The CFPB is Protecting Nobody By Standardizing Loan Officer Comp….And, Why Every Homeowner Should Care!

The Consumer Financial Protection Bureau is attempting to establish standards for what mortgage loan officers should be paid.  And, I don’t mean in a way that will protect consumers in any way, shape or form as their name implies. One example of this is a potential rule that would limit MLO compensation to a set dollar amount as opposed to a percentage of the loan amount.  This will mean that a loan officer would make the same $1,000, $2,000 or $5,000 on every loan regardless of the amount of the loan.

So, why should every homeowner care? Well, in addition to the fact that it should offend everybody who believes in capitalism and the free market, this will end up costing consumers significantly more money and result in rapidly declining service in the mortgage industry. Is that even possible you ask?  Well, yes it is, if all profit motives are eliminated. Because then most, if not all, small and mid-size brokers and bankers (along with EVERY talented mortgage originator of every stripe) will exit this business leaving consumers to grapple with the likes of the “Too Big Too Fail” guys.  And, if I am reading the papers correctly today, one of those “guys” lost $2 Billion in a very short time on some trades without batting an eyelash or being subject to any type of government condemnation.

Leaving aside the “capitalism argument” since so long as it is not a mortgage originator who costs consumers money the government does not seem to care (nor do I) that other industries (properly) charge what the market will allow, we will move on to the second point about loan costs and service.  So, Pro Flowers is “safe” in charging me an extra $9.99 delivery charge for Mother’s Day delivery for the SAME SERVICE and SAME FLOWERS they always deliver.  However, if someone in the mortgage industry delivers excellent service, in a timely fashion and even if they save a borrower more money than anyone else could (or close a loan that nobody else could), we are apparently not worthy of charging any more for that service!  I am not asking that you to care about us either, but you should care about what the federal government is doing to the mortgage market specifically, the real estate market generally and the country financially overall.

So, what is going to happen IF the CFPB passes a regulation standardizing compensation?  In this case, it will be (i) tightening of credit when it needs to loosen up since there will now be more rules to follow; (ii) a further decimation of the smaller (and now even the mid to large) mortgage companies in favor of the 5 or so remaining large banks (iii) higher costs to the consumer for each loan as a result of additional requirements and the lenders continually growing fear of government oversight and (iv) worst of all, a “regressive” mortgage market where the smaller and less creditworthy borrowers will have both less access to credit and more costs in obtaining loans than the larger borrowers!

Because, though it is often the same work to do a loan of $100,000 as it is to do one of $500,000 or more, at the same interest rate, a fee of 1-2% of a larger loan is still more money than it is on the smaller loan.  So, who will do those smaller loans? Nobody. That is, basically the same people who the CFPB is helping with these new potential rules.  Like it or not, the larger loans help subsidize the work on the smaller loans (as do smaller projects in other industries as well such as business cards for a printer).  So, without this “subsidy” the “smaller” borrower who can really use the help of a mortgage professional and benefits greatly from it, will find that it is either unavailable or unaffordable.

And, just in case there is anybody out there who has not “drank the Kool Aid,” I want to say this clearly…….The real estate market’s recovery and the original mortgage meltdown were never the result of MLOs being overpaid.   It may make people feel good to think that since if this was the case once you “fix” the compensation issues the real estate market will magically improve and we will all join hands and sing Kumbaya.  But, it is not the case nor was it ever.  It was a contributing factor for sure.  But, not the cause.  And, now, since Dodd Frank, Reg Z changes, the Safe Act, any problems that existed with it in any event (and many others that did not) have been addressed.

I leave you with paraphrases of some verses from a poem written by a priest during WWII , “first they came for the gypsies, but nobody said anything; then they came for…..and nobody said anything AND then when they finally came for me, there was nobody left to speak up.”   That is where we are today in the United States where there is a war on small business.  This may be a dire warning but it is certainly a legitimate one.  Unless pressure is exerted on this country’s lawmakers, we will continue to suffer through an anemic recovery and many more laws which exact a toll in Unintended Consequences.

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