Mortgage Monday

 Compensation plans for loan officers were part of the blame game for the collapse of the mortgage industry.  Bankers and Wall Street said that mortgage loan officers were getting paid too much and were being enticed (by more money) to steer borrowers to certain lender products.

As part of the plan to deter loan officers from ripping off and scamming the borrowers, a proper compensation plan has been put into play.  Now we have written about this previously, and will continue to discuss changes as the come about. There have been some minor changes recently.

Many people in the industry still do not completely understand the terms of the new plan and therefore have difficulty explaining it to their clients.  Here are a few of the finer points:

This stuff has been written about and is pretty cut and dry:

• The mortgage loan officer can get paid by the borrower or the lender; it is the borrowers’ choice- not the loan officer. So you must be made aware of the choices and shown how they will affect your interest rate
• If the borrower chooses to pay the loan officer directly (in the form of points) they may also have to pay an application fee and/or processing fee
• If the borrower chooses to have the lender pay the borrower, they will pay NOTHING to the loan officer except the credit report and appraisal fees

This stuff might not be so clear:

• The lender and loan officer or broker makes a compensation plan of their choosing. In other words, the broker or loan officer can make a lot or a little from the lender on their loans. Albeit, they will be paid the same percentage of each loan that closes with that lender.
• The broker may be paid up to 3 or 3.5% of the loan amount. Some lenders do not have a cap on the amount they may make. This is where it is similar to the previous compensation plans. If the broker is making the maximum allowed, the lender will have to increase the interest rate paid by the borrower. In other words if the broker makes more, you still pay more!
• Some lenders require the broker to get paid a minimum amount they will make on a loan. In other words, a loan officer can say they will never make less than 1,200 dollars, regardless of the loan size.
• Some lenders require the broker to put a cap on the maximum money they will make. For instance, a lender might say you can make up to 3% of the loan amount but you can’t make more than $12,000 a loan regardless. So will a loan officer send a loan to a lender that caps the dollar amount if they can make more?

As a note, I am using the terms loan officer and mortgage broker interchangeably. Although they are treated differently by the lenders, for the borrower’s purpose the compensation plan affects the interest rate exactly the same.

Confusing?  Yup- just a little.  The point being, the plans are in place, but they keep changing.  The lenders know that if the brokers or bankers can’t make money with them, they will do their business elsewhere.  However, the loan officer who works at the bank and the loan officer who works for the broker that does business with the bank must all follow the rules. This is a good thing.

Point being- the borrower must be made aware of the compensation plan for their mortgage, be given at least three choices and understand how the choices affects the interest rate. The information is provided to the borrower in the Good Faith Estimate in the beginning of the loan application process. You must get this form and if you don’t get it, ask for it. if you still don’t get it, go elsewhere.

The fees and costs are in the form and they do not change. It will show either how much you will pay (in points and fees) or exactly how much the broker will make for your loan. If you don’t see it, ask. It will change your interest rate.