As the real estate crisis continues to cause havoc on our economy, the mortgage industry continues to tighten regulations and requirements, both on the lenders and the borrowers.  New regulation is going into effect on April 1, 2011, outlining how mortgage brokers and other third party providers get compensated for assisting mortgage applicants with their loans.

Below is a clip from a memo we received last week from a wholesale provider we do business with

The role of the mortgage broker is clearly understood by most industry leaders as essential to providing affordable mortgage financing options to the consumer and providing services to Lenders. While the way broker compensation is calculated and paid will be affected by the amendment to Reg. Z, the amendment does not cap the amount of your compensation and you will still be able to negotiate the amount you are compensated. Generally, our data shows most mortgage brokers tend to earn a consistent compensation either in terms of a dollar amount per loan, or as a percentage of the loan amount. A major difference taking place on and after April 1, 2011 is that, under one method of payment, the amount of compensation will be a pre-determined set amount for all loans agreed to by the lender and broker. While this is a significant change to how business is done today,……….

The compensation for a mortgage broker is high. In the 1980’s, a third party provider could make up to 7-8% of the mortgage amount in some states. This means that on a $100,000 mortgage, a loan officer could make $8,000. That’s a lot of dough. As the years went by, the compensation, regulated by each state individually, dropped. New York for instance is now at 3%, still big payday.

The largest factor in the loan officer’s compensation, called yield spread premium, is based in interest rate. The higher the rate, the more money the lender makes over the life of the loan, creating a greater value to sell the mortgage on the open market. Thus, the loan officer receives a better compensation from the lender for the higher interest rates.

This is deemed unfair, and wisely so. The loan officer is supposed to be paid for a service provided and is supposed to provide the client with a competitive interest rate, typically better than they could find retail. So, if they can push the rate a little higher and make more money, why not temp fate- the client won’t know. And people did not know. They were so wrapped up in the whirlwind of getting to the closing; a decent rate was good, even if it was an 1/8 too high.

Regulation will soon require that loan officers are no longer compensated based on rate, which is fair. However, I have seen in these memos that lenders want to compensate loan officers based on production levels. Thus, if I give 10 loans to Bank A, will I now be in a higher compensation tier? If I only give 2 loans to Bank B, will they offer me very little as far as compensation? Will I give my clients loans to Bank A even though Bank B has better products and rates? If Bank A is the largest in the industry, and they want to get the lion’s share, then they will offer the most compensation to the loan officers.  When the compensation was based on interest rate, the wholesale lenders still had to compete with each other to get their clients’ business. This forced the wholesale lenders to lower their rates offered when they wanted to get more business. If the method is based on relationship and fixed compensation plan with each third party provider, the wholesale lenders will have no reason to lower their interest rates, just give better incentives to their current roster. This can create steering, which is discriminatory and probably illegal.  How will this help the consumer get a fair shake on their interest rate?