Loan Originators Who Argue That Predatory Lending was Bad Should Welcome the New FRB Rule on LO Compensation Prohibitions

funny pictures-Bad Idea: Agreeing to play a game of Monopoly with Basement Cat for your eternal soul.Under the final Federal Reserve Board’s loan originator (LO) compensation rule, effective April 1, 2011, an LO may not receive compensation based on the interest rate or loan terms. This will prevent LOs from increasing their own compensation by raising the consumers’ rate. LOs can continue to receive compensation based on a percentage of the loan amount and consumers can continue to select a loan where loan costs are paid for via a higher rate. The final rule prohibits an LO who receives compensation directly from the consumer from also receiving compensation from the lender or another party.

The final rule also prohibits LOs from steering a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the LO’s compensation.

Though a lawsuit has been filed to stop the changes from going into effect, there has been legal research conducted by the FRB over the course of many years.

The FRB’s research found that consumers do not understand the various ways LOs can be compensated such as yield spread premiums (YSPs), overages, and so forth, so they cannot effectively negotiate their fees. Yes, some LOs spend many hours educating their borrowers but this is not true for all LOs.

YSPs and overages create a conflict of interest between the loan originator and consumer. For consumers to be able to make an educated choice, they would have to know the lowest rate the creditor would have accepted, and determine that the offered rate is higher than the lowest rate available. The consumer also would need to understand the dollar amount of the YSP to figure out what portion will be applied as a credit against their loan fees and what portion is being kept by the LO as additional compensation. Currently, mortgage broker LOs must do this, but LOs who work for non-depository lenders or depository banks are not required to disclose their overage.

LOs argue that consumers ought to read their loan docs and take personal responsibility for negotiating a good deal on their mortgage yet facts related to LO compensation are hidden from consumers when working with depository banks and non-depository lenders.

The FRB’s experience with consumer testing showed that mortgage disclosures are inadequate for the average random consumer to be able to understand the complex mechanisms of YSPs when working with mortgage broker LOs. Consumers in these tests did not understand YSPs and how they create an incentive for loan originators to increase their compensation.

For example, an LO may charge the consumer an LO fee but this may lead the consumer to believe that the LO will act in the best interest of the consumer. The FRB says: 

“This may lead reasonable consumers erroneously to believe that loan originators are working on their behalf, and are under a legal or ethical obligation to help them obtain the most favorable loan terms and conditions.”

Consumers may regard loan originators as ‘‘trusted advisors’’ or ‘‘hired experts,’’ and consequently rely on originator’s advice. Consumers who regard loan originators in this manner are far less likely to shop or negotiate to assure themselves that they are being offered competitive mortgage terms. Even for consumers who shop, the lack of transparency in originator compensation arrangements makes it unlikely that consumers will avoid yield spread premiums that unnecessarily increase the cost of their loan.

Consumers generally lack expertise in complex mortgage transactions because they engage in such mortgage transactions infrequently. Their reliance on loan originators is reasonable in light of originators’ greater experience and professional training in the area, the belief that originators are working on their behalf, and the apparent ineffectiveness of disclosures to dispel that belief.

The FRB believes that where loan originators have the capacity to control their own compensation based on the terms or conditions offered to consumers, the incentive to provide consumers with a higher interest rate or other less favorable terms exists. When this unfair practice occurs, it results in direct economic harm to consumers whether the loan originator is a mortgage broker or employed as a loan officer for a bank, credit union, or community bank.

80 thoughts on “Loan Originators Who Argue That Predatory Lending was Bad Should Welcome the New FRB Rule on LO Compensation Prohibitions

  1. By the way readers, many LOs are starting to speak out online about how the new FRB rules will give them a raise.

    All this talk about “it’s bad for the consumer” will evaporate once they see their compensation plans.

    “You’re actually going to get a raise. You would have made an additional $60,000 based on last years’ numbers under this new compensation plan. From now on, you will be getting 100bps on every file instead of 60bps.”

    He has my attention. I asked, “Sure … but how much are we going have to raise our rates so we can pay me that 100bps?” He said “about 1/8.”

  2. Jillayne:

    About half of the LOs I know are getting pay raises under their new compensation plans primarily because they are no longer allowed to share in origination risk with their employers. No longer will LOs be absorbing extension fees, LLPAs, and other unexpected changes. It is VERY COMMON for LOs to just absorb costs instead of passing it on to their clients. As a result, many LOs will get pay increases.

    However, that does not change my opinion that this regulation is bad for consumers across the board. While the LOs’ pay is regulated, the banks profit margins are not. Money is just being shifted from the LO to the bank/employer. As a result, rates will be going up at a minimum of .125%, but probably closer to .25% if not .375% across the board FOR ALL CONSUMERS.

    If this regulation is truly about protecting consumers, then the results need to show that consumers will benefit from it. You know they will not. All this eliminates is any one consumer from being taken to the cleaners at the expense of ALL consumers being taken to the cleaners.

    The Fed study you site has been torn apart numerous times – the methodology was completely bogus, not too mention there isn’t a University in America that would agree that interviewing 35 people counts as a statistically significant population. The two other studies cited that were done by independent academics that were more thorough paint a very favorable view of brokers. Not too mention, it is a little odd that both of those authors were hired by the Fed all of a sudden.

    But whatever…

  3. Hi Russ,

    Don’t like what the evil banks are doing?
    No one’s stopping you from opening up your own bank. Now you can keep your SRP profits, too. But realize there’s a whole other down side to banking, namely, the massive losses they’re taking on the foreclosure end. Rates will go up anyways to pay for that mess.

    “If this regulation is truly about protecting consumers, then the results need to show that consumers will benefit from it. You know they will not.”

    Consumers will benefit from it. I know they will. .375 higher rates in exchange for the predatory lending protections are worth it.

    Have you read the entire report from start to finish? Because if you had, you’d know that the 35-person study conducted was only one of three.

    Seriously: Treat the TBWS guys as entertainment only. Their video ripping apart the fed study was just that: entertainment meant to incite the masses. The FRB’s studies go back to 2006 and there was more than just one study.

    • jillayne,

      I’d love to see these consumers who don’t care that they are being forced to pay thousands of dollars extra over the life of their mortgages for “protection” against steering to loan products that no longer exist from loan originators who aren’t even in the business at this point.

