MBA, Trade Groups Ask Bureau to Change LO Compensation Rule

Mike Sorohan msorohan@mba.org

September 27, 2018

The Mortgage Bankers Association and nearly a dozen industry trade groups asked the Bureau of Consumer Financial Protection to change its Loan Originator Compensation Rule to better protect consumers and reduce lenders' regulatory burdens.

"We believe changes to the LO Comp rule should be among the Bureau's top priorities in its review of the mortgage rules," the trade groups said in a letter to Acting Bureau Director Mick Mulvaney.

The letter points out the original impetus for the LO Comp rule was to protect consumers from steering, a situation that largely no longer exists because of regulatory actions adopted following passage of the Dodd-Frank Act. More recently, the Bureau's TILA-RESPA Integrated Disclosure rule attempted to make mortgage terms and costs easier to understand by heightening disclosure requirements.

Today, the letter said the LO Comp rule places strict limits on certain practices that actually would result in lower consumer costs or greater product availability.

"After more than five years under the rule, a rebalancing is needed," the letter said. "The LO Comp rule, while well-intentioned, is causing serious problems for industry and consumers due to its overly strict prohibitions on adjusting compensation and the amorphous definition of what constitutes a ‘proxy' for a loan's terms or conditions. These harms are felt when borrowers are unable to obtain lower interest rates from their lender of choice when shopping for a mortgage, or when lenders are unable to hold loan officers accountable for errors in the origination process. Consumers are also harmed when lenders limit their participation in special programs designed to serve first-time and low-to-moderate-income borrowers.

The letter asks the Bureau to make three changes:

--The Bureau should allow loan originators to voluntarily lower their compensation in response to demonstrable competition in order to pass along the savings to the consumer. The letter points out The Bureau's rule provides that a loan originator's compensation may not be increased or decreased once loan terms have been offered to a consumer, a provision is designed to eliminate financial incentives for a loan officer to steer a consumer to a higher interest rate or a higher-cost loan.

"However, the rule as implemented also has the effect of prohibiting reductions in compensation that could otherwise be passed along to the consumer in the form of a lower-priced, more affordable loan," the letter said. "This result also has the effect of reducing the consumer benefit that comes from shopping across multiple lenders in order to negotiate the best interest rates and other terms."

The letter noted currently, in such situations, a lender must decide between lowering the interest rate, fees, or discount points to meet the competition (and thus originating an unprofitable loan with the fixed loan originator compensation), or declining to compete with other loan offers. "The requirement to pay the loan originator full compensation for a discounted loan creates a strong economic disincentive for lenders to match interest rates," 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. This anti-competitive feature impedes loan shopping and discourages price competition, and is therefore contradictory to the stated aims of the Bureau's Know Before You Owe/RESPA-TILA Integrated Disclosure rulemaking, which seeks to encourage shopping and empower the consumer to negotiate."

To address this unintended outcome, MBA and the trade groups urged the Bureau to amend the rule to permit lenders to respond to demonstrable price competition with other lenders by allowing the loan originator to voluntarily reduce his or her compensation in order to pass along the savings to the consumer. "This change would significantly enhance competition in the marketplace, helping lenders to compete for more loans and benefiting consumers who will receive a lower interest rate or lower-cost loan offer."

--The Bureau should allow lenders to reduce a loan originator's compensation when the originator makes an error. The letter notes the LO Comp rule currently prevents companies from holding their employees financially accountable for losses that result from mistakes or intentional noncompliance with company policy when they make an error on a particular loan. This result runs directly contrary to the central premise of the Dodd-Frank Act amendments to TILA that led to the LO Comp rule--compensation is the most effective way to incentivize loan originator behavior.

"Greater accountability on the part of loan originators will incentivize them to reduce errors and consistently comply with regulatory requirements and company policy, leading to a safer and more transparent market for consumers," the letter said.

--Lenders should be allowed to alter loan compensation in order to offer loans made under state and local housing finance agency programs. The letter noted the LO Comp rule is understood to forbid varying compensation for different loan types or products, including HFA loans. "HFA programs are particularly important for first-time homebuyers and low- to moderate-income families who are often underserved and face affordability constraints under market interest rates and terms," the letter said. "These programs provide participants with much-needed lower interest rates or access to down payment assistance, often along with housing counseling and financial education, encouraging responsible homeownership in a well-regulated manner."

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 that many HFA programs include limits on the interest rates, permissible compensation, and other fees that may be charged to borrowers. In the past, lenders would address this challenge by paying loan originators a smaller commission for an HFA loan than for a non-HFA loan."

The letter recommended the Bureau explore ways to generally simplify the LO Comp rule. "The rule broadly prohibits compensation based on loan terms or proxies for terms while providing a short list of expressly permissible compensation factor," it said. "The Bureau should add clarity to the regulation, including specifying a clear ‘bright line' list of impermissible compensation factors rather than the current approach of providing a short list of permissible factors and a vague and complicated ‘proxy for a term' analysis that serves to discourage everything else."

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