New Loan Compensation Rules

By · January 24, 2011 · Filed in Mortgage Industry News

New loan compensation rules issued by the Federal Reserve Board under the Truth in Lending Act go into effect April 1, 2011.  Effective April Fool’s Day, all mortgage lenders and loan originators are subject to the new rules. Many loan professionals are unhappy about the Dodd-Frank mortgage reform bill.

Overview- The new lending rules prohibit a loan originator from the following:

  • Receiving compensation based on the interest rate or loan terms other than loan amount.
  • Increasing their compensation by raising the consumers’ loan costs – for example by increasing the interest rate.
  • Directing or “steering” a consumer to accept a mortgage loan not in the consumer’s best interest in order to increase the compensation.

These new loan compensation rules allow a loan originator to:

  • Receive payment from the consumer or the lender, but not both.
  • Receive compensation based on a percentage of the loan amount and volume.

Broker Compensation

An overview of how the compensation rules relate to brokers: Broker compensation can be paid as a percentage of the principal mortgage loan with minimum and maximum dollar thresholds. Broker Loan Officer (LO) compensation can vary by LO provided that the compensation model is the same for every transaction originated by that LO. Broker compensation can vary based on geography to allow for differences in the costs of loan origination, such as rent and other overhead expenses. Compensation models can change due to market conditions. The prohibition of paying compensation to loan originator based on loan terms and conditions does not apply to payments that the customer makes directly to a loan originator.

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Unfortunately the Federal Reserve, Congress and the Senate are making radical mortgage reforms with very little feedback from lenders, brokers and loan company employees. There is no doubt that this will kill mortgage industry jobs and it won’t even help consumers. In the end the consumer will have less choices and ultimately pay a higher interest rate. – Tom