      I’ll propose that along with compensation disclosure we ought to put a government regulation disclosure so consumers can see a breakdown of the extra cost of the regulations on products and services.

      Day late and a dollar short.

    • Jillayne, this is really a lame response to any LO:

      “Don’t like what the evil banks are doing? No one’s stopping you from opening up your own bank”

      That’s the same as suggesting that you should just go open your own university.

      BTW…FWIW, I find calling the TBWS guys (Frank and Brian) “doods” really unprofessional.

  4. I find your lack of concern for the consumer in this interesting. But then again, as long as you’re not immediately impacted I guess that’s okay with you. Yes our videos are entertaining, we keep them that way purposely, but make no mistake about it – we take our views and opinions very seriously and we do our research before we publish a video. The Fed made note of four studies, all of which we reviewed and even went so far as to speak to the authors. I don’t mind being called a “TBWS Dood”, we’ve certainly been called much worse than that, but I want to set the record straight – we DO care very much about the real estate and mortgage industry, AND about the consumers we as real estate and mortgage professionals represent.

    Yes, LO’s are getting a raise. That’s because they can’t help the consumer if they wanted too. In the end, the consumer pays the price with this rule along with much of the recent changes to the mortgage industry. I guess your lack of actual mortgage lending experience is why you don’t see the negative impact this is having on the consumer. If you want an honest evaluation of the ramifications of this rule, maybe you can survey all of the mortgage brokers you apparently train on a regular basis. They have a very clear understanding of what’s going on, and after all, they are your customers so I’m sure they would be more than willing to enlighten you on the matter.

    Yours Truly,
    TBWS Dood
    Frank Garay

  5. Hi Frank,

    Thanks for stopping by RCG.

    My concern for the consumer spans a decade teaching and publishing articles on predatory lending, and reviewing mortgage lending loan documents for compliance where mortgage brokers blatantly violated state and federal law over and over again as well as charging horrifying fees that would make any LO embarrased to be associated with what went on. My firm also does expert witness work for law firms on mortgage lending compliance and applied professional ethics.

    The FRB rule aims right at predatory lending.
    The TBWS video aims is focused on LOs and their compensation. I’m really dissapointed that LOs take your videos like the gospel without doing any research on their own but I’m also not surprised.

    Sounds like the federal judge assigned to the case doesn’t agree the legal research submitted in the lawsuit.

    The mortgage brokers I worked with have talked with me. Their compensation plans are in place and some of the full time, producing LOs are happy with their new comp plans AND ALSO happy that they won’t have to “give up” part of their commission to help in an emergency.

    All this talk about consumers not being served if the loan amounts are low….something tells me they will be able to find a lender to do their loans.

    TBWS and Rhonda and Russ think the rule is “bad” for the consumer but the FRB (and probably the judge) doesn’t see it that way. It would be great if you could do another TBWS video to help the LOs understand “WHY” the rule was structured this way. (I outlined this in the blog post, above.)

    TBWS can do some great things now with helping LOs focus on the “whys” so they can get a deeper understanding of how to explain the changes to their clients.

    Let me know if I can ever help you in any way and thanks again for stopping by!

  6. Hi Russ,

    We still have more complex loan programs out there beyond the traditional fixed rate mortgage.

    Take a look at ANY mortgage banner ad on the internet. They’re quoting rates for a 15 year loan, an interest-only loan, or an ARM loan to get the phone to ring.

    We still have PLENTY of predatory lenders out there. First they went over to the loan mod side. Then they switched to doing short sale negotiating. Now they’re hawking “mortgage litigation” services. They’re definitely still out there.

    • Jillayne, if there are still a ton of predatory lenders out there then it means none of the previous regulation worked, so why would you think this is going to work as well?

      The bigger issue here is that our government is telling private enterprises how they can and cannot pay their employees. Regardless of what you think of loan officers, if that doesn’t send chills down your spine, I don’t think there is any help for you.

      What if the do gooders all of a sudden decides that continuing education instructors should disclose their compensation? What if they say, you must make the same amount on every class that you teach, regardless of how much extra work may be required on a particular class? When your students purchase your class, do you put a disclosure on your receipt showing how much your individual compensation was for the class?

      Who is next doctors? Doctor’s have to charge the same for heart surgery as they do botox injections? Please don’t say doctor’s don’t steer patients into unnecessary surgeries as it is well documented.

      Car dealers have to set their profit margin the same on every car they sell? Car salesmen are no longer allowed to upsell the decked option car with a higher margin than the base model? Restaurants are no longer allowed to up sell you to a large soda because they make more profit on the soda?

      Where does it end?

      No one here is arguing that there aren’t shady lenders out there. There are shady people in every business. You cannot legislate ethics and morals. Passing worthless legislation that does not address the root problem is not the answer.

      Finally, according to you, most LOs are just toothless high school drops with 50 IQs who are unworthy of their compensation. If that is the case, then why are we being led to believe that these used car salesman dolts were able to bring down a a multi-trillion dollar economy by themselves?

      The roots of this crash are tied directly to Wall Street, yet you don’t see the Fed regulating bonuses of the people who actually created the predatory products that the lowly broker sold. Brokers never created, underwrote, or funded a single mortgage. Less than 1% of mortgage brokers probably make several hundred thousand a year, yet that is an entry level salary on Wall Street. Some how the broker on main street is the one that needs regulation.

    • Jillian, I am sure you do meet with them face to face. Answer me this, if there are indeed so many predatory lenders out there as you say then all this regulation has accomplished what? Don’t tell me what it was intended to accomplish, tell me what it has accomplished. Also, what or whom are you calling a predatory lender? Could this just be a question from one of the untrained, unlicensed, unregistered, bank clerks they try to pass off as loan officers asking a question because they do not know any better? Have these individuals been charged or convicted of anything, and if not how can you call your students “predatory lenders?”

      You are quit masterful at taking some bodies criticism of your position, using their celebrity status (Frank & Brian) and twisting (hijack advertising) it in such a way to further your own agenda, which happens to be the classes you teach. In addition, isn’t it a conflict of interest to have you crying “predatory lending” at the expense of hard working career professionals, such as Rhonda, Russ, and myself just so justify the need for your class? I do not imagine Frank & Brian will comment further because they realize you will just ambush what ever they say for your own gain. You are not a consumer advocate. You are purely self serving, and I find that repugnant.

