A. Smaldone

  • rainmand,rnrnIf a borrower agrees to pay an originator’s fee, then they have agreed to pay the fee directly to the originator. So what if it comes through their agent, the lender!!! Direct payment is not a check out of the checking account of the borrower written directly to the originator.rnrnWhat consumers cannot control or disapprove is YSP unless they back out of the loan; it is non-negotiable. Many consumers feel helpless about that cost to them and believe they should benefit from the YSP, not the broker u2013 the cost of origination was already agreed to. rnrnIf there is no benefit to the interest rate why would there be any YSP? One product does not mean there is no possible YSP. YSP means the rate the borrower agreed to is higher than the market demands. While the lender should be able to make its profit on interest rates, what society is asking is why should the broker (or originator) participate in that profit; they were paid through the agreed upon origination fee.rn

  • I agree, I did say, it’s not perfect and I have written about how easy it is to go to a bank rather than take the tests. Still, there is a new level of respect for licensed loan officers. Whether or not you work for a bank, that piece of paper does mean something.

  • >>The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate.rnrnHow does it work for consumers who don’t want to pay the originator directly? Most consumers I’ve met want me to pay all their fees. I haven’t met very many that want to pay the originator directly.rnrn>>This will prevent loan originators from increasing their own compensation by raising the consumersu2019 loan costs, such as by increasing the interest rate or points,u201drnrnIf a Lender only offered one interest rate, Originators wouldn’t be able to increase the rate, inhibiting them from increasing their own compensation. That sounds like a good solution to me – only offer one program with one interest rate and rn originators won’t receive compensation based on the interest rate. The only compensation received will be paid by the Lender (and disclosed to the homeowners – by all Lenders – not just Brokers).

  • Michael,rnrnPlease — SAFE did no such thing. It just gives a significant advantage to nationally chartered entities over others. All those who could sell but could not pass the exam or did not want to test, well there are homes among those that are nationally chartered.rnrnrnrn

  • Guest,nnInteresting, I took a look at the bill and it does reference open ended transactions, but only mentions HELOCs and time share transactions.nnThese are exempt, if I’m missing it let me know.

  • That’s nice, Reg Z now limits ways in which a loan originator can be compensated. It’s the “dumbing down” of an industry and proves the SAFE ACT was just another waste of time. I don’t see how anyone would want this job anymore, license or no license, now that compensation is limited. I’d like to hear some ideas from employers of loan officers and how they plan to modify compensation to implement the new laws. Can pricing power still be used to pass on premiums to borrowers? I’d like to think so but this law removes the opportunity for the borrower to choose that option over something else. Will a new generation of flat fee loans emerge? If so, what will create competition between lenders and therefore, better pricing for consumers? I think this is another instance of throwing the baby out with the bathwater. The SAFE ACT was necessary, until now and it did a good job cleaning up the industry. It’s not perfect but I think it addressed the right side of the issue which was to require qualified ethical loan officers, not 10 cents a dozen loan officers. And then there is the additional regulation of third party services management. Without pulling credit and opening escrow (and of course not ordering appraisals) the loan officer position just became one of the worst telemarketing jobs in the country.

  • That’s nice, Reg Z now limits ways in which a loan originator can be compensated. It’s the “dumbing down” of an industry and proves the SAFE ACT was just another waste of time. I don’t see how anyone would want this job anymore, license or no license, now that compensation is limited. I’d like to hear some ideas from employers of loan officers and how they plan to modify compensation to implement the new laws. Can pricing power still be used to pass on premiums to borrowers? I’d like to think so but this law removes the opportunity for the borrower to choose that option over something else. Will a new generation of flat fee loans emerge? If so, what will create competition between lenders and therefore, better pricing for consumers? I think this is another instance of throwing the baby out with the bathwater. The SAFE ACT was necessary, until now and it did a good job cleaning up the industry. It’s not perfect but I think it addressed the right side of the issue which was to require qualified ethical loan officers, not 10 cents a dozen loan officers. And then there is the additional regulation of third party services management. Without pulling credit and opening escrow (and of course not ordering appraisals) the loan officer position just became one of the worst telemarketing jobs in the country.

    • Michael,rnrnPlease — SAFE did no such thing. It just gives a significant advantage to nationally chartered entities over others. All those who could sell but could not pass the exam or did not want to test, well there are homes among those that are nationally chartered.rnrnrnrn

      • I agree, I did say, it’s not perfect and I have written about how easy it is to go to a bank rather than take the tests. Still, there is a new level of respect for licensed loan officers. Whether or not you work for a bank, that piece of paper does mean something.

    • Guest,nnInteresting, I took a look at the bill and it does reference open ended transactions, but only mentions HELOCs and time share transactions.nnThese are exempt, if I’m missing it let me know.

  • I don’t suppose that anyone at the Fed has considered returning the industry to a 2% of value orgination fee.rnrnMore nails for the wholesale coffin.

  • >>The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate.rnrnHow does it work for consumers who don’t want to pay the originator directly? Most consumers I’ve met want me to pay all their fees. I haven’t met very many that want to pay the originator directly.rnrn>>This will prevent loan originators from increasing their own compensation by raising the consumersu2019 loan costs, such as by increasing the interest rate or points,u201drnrnIf a Lender only offered one interest rate, Originators wouldn’t be able to increase the rate, inhibiting them from increasing their own compensation. That sounds like a good solution to me – only offer one program with one interest rate and rn originators won’t receive compensation based on the interest rate. The only compensation received will be paid by the Lender (and disclosed to the homeowners – by all Lenders – not just Brokers).

    • rainmand,rnrnIf a borrower agrees to pay an originator’s fee, then they have agreed to pay the fee directly to the originator. So what if it comes through their agent, the lender!!! Direct payment is not a check out of the checking account of the borrower written directly to the originator.rnrnWhat consumers cannot control or disapprove is YSP unless they back out of the loan; it is non-negotiable. Many consumers feel helpless about that cost to them and believe they should benefit from the YSP, not the broker u2013 the cost of origination was already agreed to. rnrnIf there is no benefit to the interest rate why would there be any YSP? One product does not mean there is no possible YSP. YSP means the rate the borrower agreed to is higher than the market demands. While the lender should be able to make its profit on interest rates, what society is asking is why should the broker (or originator) participate in that profit; they were paid through the agreed upon origination fee.rn

  • Good day,rnrnMany may disagree with me. However, I feel this is the first rule and regulation I have seen done right in a long time. We never had the right to play with interest rates for self gain in the past. It was a good preventive measure against gauging, which is being done in our industry daily today.rnrnAlso, in past years, we never received a portion of the gain on sale premium. We worked off of a percentage of the origination fee, simple and sweet. We did volume, we had great customer relations and we did what was right for our senior. Consequently, we did more business and made more money because of it.rnrnSome may think the gravy train is over with this new rule, well maybe it is. However, this is the best rule so far that I have seen put in place to help reduce predatory lending. The new rule may also get rid of some loan originators and companies that do not belong in the reverse mortgage industry. If we do our job the way we are supposed to do and always do what is right for our seniors, we that are hear to stay will always do well in making a living.rnrnThank you,rnrnJohn A. Smaldone

string(122) "https://reversemortgagedaily.com/2010/08/16/fed-issues-rule-to-prevent-abusive-mortgage-originator-compensation-practices/"

Share your opinion