MBA Members Urge Bureau to Change Loan Originator Compensation Rule

Mike Sorohan msorohan@mba.org

October 24, 2018

Nearly 250 senior executives of Mortgage Bankers Association member companies signed a letter urging the Bureau of Consumer Financial Protection (Consumer Financial Protection Bureau) to make changes to its Loan Originator Compensation rule, saying such changes would help consumers and reduce regulatory burdens.

The letter to Acting Bureau Director Mick Mulvaney said changes to the LO Comp rule should be the Bureau's "top priority."

"The LO Comp rule 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 MBA-sponsored letter said. "The rule harms the efficiency of the mortgage loan market by limiting lenders' ability to compete and consumers' ability to shop."

The letter comes following a series of Bureau Request for Information on a number of topics that Mulvaney pledged to review. The LO Comp rule review was one of a dozen RFIs the Bureau sent out over the past year.

MBA President and CEO Robert Broeksmit, CMB, told attendees of the MBA Annual Convention & Expo last week that LO Comp rules should "provide the appropriate guidance" to help lenders comply with the law. "We need the Bureau to provide common-sense exemptions and better guidance, so we can provide consumers with the best rates and customer service," he said.

The leader letter is the latest MBA correspondence with the Bureau on the LO Comp issue. Earlier, MBA organized a letter with nearly a dozen industry groups urging the Bureau to modify LO Comp rules.

The leader letter recommends three key changes:

-- Permit voluntary reductions by loan officers to their compensation in response to competition. 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," the letter said. "For the consumer, the result is a more expensive loan or the inconvenience and expense of switching lenders in the midst of the process."

--Allow reductions to compensation when the originator makes an error. "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 letter said. "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.

--Allow variable compensation for loans made under housing finance agency programs. "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 letter said. "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 addition to these changes, the signees also recommended the Bureau simplify the LO Comp rule, noting it broadly prohibits compensation based on loan terms or proxies for terms while providing a short list of permissible compensation factors. "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 letter said. "The ambiguous current framework encourages widely varying interpretations of the rule. This has the perverse effect of disadvantaging those companies that hew closest to the Bureau's rule. Industry and consumers would be better served with clear, easy-to-follow bright-line rules."

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