      I also find it quit interesting that you are careful not to bite the hand that feeds you, another wards the big banks who are the big players in all this. All the way up to companies like Goldman Sachs that were selling short through the purchase of CDO’s from AIG while selling these bonds to pension fund managers. These are the big fish, and the real dirty “dons” that should be in Federal prison and I have not read one word in criticism from you!

  7. Russ if you don’t like all the disclosures and the cost of doing business because of the regulations there is another way.

    LOs…and that means banks, non-depository lenders and brokers could trade burdensome regulations and instead take on higher liability to look after their client’s best interests (Some LOs already do this, others, like the depository banks, would have to be dragged kicking and screaming.)

    This is, in effect, what the FRB rule aims to do but like I said above, the FRB rule is NOTHING compared to what’s coming our way w/Dodd-Frank.

    Because of predatory lending and the meltdown, what will ultimately happen is that the industry will be forced to do both: look after their client’s best interests and also be heavily regulated. Welcome to the mortgage apocalypse.

    I will outline in a future post, that one path to shedding the regulations is to take on more professional liability. But that will also come with costs.

  8. Jillayne, I have no faith in the Fed and I have no faith in the Judge or much of our government in protecting consumers while lobby dollars and special interest are allowed to exist… hmmm… kind of like what they say they’re trying to rule out with LO comp.

    As long as there is no campaign reform, how can we trust ANY elected official to look out for our best interest?

    As far as TBWS goes…YES there is an entertainment factor AND like it or not, they (Frank and Brian) have united LOs probably MORE than NAMB or NAIHP has. They HAVE provided valuable information to LOs and the real estate community. I dare say they create community.

    Do they push the envelope sometimes? Sure…don’t you? I can’t say everything you write is fact–much of it is full of YOUR OPINION. Do you write to push buttons… I’d say, yes… it’s not far from TBWS except that they have a bigger audience.

  9. Those same lobbying dollars and special interest groups include NAMB and NAIHP and the MBAA.

    If TBWs has united more LOs than the mentioned LO trade groups, then to what end?

    All I see out there on the blogs and on twitter is LOs who are stark raving mad about the change to their compensation spouting off about socialism, and obama this, and that.

    That gets people nowhere. Sure there’s a community but what’s the community doing other than ranting and raving.

    Color me disappointed.

    If indeed the guys have that much power why not use it to now help the LOs make the transition and help LOs understand why the compensation prohibitions are in place.

    Oh, that doesn’t get as many web hits for advertisers.

    I see no conspiracy theory. I do see the elected officials and the regulators (like the FRB) trying to do what consumers have asked for: Reign in predatory lending.

  10. Jillayne… what ever… I DON’T think this is what consumers have asked for. Are you saying that the SAFE Act is a failure since according to you, predatory lending is still a huge issue?

  11. The SAFE Mortgage Licensing Act was designed to set a minimum barrier to entry for LOs, including a minimum level of “no felony convictions” in all 50 states and to be able to track LO licensing easily across all 50 states, and to catch the mortgage fraudsters from crossing state lines. This is a law.

    Before the FRB rule, predatory lending was an industry problem over and above the law.

    The opportunity to steer a customer into a lesser quality loan was a personal, ethical choice by loan originators.

    After April 1st it will no longer be allowed under the law.

    • That’s not exactly the law…not all LOs are licensed… if they work for a bank or credit union, they’re simply registered–big difference… and again, I’ll refer back to our elected officials and the power of lobby $$ on why LOs and banks and credit unions are allowed to be held to lower standards than licensed LOs.

      • We are registered, but instead of taking one entry test and some continuing education, I have to take 5 classes and tests each quarter. Also, it looks like we are going to be fully licensed, then we will be responsible for the test, continuing education, AND the courses we already have to take. I guess then we as a bank will be held to much higher standard than most other originators!

        I would agree however that the call center type situation of big banks lead to much less educated originators.

  12. Nothing is stopping the brokers and non-depository lenders from getting lobby dollar donations and doing their own lobbying to change the SAFE Act. (The original version of the SAFE Act had all LOs being licensed until the banks were able to get an exemption for their LOs.)

    BTW many depository bank LOs believe this is going to happen anyways; that it’s just a matter of time. Some are getting their LO license so they can say to their clients “as a matter of fact, I am licensed” in order to compete against heavy licensed LO competition or to just have the license in place in case they want to transition to another firm.

  13. Pingback: Loan Originator Compensation… April Fools? NAMB says LO Comp delayed until April 4! | Rain City Guide

  14. Jillayne, once again you’re spreading incorrect information that is detrimental to the industry and the consumers. You make a statement in this case “The SAFE Mortgage Licensing Act was designed to set a minimum barrier to entry for LOs, including a minimum level of “no felony convictions

  15. Great!

    Here’s what’s going on. Loan origination is a thing of the past. If Real Estate sales is going to online Brokerage Loan Origination is for sure already there. If you think you are going to compete on price, you are missing your commission the same, or more so, than Real Estate agents.

    By transparency, if a consumer can shop on line for a home that has a million variables, then a loan should be easier to present as a set of numbers.

    In 2001 I did business exclusively with a company I think was called ELoan or something like that. I met the Loan Originator once because she wanted to meet me. Other than that she did all her business out of her home. She never went out. I asked my lender for a competing loan product, and he told me he couldn’t match her pricing.

    That was in 2001. What happened in the past ten years has to do with a continued series of higher, and higher priced properties that required more hand holding to keep the consumer “in the game.”

  16. I had to put this into two comments this is the remainder of the other.

    Now that properties are headed back to being priced closer to actual value, banks will be more able to approve loans based on value. Consumers will benefit by having true market pricing on interest rates, and a much lower fee for Loan Origination.

    I agree that the need for “sales” people in Real Estate is diminishing. Loans, I have yet to get why that compensation has been so high, except, as I say, it was a matter of hand holding the consumer through the process. Now that people owe hundreds of thousands of dollars more than a property is worth, I think more, and more, people would have to think twice before signing up for over priced debt.

    • David, I did a quick background check and see that you are self employed and own a cleaning company. Back in 2001 a loan existed that allowed for self employed borrowers to use bank statements to show their income. One of the hardest loans to get done now is individuals like yourself. With the increased underwriting scrutiny if your net income was less in 2010 than it was in 2009 even though your gross sales where much higher, guess what? DECLINE! It would take someone like Rhonda, Russ, or myself to carefully go through your tax returns and document why your net was lower than before. It could be as simple as expanding the business and purchasing new equipment, or more than likely a variety of smaller factors but with us you would not get your loan. Also, if you think the clerks at the banks can do the same job…well come and see one of us after your loan is declined.

