The CFPB is closely examining loan officer compensation, an agency priority that is addressed in the Bureau’s Supervisory Highlights. Loan Officer Compensation rules fall under the Truth in Lending Act which was passed in 2013. This rule was enacted as a way to reduce product steering, and to prevent originators from charging different fees or interest rates based on any term or condition of the loan.

Put simply, mortgage originators cannot be paid more or less than a typical loan file based on Product type (Fixed, ARM, Bond, etc), The interest rate or APR, Loan origination fee, The type of collateral, The existence of a prepayment penalty.

For reverse mortgages typical variations for an HECM include a fixed rate, an annual adjustable, or a monthly adjustable. Each has its unique fit based on the needs of the homeowner and the ideal structure of the loan.

Under the current regime of Reg or Regulation Z  LO compensation is

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somewhat of a sticky wicket. “Regulation Z generally prohibits compensating mortgage loan originators in an amount that is based on the terms of a transaction,” the CFPB report says. “It defines a term of a transaction as ‘any right or obligation of the parties to a credit transaction.’ And it provides that a determination of whether compensation is ‘based on’ a term of a transaction is made based on objective facts and circumstances indicating that compensation would have been different if a transaction term had been different.”

Like many government regulations, the restrictions on loan officer compensation have unintended consequences.  In late 2018 over 200 mortgage lending executives appealed to the CFPB to loosen LO compensation restrictions and allow originators to reduce their compensation in order to remain competitive. In February 2020 Housing Wire reported borrowers might have to switch lenders in the middle of the process if a lender decides the loan isn’t profitable enough. The rule prohibits MLOs from taking a cut to their comp, which also means the loan could end up being more expensive for a consumer. Such concerns have not gone unnoticed. RMD reports that the Community Home Lenders of America (CHLA) — supports changes to the LO comp rule. In May, the organization submitted a letter to CFPB Director Rohit Chopra saying that the current rule’s “inflexibility” in certain areas is a “detriment” to consumers.

Further clarification the LO comp rule was noted in the 2013 final rule to state that it is “not permissible to differentiate compensation based on credit product type, since products are simply a bundle of particular terms”.

The CFPB examined reverse mortgage compensation since there are typically different loan types. Here’s what the Bureau noted in its report. For example, the institutions used outside lenders for reverse mortgage originations, but had their own in-house cash-out refinance mortgage product.  Examiners determined that the institutions used a compensation plan that allowed a loan originator who originated both brokered-out and in-house loans to receive a different level of compensation for the brokered out loans versus in-house loans.”

This constituted a violation of Regulation Z, the report explained.

The road where regulation, reasonable profitability, and compliance costs meet is a rocky one. With lender costs increasing and profits becoming harder to come by now is the time to revisit the LO compensation rule to ensure consumer protection and ensure the continued availability of the loan to older homeowners.

Resources:

FHA: 2024 Home Equity Conversion Mortgage (HECM) Limits

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