Some New York City mortgage brokers are panicked about new federal rules governing their pay, saying the changes could spell doom for the already ailing mortgage industry.
Last month, the Federal Reserve Board issued new regulations dictating compensation for mortgage brokers — the middlemen between the consumer and the loan originator or bank — and loan officers, who typically work directly for the originator. The new rules are the latest effort from the Federal Reserve Board to protect consumers, but mortgage brokers in New York City and elsewhere say they are already seeing unintended consequences, in an industry hurting from the subprime mortgage crisis.
“When the Fed proposed the new compensation ruling, many brokers and loan officers saw it as another nail in the mortgage industry’s coffin,” said Brooke Jacob, CEO at Everest Equity, a mortgage company in Suffern, N.Y., that regularly works in New York City.
The new rule is officially called Regulation Z: Loan Originator Compensation and Steering, or “LO Comp” for short. It requires originators to set a stable compensation fee for brokers that cannot be adjusted based on the terms of a loan, and to give loan officers a salary instead of paying them mainly on commission. The rule change is aimed at addressing complaints from consumer advocates about yield-spread premiums — the fees that loan originators pay to mortgage brokers for bringing in a customer, which are widely viewed as a reward for locking in consumers at higher interest rates.
Now, mortgage brokers say the changes to LO Comp have made them less competitive, which may make it harder for consumers to find a good deal on a loan.
Two separate lawsuits were filed in late March, by the National Association of Independent Housing Professionals (NAIHP) and the National Association of Mortgage Brokers (NAMB), both headquartered in Washington, D.C. The industry groups argued that the Fed didn’t have the authority to regulate compensation, and that the wording of the new regulation wasn’t sufficiently clear.
The lawsuits created only a short-lived stay on implementation of LO Comp, and it went into effect on April 5.
Mortgage brokers said they’re already feeling the impact of the changes.
In the past, brokers could lower their compensation rates in order to get the consumer a better deal on a big loan or an easy transaction, explained NAMB president Michael D’Alonzo. The new rule, though, requires brokers to keep their rates stationary.
As a result, in the first day after the rule went into effect, broker compensation rates around the country rose because, D’Alonzo said, they had to charge consumers higher fees to make up for lower fees paid by banks.
“For the first time in all the years I’ve been in the industry, I can’t give customers a discount,” said Marc Savitt, president of NAIHP. “I’m prohibited by law from offering that consumer a discount or negotiating with them.
“The biggest losers in this are the consumers themselves,” he added.
Josh Zinner, codirector of the Neighborhood Economic Development Advocacy Project, a resource for low-income New York City neighborhoods, called that argument a red herring.
“I’ve never seen a case where a borrower was given a lower-cost loan in exchange for broker compensation,” Zinner said.
While yield-spread premiums have been portrayed as an alternative form of broker compensation, he said, they have been used to “gouge” consumers.
Eric Appelbaum, president of Midtown-based Apple Mortgage Corp., said the Fed is re-fighting an old fight. Subprime products are now out of the market, and 2008’s Secure and Fair Enforcement for Mortgage Licensing Act created a federal registration system for loan originators, Appelbaum said. As a result, the loan market is a much safer place than it was when the rule was being drafted during the financial crisis, he said.
“They’re regulating something that doesn’t exist anymore,” he noted.
Appelbaum also said it makes little sense for New York City brokers and loan officers to have the same compensation limits as others across the country.
Before this rule, he said, a broker’s compensation rate depended on whatever the local market would bear. That, in turn, helped consumers decide between going to a bank or a broker for a mortgage.
He said he has generally predetermined a 1 or 1.25 percent compensation rate with loan originators. Since his rate was already low for New York, the new rules actually make him more competitive, because he was used to giving customers a discount that they couldn’t get at a bank, he noted. But for brokers used to charging more, and for big banks, the change could be devastating, he said.
“The people at these banks, if they haven’t realized it, they’re going to wake up in the next couple of days and realize, ‘I’m out of the market,'” Appelbaum said.
Another controversial result of the new rule is that loan originators can no longer be paid only on commission — they must be put on salary. Everest Equity’s Jacob gave this example: Chase bank (the retail financial services division of JPMorgan Chase) can no longer pay its New York City retail loan officers purely on commission, so it is offering $10 per hour plus a 30 to 50 percent commission.
“You bet these salespeople are livid and they’re dropping out as soon as they can find alternative employment,” Jacob said.
(A Chase spokesperson said the company does not discuss employees’ compensation.)
The biggest problem, however, might be banks and state regulators’ confusion about how to follow the new rules. Appelbaum said the paperwork from the Fed does not clearly explain the requirements for compliance.
“Each bank is running around with its head cut off,” he said. “They all want to be in compliance. [That’s why] we asked for an injunction, to get clear on the rules.”
But Armen Meyer, spokesperson for the New York State Banking Department, said the rules are sufficiently clear. “The state regulators will not have a problem as the rules are written,” he said.