New Compensation Rules are Effective and the World Has Not (Really) Ended

As I have written previously, the new mortgage broker compensation rules (provided by Regulation Z of the Federal Reserve) went into effect on April 1, 2011.  These rules have the effect of controlling (though not necessarily limiting) the compensation that lenders can pay to brokers.  They also affect how the mortgage brokers can pay their employees, specifically, loan officers and branch managers.

One of the restrictions is on “Who” pays the mortgage broker.  In the past, a mortgage broker was paid by the lender or by the borrower or by both of them.  Now, under Regulation Z, they can only be paid by one or the other.  At first blush, this looks like a good idea.  Because, why should the mortgage broker “double-dip” or so it was thought?   However, in practice, this restriction only hurts the borrower due to the the way it is being interpreted.

If the mortgage broker is paid by the lender (which we will be on 95% of the loans), we cannot get paid anything from the borrower.  The corollary is that we cannot give anything to the borrower as well.   What this means is that we cannot lower our broker fee to “pay down the points” and give the borrower a lower rate (e.g. if we get paid 1.5% of the loan, we get paid 1.5% of the loan.  No more but also no less).  We also cannot pay any closing costs.   So if a refinance makes sense but the closing costs are too high, we cannot offer to pay some or all of them from our fee.  We also cannot offer no closing costs loans anymore since we cannot pay the closing costs for the borrower.   We also cannot pay any extension fees for rates that are about to expire.   So, on any expiring rates, the borrower must pay for the fee or accept a higher interest rate.   In 2010, we probably paid extension fees on 1/3-1/2 the loans we did to avoid either (i) losing a deal or (ii) charging a borrower when it was not their fault that a closing did not occur.  The changes to Regulation Z do not allow this.

More regulation does not make for better regulation. It’s too bad that our lawmakers do not understand this concept!

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