November 15, 2018
Do you know how your mortgage loan officer is compensated? You should if you plan to buy a home, because your loan officer's compensation could have the potential to affect your mortgage loan – and proposed new changes could amplify the effects.
At the beginning of 2014, the Consumer Financial Protection Bureau (CFPB) significantly changed the rules for loan officer compensation by amending and clarifying restrictions under the Truth in Lending Act. The CFPB action was designed to reduce incentives for loan officers to steer consumers toward riskier loan products that increased loan officer compensation but may not have been in the consumer's best interest.
Under the CFPB's ruling, loan officers can't receive any compensation based on interest rate, loan terms, or by steering consumers toward an affiliate third party such as an appraisal or title insurance service. They can't receive compensation from a borrower and a related party for the same transaction. Loan originator compensation can't be lowered to offset changes in loan terms (known as a price concession).
The mortgage industry claims excessive regulatory burdens ultimately affect consumers. A group of approximately 250 mortgage executives recently wrote the Consumer Financial Protection Bureau (CFPB) requesting further changes and clarifications on loan officer compensation rules – and those changes could ultimately affect how much you pay.
The mortgage executives ask for three changes, beginning with the price concession rule. They argue that when loan officers can voluntarily reduce compensation, competition will increase. Lenders can compete for more loans, providing consumers with lower-cost options. Currently, a discounted loan may not be profitable for the lender since loan officer compensation can't be reduced.
The second change involves accountability. Under current rules, lenders have no way to cut a loan officer's compensation for errors or "deviations from company policy on a particular loan."
The third requested change would allow compensation variances for different types of loan products, citing housing finance agency (HFA) loans in particular. Such loans carry extra paperwork and restrictions that make origination costs higher. Without the ability to adjust loan officer compensation, lenders have difficulty covering the expenses necessary to offer these loans.
Along with the proposed changes, the executives ask the CFPB to provide a clearly defined list of which compensation factors are acceptable and which ones aren't. They call the current system vague and complicated.
How would these proposed changes affect you? If the mortgage executives are correct, you'll have better mortgage options to choose from through better accountability and increased competition – especially for first-time homebuyers and those with lower incomes. (Notice that all the proposed changes would lower loan officer compensation. Unsurprisingly, none of the executives' proposals lower executive compensation.)
However, all these changes should do is alter your shopping options. Changes in loan officer compensation, if any, would be reflected in the estimated closing costs in the Loan Estimate you receive when you apply for a mortgage and the Closing Disclosure document you receive upon closing. It's still up to you to fully understand the terms of any offer and how they compare. MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.
If you're shopping around for mortgage loans and paying attention to the terms, these proposed changes might not affect you at all. Ask for clarification on any terms that you don't understand. Use online mortgage calculators to compare the effect of differing interest rates, fees, points, and other loan terms. Mortgage executives may make suggestions that ultimately help your experience, but you'll have to capitalize on them yourself.
Remember that the mortgage rates you qualify for may depend on your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
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