  17. David, I have one simple fact for you that will always insure that I have a job. A very small percentage of loans, though I do not have the exact figures here in front of me, but it is very small go through the system without needing an experienced Loan Officer to fix a myriad of problems. Sure, there are a few that can be done by internet, the absolute cream that floats at the top of the milk. If you haven’t been in the industry, especially the last few years, you just would not believe the many things we have to fix that requires knowledge that only comes from years of experience.

    I cannot comment on whether or not the full service Realtor is in danger of going extinct because of the internet but my gut tells me “NO”. The internet is just another tool available to the Realtor to do his or her job. Again, my 17+ years of experience has been directly related to lending. I only observe what Realtor’s do. What I have observed is, when someone chooses to purchase a FSBO to save on Realtor commissions, it greatly increases the work load for myself and everyone else. You made a comment you have yet to get why the compensation is so high. I am going to do you the favor of extending you an offer of employment (once you pass your back ground check, fingerprinting, and continuing education…unless you are going to work for a bank). You can learn firsthand so you can have some idea about what you are talking about. I am serious as a heart attack; take me up on my offer (360) 981-8615.

  18. Jillayne! I do not know what to think of you. Several days ago I became convinced by something that you wrote that you were fanning the flames of fear in the public to further your agenda, and your classes. I have jumped your case pretty hard these past several days for being against loan officers. You make us sound like uneducated dim witted simpletons when many of us hold advanced degree’s.

    I just finished reading an article you wrote in 2008 about MILA. So much for my charge your afraid to take on the heavies. I just do not know what to think of you. Are you friend or Foe? Are you here to help us rebuild this industry or just here to keep kicking us in the ass?

    What is your purpose? You seem to be all over the place. I did read some great articles on your page Mortgage Fiduciaries. I still think you are wrong on the extent of predatory lending. You are a very confusing person to pin down.

  19. In 2001 there were 32 retail loan products listed online on any given day. There are also a variety of wholesale loan products, plus investor products.

    In a world of transparency those products should be viewed by the consumer. The same as there was a demand that the Multiple Listing Services should make all information available, loan products, plus the cost of that money should be common knowledge to the consumer.

    There have been no loans to make since 2008 when posters on blogs were encouraging people to put 20% down on home loans. If some one in 2008 did put 20% down that money, that equity, is now gone.

    After the tax credit people again paid way too much for property, people reaffirmed debt by converting ARM products, neg am, predatory loans. Many people went into foreclosure rather than play the refinance game on a property declining in price by the day.

    Mortgages have made a mess of the global economy, and every government has dumped trillions of dollars, Yuan, and Euros into the financial markets in hopes of stalling deflation.

  20. Again I had to break my comment in two so it didn’t apear spammy to the Rain City Guide system.

    The very idea that any one is discussing a 3% commission on loan products is just ridiculous.

    Yes we did use bank statements, but that isn’t why Myrna wanted to meet me. We put an offer on her house in Mercer Island for $500K. We determined the property needed more work than we were prepared to do. Other than that she had done about 20 or 30 loans for a couple of clients of mine.

    I had a lender that I had worked with since 1986. Actually I was also using Continental at that time, I think they own Home Street? now. For some reason, back then, Myrna was able to do every thing online. We faxed stuff. The guy who referred me to her had never met her. Her pricing was lower than a guy I had used for that many years.

    What I think the upshot is that there needs to be much more regulation of the mortgage industry, and there really needs to be much more working knowledge of how mortgages fit into the financial plans people have.

    The mortgage is solely to hold, and control the property until it can be paid off. Paying off the property is the goal. Refinancing is never an option unless it is to take cash out.

  21. Steve says “Before the FRB rule, predatory lending was an industry problem over and above the law. (Who says? Cite your sources!)”

    Google “Predatory Lending”

    There are literally thousands of references.

    Google “Predatory Lending” and then pick a year, say, 1999.

  22. Steve asks “The opportunity to steer a customer into a lesser quality loan was a personal, ethical choice by loan originators. (How did you come to this conclusion? (Cite your sources that back up this ludicrous, sensationalist statement!)”

    Are you arguing that loan originators had no choice but to steer consumers into a lesser quality loan; that they were forced to sell Pay Option Arms or forced to sell subprime loans over, say, a better quality loan such as an FHA loan?

    I have definitely heard stories from LOs who worked for companies that trained them to sell customers subprime over other loans. Most of them told me that they couldn’t sleep at night and had to leave the company when the realized what they were being trained to do.

  23. Steve asks “what’s your purpose?”

    I love the mortgage lending industry and am so sad to see the predatory lending that went down over the last decade destroy the consumer’s view of the mortgage lending industry.

    I love my mortgage broker students. MANY LOs who use to work for a broker are now working at non-depository lenders. The non-depository LOs I met during 2010 were definitely high quality LOs. I know lots of LOs who work for banks as well.

    The whining about this FRB rule is nothing compared to what’s ahead with Dodd Frank.

    Everyone’s stuck in the “anger” phase (see Elizabeth Kubler Ross’ cycle of grief) of this big change and we need to move beyond the anger and start transitioning.

    This same anger phase came around with the changes to TILA in the fall of 2009 along with the anger about the new GFE.

    This too shall pass.

  24. Hey Steve, I have an idea. Have you considered writing a guest blog post about your experiences with A Plus Mortgage?

    I know you have special insight as to what went down there and I had to go on was the scathing HUD Audit and the DFI consent order.

    If you want to tell your story first person, let me know and I will ask Dustin to set up a guest post account for you. I think people would really enjoy hearing your perspective including me.

  25. Steve, Rhonda,

    When I write blog posts, I like to take on taboo subjects or to take a contrary position that makes people really think.

    My target is not loan originators or mortgage brokers or bankers. Instead I dream of the day that we can say predatory lending is gone for good.

    Predatory lending is a behavioral choice that was not reigned in by the bankers or brokers so instead the fed government is forcing this new rule on the industry.

