On April 1, 2011, the latest revisions to Regulation Z, (as required by the Frank-Dodd Act) commonly known as Mortgage Compensation Reform, took affect. In one swoop of the pen, Washington completely and radically changed the way mortgage originators can be compensated. This effectually lands another stunning body blow to a real estate industry already down for the count.
As with most poorly conceived legislation coming out of Washington, this law was passed under the guise of “protecting the consumer” from abusive mortgage practices, thereby saving consumers from higher fees, rates, and the possibility of losing their homes. Yet it accomplishes none of this. If anything, it will raise borrower costs!
Consider the following:
- Most of the offending “salespeople” have already left our industry and have gone back to selling shoes, cars, or whatever they were doing before they decided to “give mortgage sales a try.” Effectually, Congress has closed the barn door after the horses have run away.
- The new law does NOTHING to reduce the rates and costs to mortgage borrowers. Instead it keeps the revenue at the top, in the hands of the lender, without allowing it to trickle down to the loan originator. As a result, lenders will realize a tremendous increase in revenue while loan originators could see their incomes drop by as much as 50%!
- Since The Fed has now “fixed” mortgage originators’ compensation (it can neither go up nor down), loan officers can no longer discount rates to best their competition, reduce their compensation to pay for a borrower’s lock extension, or credit some profit to help a borrower pay for their closing costs. (This is good for consumers??)
- Under the old system, most lenders held loan officers accountable for sloppy files and errors when disclosing closing costs. If the closing costs disclosed by a loan officer were inaccurate and triggered a tolerance violation, the loan officer was held responsible to correct the violation out of his commission. Under this new system, the loan officer’s income is fixed or salaried and can not change.
So guess who will bear the brunt of tolerance violations?
- The loan officer? No.
- The government? Certainly not.
- The lender? Not directly.
These errors and costs will be funded by YOU, THE CONSUMER, in the form of higher rates and fees charged to everyone. These higher fees will subsidize a slush fund that lenders will likely set up to cover violations.
For years, government regulation has increasing burdens on business. Yet the protections that inspired these regulations often go unrealized. We all can think of examples, from obstetricians and other physicians, to farmers, to small fishing companies, where increased government regulations have forced companies out of business.
So who might the government put next in their cross-hairs, supposedly in the interest of protecting the consumer?
- Will Realtors be forced into salary-based compensation, earning the same salary regardless of their volume or property prices?
- Will accounting fees be regulated, forcing all CPAs to ”fairly” charge the same fees to all clients?
- Maybe attorneys should be forced to charge the same flat fee to all of their clients, regardless of how much time they’ve invested or how large the case.
After the Holocaust, Pastor Martin Niemöller discussed the inactivity of Germans following the Nazis rise to power. To paraphrase his famous quote:
“They came for the obstetricians and I didn’t speak out. They came for the local farmers and fishermen, and I didn’t speak out. They came for the mortgage originators, and I didn’t speak out. Then they came for me. And there was no one left to speak out.”
Pressure your Senator, Congressman, and especially members of the House Financial Services Committee to repeal this ridiculous and ill-conceived amendment to Regulation Z known as Mortgage Compensation Reform.
Warren Goldberg is a Mortgage Planner and published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. His newsletter is read by almost two thousand subscribers.
Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.