Beginning the Conversation, but No Imminent Changes.
On October 17, 2018, nearly 250 member companies of the Mortgage Banker’s Association (MBA) submitted a letter (the “Letter”) to the Bureau of Consumer Financial Protection (the “Bureau”) urging “the Bureau. . . to make changes to its Loan Originator Compensation (LO Comp) rule necessary to help consumers and reduce regulatory burden.” This Letter is the MBA’s latest correspondence with the Bureau on the LO Compensation issue. A very similar letter was sent on September 26, 2018, from the MBA and nearly a dozen industry trade groups.
The Letter requests three key changes to LO Comp rule to allow:
- Voluntary reductions by loan officers to their compensation in response to competition. The letter requests to change the LO Comp rule’s prohibition against changing a loan originator’s compensation after loan terms have been offered to a consumer. The letter noted 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. “Currently a lender will be forced to decide against making a loan if doing so is unprofitable due to the requirement to pay the loan originator full compensation for 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.”
- Reductions to compensation when the originator makes an error. The Letter requests changes to allow lenders to reduce a loan originator’s compensation for losses that occur on loans due to mistakes or noncompliance with company policy: “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 present rule prevents creditors from holding their employees financially accountable for mistakes or deviations from company policy on a particular loan. 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.”
- Variable compensation for loans made under housing finance agency (HFA) programs. The LO Comp rule prohibits varying loan originator compensation based on loan product type, including HFA loans. The Letter requests a specific exception to this rule for 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.” “However, the robust underwriting, tax law-related paperwork, yield restrictions and other program requirements make HFA loans more expensive to produce. Covering these expenses is particularly difficult given many HFA programs include limits on interest rates and fees.”
In its conclusion, the Letter also suggests that the Bureau should generally simplify the LO Comp rule by “specifying a clear ‘bright line’ list of impermissible compensation factors.” This would be a stark reversal from the current approach of providing a “short list of permissible factors” and a “complicated ‘proxy for a term’ analysis.”
Although the Letter begins the conversation, lenders considering aggressive approaches to their compensation plans should understand that any changes are not on the immediate horizon. The Bureau’s recently published Fall 2018 rulemaking agenda makes no note of any plans regarding the LO Comp rule. Indeed, when the Bureau’s Acting Director Mick Mulvaney addressed the MBA Annual Convention in Washington, D.C., on October 15, 2018, Mulvaney advised that the letter is being reviewed by staff, but that he had not actually seen the letter. Any changes to the LO Comp rule could be years down the road, and lenders should plan accordingly.