    My target is mis-information, trade association propaganda that seeks to motivate using fear. My agenda is to take a stance that no one else is willing to take, in order to help people see a different perspective.

    I am constantly getting backlash for this and that’s okay. I do have an endgame which I will reveal soon and I think you’re going to eventually see that loan originators and I agree more than we dis-agree.

    Most of the LOs I meet in the classroom want predatory lending to be gone for good, too. They just don’t want to have any of that change effect them personally. Unfortunately that’s not going to happen.

    The FRB Rule changes need to happen and the pain LOs are going through is just part of a process.


    So is it possible that there will be some GOOD that comes out of the FRB rule change?

    Take a step away from all the trade association propaganda and think about what the change really means for not only small businesses, mortgage brokers, LOs but also for consumers.

    Instead of focusing on the dark, focus on the light. It’s there.

    • Jillayne, I find it insulting that you think I would base my opinions on trade propaganda. I wish you would give me and fellow mortgage professionals a little more credit.

      Just because someone doesn’t agree with your opinions, doesn’t mean they don’t think on their own and do their own research.

      The tone that you sometimes use, which you may label “contrary” can sometimes come across as flammatory… IMO you’re not always getting the result you may perceive… and often times, I wonder if you’re doing this for some sort of “entertainment” value.

      Just my 2 cents.

  26. Hi Rhonda,

    Thank you for sharing your perceptions. I do admire the work you’ve done in the industry and for consumers and my statement wasn’t made about you directly. I have and will continue to recommend you to consumers.

    At times when I hear or read things loan originators are saying, it’s as if they are parroting exactly what’s printed in the trade group press release.

    • Thanks, Jillayne.

      I guess I never like seeing a large brush being used to paint anybody or anything… it seems like profiling to me.

      I know many excellent mortgage originators… and yes, the industry does have some flakes–what industry is doesn’t? I can’t think of one…

      I know we both want what’s good for the consumer and to eliminate the bad guys from the mortgage industry…we just have different opinions and voices on how this should happen.

  27. Overheard in my classroom today:

    Mortgage broker/company owner: “Back in the day account executives from wholesale lenders were offering free gas, free vacations, and one company offered my entire staff free lunch for the whole month if we’d just send loans to her company. It was a good thing. Everyone was making money. I was making money, my LOs were making money, the customer got a house, even if the loan wasn’t the best loan they could have gotten.”

    Jillayne: “But that was unsustainable.”

    Jillayne: “If that all came back, and banks/wholesalers once again offered the enticements, would you do it all over again?”

    Mortgage broker/company owner: “Well we can’t anymore.”

    Jillayne: “What if the new FRB Rule doesn’t go into effect and you could once again steer people into loans based on what company gave your staff the best freebies.”

    Mortgage broker/company owner: [very long pause] “I don’t know.”

  28. Since you guys haven’t had an examiner chime in yet, I’ll give you my opinion. I won’t say where I work, but I’ve been visiting mortgage companies for 7 years. I’ve exchanged several emails w/ Rhonda in the past and she can vouch for me.

    I have no idea whether changes to LO comp are good overall or bad overall for consumers. All I know is that I see borrowers who were ripped off at almost every mortgage company that pays their retail LOs overage. Almost every company that allows their LOs to use his/her discretion to price loans will end up with various issues. The recent Countrywide settlement in WA was a Fair Lending issue, but it started because of pricing and overages.

    Off the top of my head, the two most common scenarios are discount points and rate movements. For discount points, we verify that the discount bought down the rate. We always see retail LOs jacking up the pricing — such as charging 2 discount points for 99.0 pricing. This is in addition to their other origination fees.

    The other common scenario is from dropping rates. The LO gives a GFE quoting a 5% rate that isn’t locked. Rates drop another .375% before the lock and the LO locks at 5% and pockets the overage. The discount point scenario and dropping rates often works together. When we ask why the rate drop wasn’t passed on to the borrower, they say “buyer beware”. Buyer beware is great when shopping at closeout sales, but it sucks when it’s for 40% of your income for 30 years.

    When we look at pricing, we often find that there are many more instances where the price is lower than it should have been rather than higher (the borrower gets a better, rather than worse deal). Sometimes this happens because an LO will take a loss just to make certain volume/unit requirements that bump up the overage as the units get higher.

    Pricing should be fair and consistent across the board and I’ve only seen that at companies that pay straight bps on volume. I think the new rules are great and I wish they’d come a long time ago.

    • If the rule goes through, I do like that my compensation is separate from the rate… it’s really no longer any business of the borrower what I’m going to be paid on a transaction. But there are times when I do give up plenty of my commission or price a rate making less than I would perfer to, and it has nothing to do with making a “volume” bonus.

      Our company does not pay based on volume bonuses nor do they currently plan to (as far as I know). I think volume incentives for mortgage originators promotes poor service to the consumer. Instead of focusing on each transaction, the goal is to close as many as possible in a month in order to reach the next carrot.

      Many big banks have paid with this type of structure for a while… I’ve talked to a few of them so I know this is all designed to have their retail loan officers/mortgage tellers cram in as many loan apps as possible for their reward. And now that their LOs are registered instead of licensed since they were able to modify the final SAFE Act, they can pay their retail LOs less than a “licensed” LO….making the bank LOs jump all the higher to reach that “volume nugget”.

      I am hearing of a lot of movement in the mortgage industry with LOs leaving the big banks over new comp plans…unless they go to another big bank or a credit union…they’ll get to be licensed (really, any LO who takes a residential loan application should be licensed).

      Thanks for coming by, Audit1 and chiming in 🙂

  29. Jillayne, my only question in what is a fasinating discussion is, “If you have encountered so many people ripping off the consumer and have seen evidence of that ripoff, have you ever filed a complaint or assisted the borrower with filing a complaint with the Department of Financial Institutions, or HUD, or the WA State Attorney General?” If not shame on you. If so, thank you. I know I have both filed complaints and assisted others. The path out of this moras is not with more regulations. God knows we have enough already. The path out is better enforcement and run the the bad players out of the business. BTW, I do have 15 years in the industry as a broker and now a LO. I hung up the broker shingle as I couldn’t keep up with every lender going their own way in interpreting regulations and trying to stay compliant. If you think there isn’t confusion in the regulations, talk to one of your regulators and ask their opinion. My experience has been everyone is scratching their heads on some of this stuff. Have a great day.

