*Process Improvement: Dare To Change*
**By Tony Garritano**
***I have never experienced such raw emotion over a new piece of regulation. Even the RESPA changes that came into being last year weren’t as maligned by mortgage participants as the new loan officer compensation rule. By listening to bankers on both sides, you would think mortgage lending as we know it will change forever, and that change will be to the detriment of the industry.
****Before I tell you what I think the overall significance of this change should be, let’s frame the argument first. In fact, Larry Cragun frames the background and impact of this new rule perfectly in his blog called Real Estate Undressed. Here’s how he explains it:
****“On August 16, 2010, the Federal Reserve published its final rule on loan originator compensation. The cornerstone of this rule is to preclude loan originators from having any financial interest in the terms or conditions of the loan. In effect, a lender’s compensation of the loan originator (a loan originator is defined as a retail loan officer or a wholesale loan broker) must be pre-determined for any loan, while the lender’s negotiation with the consumer about the terms and conditions can vary as the lender deems necessary in light of market conditions.
****Much confusion exists in the industry. The rules outlined below are from the Federal Reserve. They have not reconciled these rules to what was proposed by the Frank-Dodd Act. While close, there are some differences and you can expect that some of the rules will change.
****This represents a paradigm shift in how loan originators will be compensated.
****The Rule: Mandatory compliance with the rule is required for applications received by creditors on or after April 1, 2011. In general,
****1. The rule provides that no loan originator may receive and no person may pay to a loan originator, directly or indirectly, compensation in any amount based on any of the loan transactions terms or conditions.
****2. Increasing or decreasing a loan originator’s compensation based on transaction terms or conditions are prohibited.
****3. Varying of a loan originator’s compensation based on factors that serve as a method to increase an originator’s compensation for a transaction’s term or conditions also are prohibited.
****4. The Dodd-Frank version, a loan originator can be held personally liable for steering a consumer to a higher rate loan.
****In English…Yield Spread Premiums and Service Release Premiums to originators are gone. Loan originators will no longer receive YSPs or SRPs.
****Permissible Compensation Plans: In general, permissible compensation plans include plans that allow for:
****1. The notion that the loan should be based on a fixed percentage of the amount of credit extended. The percentage may not vary based on transaction terms or conditions.
****2. The compensation should be fixed in advance for each loan of loan originator.
****3. Compensation should be based on a percentage of the loan originator’s applications that result in closed loans
****4. Compensation should also be based on the long-term performance of the loan originator’s loans.
****5. Lastly, compensation should be based on the overall loan volume of loan originators
****Some examples of allowable compensation plans include:
****1. 100% of the origination fee collected is allowable and can vary between originators.
****2. A fixed dollar amount per loan.
****3. A quarterly incentive is allowable.”
****Cragun ends his blog by saying, “More changes are forthcoming. While the Fed has published these rules, they have acknowledged that more changes are forth coming.”
****I wanted to share that blog post in its entirety because it’s the best explanation of this new rule that I’ve seen. It provides clarity. Too bad Cragun isn’t up in Washington helping the politicians write these bills. But I digress.
****Now, let’s examine the points for and against this new rule. As I said earlier, this new rule has people on both sides of the fence expressing very harsh views. Those that are against this new rule say that they are working too hard to give up traditional compensation and this rule is evidence that government is overstepping and over regulating the mortgage space. One blogger (a loan officer who I will not name) put it this way:
****“What Congress is attempting to do is eliminate excessive fees and higher rates to consumers. I have to admit I’ve witnessed loan officers make in excess of 3% on their loans in the old days. We’re capped at 3% total and last year I made 1.08% on all my loans. The bottom line is this: All of us in the business are working harder than ever and making less money.”
****On the other side, you have people cheering this new rule. This blogger (again a loan officer who I will not name) says:
****“I hope this goes through. In my opinion, loan officers should be on a salary basis, just like most other white collar workers are these days. Imagine if a doctor got paid a percentage based on their surgery fees or based on how many prescriptions they wrote. Finally, government is trying to do something about the out-of-control financial industry and this is only one small step in the right direction.”
****What do I think of all this? Hard-working LOs are going to suffer and probably get paid less. That stinks. On the other hand, a system that provides any kind of financial incentive to put a borrower in one loan product over another is flawed and opens the mortgage industry up for people of little character to try and con the system to get a bigger commission even if it is to the detriment of the borrower. This conflict has to be addressed.
****Are the rules being proposed by Washington the best way to make for a more equitable system of LO compensation? Probably not. Lenders are going to now put their heads together to come up with individual programs that both comply with the rule and work for their organization.
****What can we as an industry learn from all this? We can’t wait for Washington to tell us how to conduct business, but we can’t sit around and do nothing to improve the mortgage process and expect to be left alone. The mortgage industry has reached a critical juncture. There’s no turning back, so let’s move ahead together. I suggest that the industry use this rule as a way to rethink its processes and change them for the better.
****Think of it this way: You may like that comfortable sweater that you got as a Christmas gift 10 years ago, but the fact of the matter is that it now has holes and it doesn’t fit right because you’ve gained a few pounds. Do you really need someone to tell you that you can’t wear that sweater out in public anymore? I hope not. The mortgage process is that old sweater. Let it go and get a new and better sweater.
****Let’s look at another analogy. As we all know, there was a time in the history of our planet that the terrain was ruled by dinosaurs. These huge animals quite literally spanned the globe. They were the dominant force. How could anything so widespread literally be wiped out? Simple, there was a shock to their system, most likely a huge asteroid or series of asteroids hit the planet, and they couldn’t adapt.
****The mortgage process is a dinosaur. Right now new regulation is shocking the system. So, we all have to adapt. We can’t rely on the same old/same old and expect to get by. If we as an industry cling to the process of old, we are doomed to extinction. A new and better process coupled with smart technology is emerging. Don’t just stand still and complain, dare to change.
****ABOUT THE AUTHOR: Tony Garritano is Chairman and Founder of PROGRESS in Lending. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker. He can be reached via e-mail at firstname.lastname@example.org.