As anticipation builds around potential changes to the LO comp rule, some industry stakeholders have started to chime in with their visions of what form the regulation should take.
The Community Home Lenders of America, specifically, is the first to publish a blueprint of what changes should be implemented to the Loan Originator Compensation Requirements.
In a 13-page white paper, the trade group representing small-to-mid-sized independent mortgage bankers, argues that the rule in its current form does not create a competitive playing field for originators, nor does it benefit consumers because it does not allow for varying LO pay.
It is proposing future legislation that would “dial back the LO comp statutory remedy to the practices it was designed to address — yield spread premiums between firms,” a practice in which mortgage loan aggregators paid brokers higher fees for originating higher-rate loans.
But in the interim, the CHLA wants the Consumer Financial Protection Bureau to create as much “flexibility” within the rule as possible. The group, in calling for revisions, pointed out that current restrictions around lowering compensation for originators makes it harder for LOs to stay competitive. When borrowers compare offers from different lenders, loan officers often lose customers because lenders are unwilling to match a competitor’s offer if it means taking a financial loss.
“Because of LO Comp, the loan originator cannot reduce their compensation to compete on the deal and maintain the client relationship. And, understandably, their employing lender is unwilling to originate the loan at a loss,” the CHLA said in its white paper.
Therefore, the trade group said it is pertinent for a new iteration of the rule to allow for reduced LO compensation to match competitive offers for a borrower the LO is working with.
The CHLA is also calling for other changes such as allowing different LO comp for state housing finance agency bond financed mortgage loans and for a reduction in compensation on a loan where the loan originator makes an underwriting error.
Though the LO comp rule has always been a contentious topic, discussions have recently sparked following the Consumer Financial Protection Bureau sending the rule to the Office of Management and Budget for review.
For now, it is unclear what changes the bureau is seeking, but it has made mortgage stakeholders ponder how the industry could change with the rewriting of the rule.
The rule, originally implemented to prevent steering, has been criticized for disenfranchising lower-to-moderate income buyers by making certain products financially unprofitable for mortgage lenders to offer. Additionally, the industry, specifically mortgage lenders, have wanted to be able to reduce LO comp when an originator makes costly mistakes.
Stakeholders have expressed a range of thoughts regarding outcomes to the rule being revised. Bill Dallas, industry veteran, in a previous interview noted if changes to LO comp were done properly, it could make mortgage lending “much more profitable [for IMBs].”
“It is a mess today and it doesn’t make sense to have salespeople selling varying products at the same comp,” he said. Meanwhile, others think it is best to completely dismantle the rule and start over.
“These rules don’t apply anymore,” said Paul Hindman, industry consultant. “Rules just like laws become outdated, a situation they were designed to restrict changes with circumstances.”Whatever the case may be, the LO comp rule, as of June 27, remains pending for review on the Office of Information and Regulatory Affairs website.