  30. Hi Gary,

    Thanks for stopping by RCG. When I see something going on out there that’s questionable, in my opinion, the best place to start is right at the source so I encourage people to call the person or company in question and ask about the possibly unethical conduct and if the person is unresponsive or otherwise give me the verbal middle finger, all bets are off.

    My firm has testified on the issue of predatory lending on many occasions and I’ve seen some horrible harm done to consumers.

  31. Jillayne, please let us know if you have been an LO, when, and for how long. Not sure you have been.

    I know a RE clock hour training company that agents specifically go to because they never verify clock hours and basically, if you take the test, they don’t confirm if you did the hours at all.

    Because of that company, maybe the government should federally mandate a 50% paycut for you?

    • Hi there, yes, I have originated, processed, worked as an underwriter and also in loss mitigation.

      Regarding the argument that the federal government should regulate the pay of other companies, well real estate clock hour instructors didn’t take down an entire economy now did they? I’ve also heard the waitress argument, too. Buying a meal in a restaurant is a radically different transaction compared to selecting a mortgage loan.

      If you know of that RE education company, why don’t you turn them in to the Dept of LIcensing?

      Most all markets have at least one bogus company like that who gets away with it for a long time because the Realtors using the company like having the option to cheat and don’t want to lose that option.

  32. Good Lord, Jillayne you are so full of “I have heard stories”, “and citing unsubstantiated sources” you should consider working for the National Inquirer. I have heard stories of Bigfoot being kidnapped by UFO aliens too, but does it make it any more true than the stories you have heard? You should know how to properly cite a source (being a college you claim to be) You can not cite generalized sources. APA formatting has very specific rules to follow to prevent your kind of tabloid journalism. Telling me to “Google” predatory lending. Are you kidding? That’s your source. You ask me if I have ever heard about someone being put in a Payment Option Arm verses an FHA loan. It doesn’t matter what I have heard because that is not even admissible in court. It’s called “hear-say.” Payment Option Arms are a good loan for the right person….someone on a commission income like myself that might not be able to make the full principle and interest payment each month so having the ability to make an interest only payment or deferred interest payment is greatly beneficial. Rhonda is correct in saying that you paint everything with a broad brush. Not all payment option arms originated were bad! Does that mean that there were some LO’s that took advantage of clients with this product? I am sure that it happened, but how many of those individuals do you think are still in this business? They were gone when the money dried up and you know it. I have got to stop responding to your ludicrous post. It waste my time and it gives you an appearance of credibility. I suggest the rest of you do the same and one more thing. If you feel you have been damaged by Jillayne’s inflammatory writing unsubstantiated by fact. remember this when you spend you money for your continuing education classes. Reminds me of an old addaige. Those who can do, “do” and those that can’t, teach, or try to.

  33. Hi Steve,

    This statement in and of itself tells me everything I need to know:

    “Payment Option Arms are a good loan for the right person”

    Half of all Option Arm borrowers are in default.

    Steve says “They were gone when the money dried up and you know it.”

    If anyone wants examples of companies and their employees/LOs who harmed consumers but are still in business, we can start with this list in WA State:

    Take 2011 for example. There’s a company with a closed consent order called Premier Mortgage Resources LLC out of Vancouver. Here’s their order.

    Last time I checked….still in business. Instead of a mortgage broker license, they have a consumer loan license.

    Here’s another consent order from 2011:
    and if you look very carefully, you will see that the respondent is still originating loans.

    I could go on.

    The FRB Rule was needed. Even if the FRB Rule was repealed this is NOTHING compared to what’s ahead under the Dodd Frank Act.

    • Jillayne:

      You do realize that option ARMs were around for decades before the housing bubble and performed just fine? The issue with option arms is they were pushed on Joe Sixpack as a way to afford higher priced properties instead of a financial management tool for more sophisticated borrowers which were who traditionally used the product (basically wealthier borrowers).

      WAMU, World Savings, Countrywide et al pushed this product on the masses and originated the vast majority of them. Of course, everyone loves to try to say broker some how made up this loan product and cast blame on them. I agree that brokers should have been more cautious, but hey, for some folks it is hard to say no to a smoking hot Wamu account executive waiving her double D’s in your face and offering 4 points. Of course, those folks are long gone from the business and we are left picking up the pieces.

      Risk layering is why a lot loans went bad and you cannot simply say POA (or interest only, 100% down, some variations of sub prime, etc) are bad without looking at how banks lowered the underwriting standards on the products – lower FICO scores, higher LTVs, stated and low documentation, etc.

  34. Hi Russ,

    Thanks for making my point that the FRB Rule is needed. If all it takes is a pair of doubld Ds and 4 points then the Fed did the right thing.

    The argument that “those guys are long gone” doesn’t hold weight with me. They’ll be back.

    The main reason why the Pay Option ARMs are a bad program is most people only make the teaser/minimum payment and aren’t disciplined enough to make higher payments when their income increases. It’s a bad loan program for the majority of people it was sold to.

    I was working in underwriting and loss mitigation in the 1990s and saw Option ARMs go bad. Banks will never learn. And they will be back again someday pushing ARMs again.

  35. “I was working in underwriting and loss mitigation in the 1990s and saw Option ARMs go bad. Banks will never learn. And they will be back again someday pushing ARMs again.”

    If this is the case that you believe defined products that aren’t in the interest of the borrower will be back and the business will be harming consumers, then what is the purpose of the new regulations? What have we gained? If the consumer is informed about the pros and cons and they make an informed decision on a loan product, why is that bad? What I think is bad is a select number of mega banks controlling the market and undercutting competiion to the extent that they are influencing their own profit margins and doing it through the Federal Legislative and Regulatory channels.

    BTW, again I ask the question, “Have you ever filed a complaint on a mortgage lender for illegal practices?” In your response to my earlier comment, I don’t think you ever answered it. You said you’ve testified regarding predatory lending, and that is good. But did you really ever try to make sure an individual or their company who was harming consummers pay the price for their activities?

  36. Gary asks: “If this is the case that you believe defined products that aren’t in the interest of the borrower will be back and the business will be harming consumers, then what is the purpose of the new regulations?”

    A: When creative lending programs return someday, the difference now is that LOs will not be allowed to steer a borrower into a lesser quality loan program in order to earn extra compensation.

