“I refinanced last year and negotiated the fee I paid the
mortgage broker. Now, I want to refinance again to take
advantage of lower rates, and my broker tells me that the
arrangement we had last time is no longer possible under new
rules. He says that his fee is set beforehand and that there
is no way he can change it. That fee would be twice as much
as I paid him last time, and may change my mind about doing
the deal. Is he being straight with me?”
Yes, the broker is being straight with you. The Federal
Reserve amended Truth in Lending (TIL) last year to change
the ways in which loan originators (mortgage brokers and
loan officers, henceforth LOs) could be compensated. More
changes may be coming when the new Bureau of Consumer
Financial Protection authorized by Dodd Frank implements
similar provisions of that law.
Purpose and Scope of the New Rules
The purpose of the
TIL amendments was to eliminate the ability of LOs to use
their greater knowledge to take advantage of borrowers. The
practice of “charging what the traffic will bear”, which was
how many LOs operated before the amendments, is gone. The
new rules come closer to requiring LOs to treat all
borrowers alike. In the process, LOs have lost their ability
to lower
their compensation in cases where that is necessary to make
a deal work. The letter cited above is one of several I have
received on this unfortunate aspect of the new rules.
These rules
prohibit LOs from collecting larger fees on loans with
features desirable to lenders, such as a higher interest
rate. The only exception is that LO fees can vary with the
size of the loan, and almost all LOs set their fee as a
percent of the loan amount. LOs cannot steer borrowers to a
loan that pays the LO more if that loan is not in the
borrower’s interest. And while LOs can continue to be paid
by the borrower or by the lender, they can no longer be paid
by both.
The detailed
rules implementing these principles are voluminous and
complex – and also unprecedented. While the Government
doesn’t dictate what LOs can charge, it requires them to
declare and document their charge, and stick to it. LOs can
change their fee but only at specified times – not to meet
the circumstances of a particular case. Firms in many
industries, such as insurance, mutual funds and automobiles,
rely on commission-paid salespersons to distribute their
products and services, but to my knowledge none have ever
been subjected to this type of regulation.
Were These Rules Really Necessary?
The case for the
new rules depends on 2 claims. The first is that the abuses
associated with LO compensation were egregious and
widespread. Having written about such abuses on numerous
occasions over the last 12 years, I would not dispute that
claim.
The second claim
is that a less-complex, less-rigid. less-costly remedy was
not available, and that clearly is wrong. The Upfront
Mortgage Broker (UMB) model eliminates pricing abuses by
mortgage brokers by requiring the broker to “establish a fee
for his/her services upfront and in writing, before the loan
application is submitted…” The fee covers all broker
services, and holds whether the broker is paid by the
borrower, the lender, or both. The borrower is protected by
the complete transparency of the process, while the price
can be adjusted to the particular circumstances of each
transaction. This is protection with flexibility as opposed
to protection with rigidity.
The remedy is
even simpler when the LO is an employee of a lender. A rule
that eliminated LO discretion over prices, requiring them to
quote and deliver only the prices posted by the lender, is
all that was needed to eliminate pricing abuses.
Selecting a Broker Under the New Rules
LOs have to live
with the rules as they are, and so do borrowers. Ironically,
while LOs are required to declare their fee and stick to it,
they are not
required to disclose it to borrowers! Some brokers are
charging 1% of the loan amount and many are charging 2%, but
there is no place borrowers can go to obtain this
information except directly from the brokers they ask. If
they don’t ask, they won’t discover the broker fee until
they have applied for a loan and received a Good Faith
Estimate, which is too late to help them select a broker.
The exceptions to this are UMBs, which disclose their fees
before taking an application.
In querying
other brokers about their fee, you should frame the question
so that they can’t provide an ambiguous or deceptive answer.
Ask “If I retain you, how much is the lender paying your
firm?” This discourages the broker from telling you
that you are not paying her anything because she is being
paid by the lender. (The fee paid by the lender is paid by
you in the form of a higher interest rate). It also prevents
the broker from citing the fee she gets rather than the fee
paid to her firm, which is what it costs you.
Many thanks to
Kevin Iverson for his help in developing this article.