Is the CFPB Creating a “Seismic Shock” Through LO Comp Rule Making?

The question of the Consumer Financial Protection Bureau’s take on the way in which loan originators are compensated has sparked conversation this week following an outline of the CFPB’s plans for upcoming rule making which would place controls on discount points, origination fees and broker compensation. 

“The Consumer Financial Protection Bureau (CFPB) is considering putting strict limits on a creditor’s ability to price its mortgage loans, and on a consumer’s ability to choose among pricing options,” an attorney with K&L Gates explains in a memo. “By way of implementing the far-reaching provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is proposing to require that when a creditor pays a mortgage loan originator’s compensation (which includes most mortgage loan transactions), any up-front amounts the consumer pays for the loan must be in the form of bona fide discount points that reduce the interest rate or a flat origination fee that does not vary with the loan amount.

The CFPB says it’s listening to the mortgage industry for feedback and will respond accordingly. But the recent memo from law firm K&L Gates spells out the issue and points to a potential problem with the CFPB’s authority, which it calls a “seismic shock.”

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K&L Gates’ Kris Kully writes:  

The CFPB has rightly indicated, in its cost-benefit analysis, that the Dodd-Frank Act’s widespread ban on consumer-paid points or fees would “significantly change the financing” for most mortgage loan originations, could “negatively impact consumers’ access to credit,” and could lead to “significant unanticipated consequences.” However, as described below, the CFPB’s use of its exemption authority to rein in those consequences would likely create seismic shocks of its own.

Specifically, the CFPB would allow the consumer the choice of paying discount points in creditor-paid transactions, but only if: (1) the points actually result in a “minimum reduction” in the interest rate for each point paid; and (2) the creditor also offers the option of a no discount point loan. The CFPB does not provide any details for how that “minimum reduction” in the rate would be calibrated.

Similarly, the CFPB would allow a consumer to pay up-front origination fees in creditor-paid transactions only if it is a flat amount that does not vary with the size of the loan (and if it is not compensation to the individual loan originator).

The Dodd-Frank Act does allow consumers to pay bona fide third-party charges (even in a creditor-paid transaction). The CFPB would clarify that third-party carve-out, so that consumers could pay up-front fees to affiliates of the loan originator or of the creditor, provided that those fees are flat (although title insurance fees could still vary with the loan amount, even if paid to an affiliate).

While the CFPB appears willing to try to avoid a “significant restructuring” of mortgage loan pricing, its proposed restrictions on discount points and origination fees in creditor-paid transactions as described above are still severe, and would if adopted create their own uncertainties – including whether consumers can choose how to pay for their mortgage loan.

Read the full memo

Written by Elizabeth Ecker

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  • Watch out again for the “Frumious Bandersnatch” (aka government regulations) and the law of unintended consequences. Forcing the AMCs on the industry increased consumer appraisal costs and lowered valuations to the point that it almost killed the reverse mortgage industry.

  • I am appalled at what we are seeing happening right before our eye’s! The CFPB had this planed long before they received there authority. The comp plan was changed once but the big one is on its way.

    All the confusion over what could happen with the the future of the comp plan is changing the way originators are thinking about their careers.

    many good people are being effected from a stress standpoint over what the CFPB is eluding to the industry. They say they are looking for feed back, are they? I say there mind is made up. We as a group of professionals need to press NRMLA and AARP to apply a lot more pressure than they have.

    The senior will be impacted severely by all of this. The CFPB feels they are doing this for the senior, the consumer. In no way shape or form will we see benefits for the senior, on the contrary.

    Look at the flat fee concept that is being talked about. What happens to the senior with a $100,000 home versus the senior with a $350,000 home? What does the flat fee do for the senior with the $100,000 home, what percentage will the flat fee be according to the $350,000 home?

    OK, most of you are saying that will never happen, the flat fee will be at different amounts depending on the value of the home? Will it be done that way? Even if it is done that way, will that accomplish anything?

    A lot of questions lead to a lot of confusion. We need to get back to normality some how, we need help and we need it fast my friends!

    John Smaldone

  • Obviously Met is now out of the business, but if I’m reading this correct – that was their exact pricing model….a flat origination fee – regardless of loan size.  And I have been very successful with it and clients have not complained.  In fact – I was usually the lowest priced game in town with the Met pricing model.  It was simple:

    $0, $1500, $2500 origination fee option (there were a couple others in there – but you get the point) – each one giving you a lower rate by the same amount regardless of loan size.

    So if this were to be implemented – and I’m still paid what I’m paid – and everybody is making money – and the client is provided with a legitimate and needed service….what’s all the hub-bub?  And I’m not being sarcastic – I’m certain there is an aspect I may have overlooked so please share your insights.

  • The consumer will benifit from this for many reasons but maybe the biggest will be because there will far fewer loan officers to do their loans. If this happens as it sounds, they are looking to cap what we make and it appears to be on the low end. It will make it seem like we are working a retail job for minimum wages. With fewer people in the business that will mean higher cost to the borrower. What happened to capitalism in this country? Why is our industry being so targeted? Why would any of us want to keep doing loans when we are treated like second rate citizens and made to feel like crooks that are ripping off our customers by actually “Charging” for our services. We all love what we do but we also all want to make a good loving doing it. What is wrong with that?

  • The biggest problem I have with the new structure is that the banks have the ability to use the back end money to pay for closing costs and fees and still keep the remaining money for themselves. As a broker I do not have that same flexability so I either have to go in with the borrower paying all the fees or switch to a consumer paid and only get whatever the origination would be, I do not get to share in any of the back end that may be left over after paying all the fees. How is this a level playing field?

  • That is a good point! Practically speaking – I never have low value clients looking for anything other than max cash. And higher value clients consider the long term more. So ‘buy downs’ occur more with those high end clients. But if buy downs worked off % than flat – it would be more ‘fair,’ as you have stated.

    • David,

      Wow!!!

      I never expected to see anyone reply to a RMD article response about 14 months later!!

      If we as licensees have a fiduciary responsibility to our clients, the issue of rate reduction needs to be addressed whether we have assumed the customer would want it or not.

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