Edition #3: Is the LO Comp Rule going away?
February 2, 2020|CFPB, LO Comp, UDAAP
Nope. Sorry, it's still a total nightmare for the industry and consumers, but better news may be on the horizon.
I don’t have to tell most of my readers that the 2011 Loan Originator Compensation Rule (replaced by the CFPB’s 2014 Rule) was designed to prevent LO’s from steering consumers to higher priced loans by prohibiting compensation based on loan profitability. Coming out of the Dodd Frank Act’s reaction to the “subprime mortgage meltdown”, the folks that came up with LO Comp weren’t big fans of capitalism. Presently, however, LO Comp is a regulatory solution in search of a problem: a consumer protection law that actually prevents lower costs for consumers by making discounting more difficult. Ronald Reagan famously said, the nine scariest words in the English language are, I’m from the government, and I’m here to help.”. We can debate whether that is really 9 words, but with the virtual disappearance of subprime and stated income loans from the market, LO Comp proves him right. More on the English language (and martinis) later.
Help is on the way (sort of).
No, the CFPB isn’t going to rescind LO Comp any time soon, but there is some slightly better news on the horizon. In response to a letter from 2018 in which the MBA, ABA and other trade associations begged for 3 changes , it looks like two of the three requests might have a chance (everyone who remembers 70’s singer Meatloaf knows “2 out 3 ain’t bad”).
Specifically, the CFPB may let companies: (i) pay LO’s less for State housing and bond programs and/or (ii) ding LO’s for stupid/foreseeable mistakes. The associations also asked for the ability to lower LO commissions to provide discounts to borrowers, but, unfortunately, CFPB doesn’t seem interested in facilitating that (or in admitting the LO Comp rule was a bad idea generally). The CFPB under Director Kathleen Kraninger is not the same agency as it was under Richard Cordray and is now much more responsive to industry concerns; e.g., they finally told us what the word “abusive” means in UDAAP. Still, these LO Comp changes are just on CFPB’s long term agenda, and nothing has happened yet, so don’t go out and change your compliant comp plans now because Levy said you could . I didn’t say it and you shouldn’t.
Endless frustration with LO Comp.
Despite almost 10 years now of living with LO Comp, at least weeklly, mortgage people remind me how remarkably nostalgic they are for the old days. The best minds in the business seem to spend much of their waking hours trying to figure out how to pay LO’s like we used to. Take, for example, the amount of brain cells destroyed trying to figure out how to pay loan officers less (all the way down to $0) to enable customer discounts. Again, if you could do that, why would those trade associations bother to send that letter asking for a change?
I, too, remember the pre-LO Comp salad days when LO’s got paid like 50 bp and then got 50% of the overage. Back then, when LO’s wanted to discount a loan for a consumer (or did a bonehead move like locking a purchase deal on a 15-day lock), the mortgage company simply took it right out of the commission, so it was their problem not the company’s. "Easy peasy" as my pal, attorney Loretta Salzano, likes to say. Of course, Loretta would also tell you all of that’s been illegal since 2011, but apparently nostalgia (or the desire to have salespeople internalize the company’s profit motive) has a powerful pull on mortgage lenders.
Similarly, if I had a nickel for every time I heard, “Whaddya mean we can’t pay less for a brokered loan? I only get a point for those things. How are we supposed to make money if we have to pay the LO everything we make?!!”…., umm, wait. Nevermind. I actually do get a (very much appreciated) nickel every time I get asked that. Still, there are a few things that a clever lawyer can tell you about how to handle some of your loans differently or structure your compensation arrangements to get closer to paying on profitability, but for the most part, the LO Comp made it illegal to pay LO’s more or less (or zero) based on loan profitability. I can assure you that after 10 years of LO Comp, with all the creativity in the mortgage industry, that there are no silver bullet ideas out there that will (legally) allow you to turn the clock back and share overage, allow an LO to discount their commission or otherwise pay LO’s based on loan profitability. To borrow from a book title, the cheese has been moved.
Finally, some useful advice.
Speaking of cheese, try this creamy blue to hand stuff olives for the martinis you’ll need to help you forget about LO Comp. Since we’re stuck with this Rule (and RESPA, TRID, and CFPB generally) for the long haul, expect more on martinis in future Musings. Also, if you missed it (and you’re a Boomer or GenX like me), go back and click one of the links above on the uses of the word “they” today to realize how much time you wasted on Warriner’s English Handbook in middle and high school.
Thanks for reading this.
P.S. I'm taking ideas on a better, kind and/or inspirational but affable "sign-off" to each Musing.