After bouncing around like a pinball, the new mortgage loan originator compensation rule finally has become a reality. The rule is designed to deter “steering,” the practice of a loan originator directing a customer to a lender that offers unfavorable mortgage terms.
Steering long has been prohibited under the Real Estate Settlement and Procedures Act, which is a good thing. But the new compensation rule, in my humble opinion, does far more damage to the consumer than any benefit it may provide.
Last week, I summarized my biggest complaint about the new rule, declaring that not all loan applications and approvals are created with an equal amount of effort. The compensation rule requires my company, PMC Mortgage, to pay its loan originators a fixed percentage of the loan amount, based upon a prior agreement between PMC and the originator.
My company’s agreement with Peter, a loan officer since 1992, is 0.5 percent of the loan amount. In most cases, 0.5 percent is a fair balance. Peter’s compensation is reasonable and the rate quoted under such compensation certainly will be competitive.
But the devil is in the details. PMC Mortgage is now required by law to pay Peter 0.5 percent, regardless of individual circumstances. He cannot make more or less based upon the particular loan application. This is where the law is unbelievably short-sighted. Consider a couple of examples.
A customer calls Peter inquiring about a refinance. His loan balance is $600,000 and his property is worth more than $1 million. He’s a high-ranking career government employee. He has lots of money in the bank and perfect credit. He wants to convert his 30-year fixed-rate loan, currently at 5.50 percent to a 15-year fixed. Peter quotes the customer a 15-year fixed rate of 4.50 percent with no closing costs. He receives compensation of the agreed-upon fee of 0.5 percent, or $3,000.
This loan is simple. Peter takes the application, obtains the credit report, bank statements, pay stubs, appraisal and W-2 forms. The loan is submitted, approved and closed.
The problem is obvious. Before the ruling, Peter, noticing the ease and creditworthiness of the borrower, would have followed his company’s long-standing mission of remaining competitive in this business, and would have quoted a rate of 4.25 percent. Before the ruling, the “yield spread premium” (YSP), or fee paid by the lender to the mortgage broker, was split between the company and the originator. At 4.25 percent, the YSP fee from the lender is $3,000. Peter receives a $1,500 commission, which is reasonable given the ease of getting the loan through, and PMC retains $1,500 to pay for the company’s processing and overhead.
Under the new ruling, PMC must pay 0.5 percent to Peter in all cases. If he quotes his borrower 4.25 percent, PMC would be required to pay Peter 100 percent of the fee, leaving nothing for the company.
Let’s examine it from the other side. Another customer phones Peter about a Federal Housing Administration loan to purchase a “fixer-upper” in the District. The borrowers are not well-qualified, but their parents have agreed to cosign. The buyers’ credit is questionable and their income is difficult to verify because they are self-employed. The purchase price is $125,000 and they are seeking a loan for $120,625.
Peter immediately can see this loan is going to be difficult to get through. We have a scenario with four applicants, self-employment, spotty credit and a home that may require repairs. Peter’s a great loan officer and knows what needs to be done to get this through.
Before the ruling, Peter would have quoted an interest rate of perhaps 5.25 percent with no points. The lender pays PMC a YSP of $5,000 at this rate. Peter, for his efforts, receives 0.5, or $2,500 commission. The company retains the other $2,500. This is perfectly reasonable based upon the difficulty of the particular circumstances.
Under the new ruling, Peter’s compensation is limited to $603, or 0.5 percent of the loan amount.
Guess what? Peter turns down the applicants, and I don’t blame him. For $603, getting this application to closing just isn’t worth it. As Peter politely explains this to the potential borrower, the borrower informs Peter that he’s the fifth loan officer to turn down the business.
The new ruling is wacky and ill-thought-out. As always, I welcome responses and discussion on the topic.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.
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