Almost 250 senior executives at some of the nation’s largest mortgage companies want the government to make changes to the rules surrounding how they’re allowed to pay their loan originators.
Last week, the group of mortgage execs (organized by the Mortgage Bankers Association) sent a letter to the Consumer Financial Protection Bureau, calling on the bureau to change its Loan Originator Compensation rule.
The executives write that changes to the LO Comp rule should be the CFPB’s “top priority.” The group, which includes senior leaders at Franklin American Mortgage, Guild Mortgage, loanDepot, and New American Funding, also state that making changes to the LO Comp rule will “help consumers and reduce regulatory burden.”
According to the group, the LO Comp rule as currently written “causes serious problems for industry and consumers due to its inflexible prohibitions on adjusting compensation and its amorphous definition for what constitutes a proxy for a loan’s term or conditions.”
The execs also write that the rule harms the mortgage market by limiting lenders’ ability to compete and making it harder for consumers to shop for a mortgage.
To address the issues with the LO Comp rule, the execs lay out three changes to the rule they’d like to see enacted.
First, the execs suggest that loan officers should be allowed to voluntarily reduce their compensation to allow them to compete more fairly in the market.
“This change would significantly enhance competition in the marketplace, benefiting lenders who can compete for more loans and consumers who receive a lower cost loan offer,” the execs write.
According to the group, a lender is often currently forced to decide against making an unprofitable loan because of the requirement to pay the originator full compensation on a discounted loan.
“For the consumer, the result is a more expensive loan or the inconvenience and expense of switching lenders in the midst of the process,” the group writes, adding that preventing loan shopping or price competition is “directly contradictory” to the bureau’s Know Before You Owe rule.
Second, the group want to be able to reduce loan originator compensation when the LO makes an error in the loan process.
“Greater loan originator accountability will reduce errors and encourage compliance with regulatory requirements and company policy, leading to a safer, more transparent market for consumers,” the execs write.
“The present rule prevents creditors from holding their employees financially accountable for mistakes or deviations from company policy on a particular loan,” they continue. “This is contrary to the central statutory premise underlying the LO Comp rule — that compensation is the most effective way to incent loan originator behavior.”
Lastly, the group wants to be able to pay varying compensation on loans made under Housing Finance Agency programs.
“The LO Comp rule forbids varying compensation for different loan types or products, including HFA loans. HFA programs are particularly important for underserved borrowers such as first-time homebuyers and low- to moderate-income families who often encounter difficulty accessing credit elsewhere,” the execs write.
“However, the robust underwriting, tax law-related paperwork, yield restrictions, and other program requirements make HFA loans more expensive to produce,” they continue. “Covering these expenses is particularly difficult given many HFA programs include limits on interest rates and fees.”
In addition to those changes, the groups calls on the CFPB to simplify the LO Comp rule, suggesting that the bureau should “explore ways to clarify the regulation, including by specifying a clear ‘bright-line’ list of impermissible compensation factors rather than the current vague and complicated ‘proxy for a term’ analysis.”
The execs close by stating that the current LO Comp rule harms both those who strictly follow the rule and consumer alike, and ask the CFPB to change the rule quickly.
To read the letter in full, click here.