    Q: “What have we gained? If the consumer is informed about the pros and cons and they make an informed decision on a loan product, why is that bad?”

    The gain comes from pulling LOs, some kicking and screaming, others don’t need to be pulled at all, to take one step away from being a retail salesman (nothing against retail salesmen in general) and one step toward putting the clients best interests ahead of the LO’s own interest to maximize profit at the expense of a consumer who could have qualified for a better loan program.

    Gary, how do you know your customer understands what you’re saying when you explain loan programs? Informing customers about the pros and cons plus handing them a set of disclosure statements is a far cry from making sure our customers understand what we’re saying. LOs are not held to this high standard….yet. The FRB Rule is sending LOs on this path, though. We have a long way to go. Now lest I get accused again of painting everyone with broad brushstrokes, I will add that some LOs do care for their clients in a very professional manner, but that’s not the case at all mortgage firms.

    Gary says “What I think is bad is a select number of mega banks controlling the market and undercutting competiion”

    A: Gary, I have all the confidence in our industry. Mega banks have never been able to do mortgage lending well. Mortgage lending is best done at mortgage lending firms that specialize. LOs at the banks will leave for the mortgage lenders. Mortgage lenders leave to open their own broker shop. Then the market turns and brokers return to lenders and the banks. And then the cycle starts all over again. I’ve seen this cycle happen more than one time. Our broker numbers will get smaller and eventually the cycle will reverse.

    Last time I checked, the banks aren’t doing all that well. How many do we have on the unofficial troubled bank list this week? It must be pushing 1000 banks.

  37. Ah Jillayne, the mortgage people are really out for you.

    I also have a lot of stories, but when I tell the stories I’m called a witness, it’s only hear say if you hear about it.

    My wife is from Peru. We have been married for eleven years. It is an eye opener.

    I had seven files on my desk of properties to short sale. All were people of Hispanic decent. All the loans were very fishy. Property price that could never have appraised, neg am, option arm, for a guy who had been employed at the same place for twenty years? Lot’s of higher than going rates, caused by minor credit dings.

    I could have sat at my desk and taken files all day, every day, some people still do.

    I’m pretty good at short selling property because that has also been around for ever. I’ve done a lot more than most, and know people in Loss Mitigation. We are all wondering how there ever got to be so many loans in default.

    Just by sheer volume some one, some place, other than me, must realize something is terribly wrong. It’s not just here. My wife came back from Spain about a month ago, and there are offices there crammed floor to ceiling with foreclosed property files. It’s never been that way before.

    Australia, who a year ago was claiming there is no Bubble, is starting down the same path of foreclosures.

    By sheer volume the people in the mortgage business must realize that something is wrong. How can you get on a blog and be oblivious to the fact that loan products are defaulting left, and right? A default is kind of like a return policy. They may want the house, but they don’t want to pay the high price of the mortgage.

    I could go on, but it’s incredible that this blog has so much discussion about the mortgage commission when people are returning the product in droves.

  38. No. It’s purely window dressing.

    What is surprising me is that no one is addressing debt.

    From the argument about who should have known better, the Real Estate agent or the mortgage lender, the mortgage lender should have known better. It’s the lender who has the skin in the game. The lender has the appraisal, the analysis, the financial data of the global market place, and yet they lent far in excess of value. They did that because they could sell the loans that were repackaged into securities then resold, insured, and traded along with consumer debt instruments.

    This was all allowed by global government regulation, or a loop hole, or a set of loop holes.

    Putting agents or loan originators into the field is a minor point compared to the product that they were “selling,” or orders that they were taking.

    There needs to be a set of United States regulations that at least monitors banking activity, and has the ability to stop what is contrary to National Security. We just spent a few trillion dollars to clean up the last banking disaster, after we what we already learned from the Savings, and Loan industry.

  39. Pingback: New Rules for Home-Loan Brokers, by Amy Hoak, « Oregon Real Estate Round Table

    • Jillayne, but the Fed Rules still leads to unintended discrimination. Many LOs are going to be reluctant to work with borrowers who need a little extra help or have small loans (both of which tend to go hand in hand) if they can’t charge appropriately for their services. Borrowers with higher loan amounts are paying more than they otherwise would have to pay. Why is this fair to them?

      Those articles tend to rely on very specious data to come to their conclusions. There is a saying in statistics courses that correlation does not equal causation. In other words, even though Hispanics may get higher rates on average, it does not mean the higher rates are caused by them being Hispanic. The problem with broadly saying credit and income is that any LO with five minutes in the business will tell you that there is more than credit and income that go into pricing a loan. What about average loan size? Some people of similar credit and income have other nuances with their deal that could lead to one having a higher rate than another.

      At what point does this end? Is it fair that convenience stores in minority neighborhoods charge more than regular grocery stores in non-minority neighborhoods? Often times convenience stores are the only option. Should the government step in and force convenience stores to charge the same as large grocery chains?

      What about if the LOs charging more are minorities themselves which is often the case, particularly with insular communities like Hispanics and Asians. I see it all the time.

      Should all car dealers be required to set firm prices and not allow buyer and car salesmen negotiation? I am sure there are studies that show women or minorities pay more for similar cars.

  40. Jillayne, do you think this resulted more from a (bad) company culture?

    Should RE agents have their commissions regulated so that they cannot discriminate which clients they might rebate or discount to? There’s a big chance for discrimination there too since they still have the freedom to pick and choose who they might help.

  41. It’s almost pointless to comment here, since thoughtful entries get labelled as spammy, and then get vaporized.

    Thankfully, I have learned to compose them in a different program, so as not to lose my work.

    Please, get Dustin to fix this. A mindless robot is no substitute for a keen eye.

    • The message “Your comment appears to be spammy, please retry” appeared, and the comment vanished.

      There’s a vast difference between human judgement, and robots.

      My comment was anything but spammy. Any human could see that.

      Same goes for trying to legislate ethical behavior I suppose.

      Maybe there is a good reason to employ robots as internet policemen, but the results are often poor.

