“Check out this example of the regulatory nonsense that the (largely) nationalized U.S. mortgage industry deals with on a daily basis. Aren’t most young, talented and driven Americans going to avoid a state-controlled industry like this?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Excerpt from November 2014 Mortgage Industry Newsletter:


“The issue of not being able to change fees, even when there is an advantage to the borrower, continues to plague portions of the industry. Joe K. writes, “Let’s assume a mortgage broker takes a borrowers application and the rate will not be locked until the loan is approved. The Broker issues their initial GFE with a compensation of, let’s say 2.00 points. The compensation is borrower paid. The broker locks the loan at time of approval and, because rates have gone up, decides to lower his compensation to 1.50 points. The broker reissues the GFE with the lower compensation. Our company says this is not legal, the broker may not lower their comp except for a few rare instances, but it cannot be a routine business practice. In states where broker fee agreements are not required, many brokers do this routinely because competing wholesalers permit the broker to lower their comp at time of lock on a floating loan.


It is very important to be sure the readers know that a broker is defined as a loan originator and is obligated to follow compensation rules for loan officers.  Therefore they are not permitted to lower their fees as well. Also important are the fair lending regulations. For example: lowering the comp for a non-protected class versus not lowering for a protected class when the broker locks in the floating loan. Some lenders are ignoring this law for brokers. Who is right? Your help is greatly appreciated.”


I turned to John Doe with Doe & Doe LLP (the real name were take out to maintain anonymity) who responded, “Your reader’s question raises two important Federal Consumer Financial Laws, the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”).  RESPA, of course, comes into play because the question concerns a Good Faith Estimate (“GFE”).  And, TILA is involved because the question also concerns compensation paid to a Loan Originator, as that term is defined in TILA’s Loan Originator Compensation Rule (“LO Comp Rule”).  As a general proposition information disclosed on a GFE may only be changed in the event of a ‘changed circumstance.’  However, the more immediate concern here, is the LO Comp Rule.


“As you know, the LO Comp Rule provides that in connection with a consumer credit transaction secured by a dwelling, no Loan Originator shall receive, and no person shall pay to a Loan Originator, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual Loan Originator or the terms of multiple transactions by multiple individual Loan Originators.  And, of course, the interest rate is a term of a loan transaction.  Accordingly, a Loan Originator’s compensation may not be reduced (or, for that matter increased) to reflect changes in loan terms, such as a change in the interest rate.  Indeed, the Consumer Financial Protection Bureau’s Official Interpretations directly address this issue at §36(d)(1):


5.  Effect of modification of transaction terms.  Under §1026.36(d)(1), a loan originator’s compensation may not be based on any of the terms of a credit transaction.  Thus a creditor and a loan originator may not agree to set the loan originator’s compensation at a certain level and then subsequently lower it in selective cases (such as where the consumer is able to obtain a lower rate from another creditor).  When the creditor offers to extend credit with specified terms and conditions (such as the rate and points), the amount of the originator’s compensation for that transaction is not subject to change (increase or decrease) based on whether different credit terms are negotiated.


Accordingly, your reader’s company is correct.  Except under limited circumstances (which are not applicable here), it is illegal for a loan originator’s compensation to be changed after a transaction is initiated. Therefore, changes in the terms of the loan, such as a reduction in the interest rate, may not serve as a basis for a change in the Loan Originator’s compensation, either up or down.” Thank you very much Dave and best of luck as you ease into retirement!””

Posted on November 11, 2014, in Postings. Bookmark the permalink. Leave a comment.

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