  42. You know, I want to know what ever happened to personal accountability in this Country? The number of people that took out Payment Option Arms buying homes they could only afford by making the minimum payment. Their plan being to hold onto the home for a year maybe two, tops, and then sell, and make big money off the appreciation in price. If I as a loan officer would of said “No I can’t allow you to do this. You are unsophisticated, and don’t understand that we may be on the tip of a bubble and you could end up owing more for a home than you could sell it for” as would be my “fiduciary duty” under Jillaynes view of the industry. What do you think would of happened? I see myself first being punched in the nose by an enraged buyer who then would of filed suit against me for discriminatory lending practices. If I do what the customer wants and the consumer ends up not being able to sell the property in time…..rather then admitting they were speculating and lost, they blame it on me for predatory lending practices. Either way, we are the fall guy. It can’t be that the consumer just made a bad choice eh Jillayne?

  43. Steven, I did tell many people that they shouldn’t have an Option ARM or do OVERstated income… I have no idea how much income I LOST during those days and I don’t care…I’m still here! 🙂 Often times, when I’d refuse to do programs that didn’t make sense for a borrower, the agent always had another LO in their pocket who was more than happy to slam them into an inappropriate loan. Part of why I started blogging was because I was tired of subprime and I was losing agents quickly because I wouldn’t write a preapproval letter with no sales price for their buyer who wanted stated.

    Yet, the consumer still had (and will always have) the responsibility of being accountable for their mortgage selection and finances. At the end of the day, unless fraud was committed by the mortgage originator, how can the consumer claim to be a victim if they had a choice and made the wrong one?

    The only good that I really see with LO Comp is that our pay is detached from the transaction – I’m okay with that. But I don’t see how the rule will protect consumers from themselves if they’re not going to be proactive in their finances.

    I’ve wondered if we should have test required… my son just had to do one before he could apply for his student loans to make sure he understands the terms of the program.

    • I agree about testing. However, it would never fly because the left leaning types would then claim some form of discrimination with the test once certain groups start failing in higher numbers than others.

      I think the best way (it will never happen though) to fix the mortgage side of the housing market is to make all loan officers fiduciaries and independent contractors. Completely decouple the loan originator from the mortgage provider as an employee. It would be relatively easy to do.

      Imagine a model where every licensed LO has access to every wholesale mortgage lender. Very similar to how a Realtor has access to the MLS. Mortgage lenders could not offer any special incentives above and beyond their going rates as posted through the wholesale channel. This would also mean that consumers have access to all available products through any LO.

      What this would allow is that consumers are basically hiring an LO based on their expertise and final rate/compensation is removed from the equation and that LO then is acting in a manner similar to a CPA. He charges an upfront fee for his services that can either be paid upfront by consumer or financed as part of the mortgage. By doing this, we can also hold LOs more accountable, track closings, foreclosures, and all kinds of other data. This elevates the indivdual LO to professional status and gets rid of a lot of the lack of transparency that is so prevalent in the market now.

  44. Hi Steven,

    Regarding being accused of discrimination for not making a loan, realize anyone can sue anyone.
    You would explain your logical reasons for not making the pay option arm loan.

    If you were ONLY steering people away from homeownership because they were a member of a protected class, that’s problematic. If you were steering all applicants away from risky mortgage products, that’s another thing.

    Making a loan out of fear of being sued is a pretty lousy reason to make a loan.

    Better reasons are because the person fully understands the loan program and its risks.

    The fiduciary model works well.
    Why? Because if indeed a certain type of loan program would lead to bad consequences for a borrower, then there would be no logical reasons to make that loan and you would be ethically justified to counsel the borrower to consider less risky loan programs….AND ALSO your competitors would be ethically bound to do the same thing.

    We don’t have that system set up. However, I am a very much in favor of creating that system and hope to do so before I retire. It may take 10 years but that’s okay. I’m patient.

  45. Hi Rhonda,

    “Should RE agents have their commissions regulated so that they cannot discriminate which clients they might rebate or discount to? There’s a big chance for discrimination there too since they still have the freedom to pick and choose who they might help.”

    I have heard of no consumer complaints about real estate agents engaging in Fair Housing violations or other discrimination problems with regards to commission rebates.

    On the other hand, there are many Fair Housing discrimination-type cases regarding predatory lending. Lest Steven accuses me of making statements i can’t support, here is some background.

    Also search the department of justice for enforcement actions.

  46. Here’s the message I get when I try to submit a comment:

    “Hmmm, your comment seems a bit spammy. We’re not real big on spam around here.

    Please go back and try again.”

    OK, I did that, and pondered whether my comment was “spammy”.

    No, not spammy. It included one link to a popular website, with content relevant to my comment, and possibly amusing to your readers. Maybe 500 words of content.

    So, I’ll have my robot respond to your robot:

    “Hmmm, your site seems not to care about getting thoughtful comments with relevent content. Please go back and try again.”

    Let me know when the robots work it out.

    Robots are not substitutes for editors. Laws are not substitutes for ethics.

  47. So, apparently only Jillayne, Rhonda, and other writers here can post a link in the comments, or be rejected as spammers?

    Seems lame to me.

    I realize ALL of the writers here have other jobs, and are very busy.

    But isn’t Russ? Or Steve H, or David L, or me?

    Dunno, but it seems disrespectful of your fans to limit their comments in such a way.

    I judge a site by the quality of their comment section, and the intelligence of the commentors it attracts. Ban commentators if they cannot behave responsibly. Expect us to act like adults.

    And accord us the respect that responsible adults merit.

    • Hi Roger,

      I don’t see any comments of yours in the spam bin, but oddly I don’t see any there at all. Usually when Jerry emails me that a comment of his gotten “zapped” I can see it and release it. But I don’t see one from you trapped in limbo.

      The spam filter we use is called Askimet and has trapped 54,000+ spam comments. I’m not sure how it functions exactly. Some links seem to trigger it more than others.

      I’m going to post a random link here to see if it traps me.

    • the site wouldn’t let you copy and paste a link? Were you trying to embed it? Also – have you upgraded to the latest IE? I’ve found the new IE is very wonky and I’ve switched to google… I’m wondering if it’s the browser you’re using?

  48. I noticed if you write too long of a post, it says your post is spammy even with no links. It has done it to me several times. It is very frustrating because it loses all the stuff you wrote and you have to start over. I have learned to copy my text before I hit submit just in case it thinks it is spam, that way I don’t lose what was originally written.

  49. And here we are several months later with news that mortgage broker numbers are on the RISE:

    All that scare-talk about LO Comp putting mortgage brokers out of business was just a big fat nothing burger.

    There will always be a place for mortgage brokers in the industry. We need them and their numbers will contract and expand following the business cycles.

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