Tucked into QM Rule, Big Changes on Affiliates, Compensation

Banks are facing big changes in how they compensate mortgage brokers and charge for ancillary services, such as title searches, unless they can convince the Consumer Financial Protection Bureau to modify a provision in its new rules governing mortgage lending.

The provision tucked into the qualified mortgage rules released in January would impose a 3% cap on points and fees that bank affiliates can charge consumers for home inspections, closing costs and a range of other mortgage-related services. Consumer advocates have long sought to rein in such fees, claiming borrowers often are held captive to lenders' third-party affiliates and have little incentive to shop around for lower prices.

Also, the CFPB provision aims to curb the practice of steering borrowers into high-cost loans by capping loan originator compensation at 3% of the loan amount.

The banking industry opposes the cap on points and fees because it applies only to those providers that are affiliated with lenders. They also say the rule could harm lower-income borrowers because it would discourage lenders from making small loans.

On compensation, lenders oppose the 3% cap on buying loans from brokers, fearing it would drive many brokers out of business — and some banks rely heavily on outside brokers to originate loans.

The CFPB is expected to be inundated with comments on the cap, with banks expected to ask the CFPB for more wiggle room when it comes to fees and compensation. Though the 3% cap on fees is spelled out in the Dodd-Frank Act, the CFPB has the authority to make changes. The comment period ends Feb. 25.

Lenders say the cap on fees could wind up harming low-income borrowers most. Since it costs the same to process and underwrite a loan, no matter the size of the loan, small loans will be far less profitable for lenders since they will more quickly reach the 3% cap.

Moreover, Mitchel Kider, the chairman and managing partner at the law firm Weiner Brodsky Kider, says it is simply unfair that lenders with affiliated third-party providers must comply with caps while unaffiliated providers do not.

"It absolutely upsets the business model and there's no reason for it," Kider says. "What happens to the consumer using a lender that does not have a third-party settlement provider? They're paying up to the maximum and that's confusing to the consumer.

Sue Johnson, the executive director of the Real Estate Services Providers Council, a trade group, says fees on most loans lower than $128,000 would be higher than 3% of the loan amount. Since such loans would not qualify as qualified mortgages, and would not receive a safe harbor from liability, they either would not be made at all or lenders would charge higher interest rates to make up for the higher liability risk, she says.

Roughly 26% of consumers purchase loans using a bank or lender with an affiliated title company, according to the trade group. Johnson puts the blame for the 3% cap on the Dodd-Frank Act, which took the definition of points and fees from the Home Ownership and Equity Protection Act, or HOEPA.

"There was a concern that mortgage lenders would try to hide fees in an affiliate and try to circumvent HOEPA," Johnson says.

Bankers and mortgage lenders are also concerned that the CFPB used an overly broad definition of what constitutes a so-called "loan originator," that would be subject to the 3% cap on points and fees. Many say the bureau has been put in the position of picking industry "winners and losers," since the definition of a loan originator would apply to "all compensation" paid to a mortgage brokerage firm — not just what is ultimately paid in compensation to an individual broker or loan officer.

The Center for Responsible Lending and other consumer advocacy groups are concerned that loan originators often are paid a commission by creditors that is included with the interest rate charged to consumer. They are concerned that mortgage brokers that charge consumers up-front fees to cover some of their costs also may at the same time be receiving back-end payments from creditors.

But many in the industry say counting all fees paid by creditors would result in a form of "double-counting," because creditors often pay loan originators with funds that are collected from consumers when they close a loan. The bureau, in its 804-page qualified mortgage rule, said the structure of such commissions and payments "may have contributed to consumer confusion about where the brokers' loyalties lay."

While the 3% cap on loan originator compensation attempts to rein in abusive practices, it may also set up a disparate model between banks and mortgage brokers and independent mortgage bankers.

John Hudson, an area manager at Premier Nationwide Lending in San Antonio, who is chairman of government affairs at the National Association of Mortgage Brokers, says the 3% cap will make it harder for small mortgage broker to compete against banks, leaving consumers with fewer options.

Under the cap, banks only have to include the amount paid to an internal loan officer for compensation. But the points and fees to mortgage brokers would include not just compensation but also gain on sale or servicing release premiums on the loan.

"The cap will squash small business and support the policy of 'too big to fail,' " Hudson says.

Richard Gottlieb, a director of financial industry group at the law firm Dykema Gossett in Chicago, adds that the 3% cap on loan originator compensation "sounds simple in theory" but is very difficult to put into practice.

"The industry wants rules that are easy to understand, to interpret and to comply with," says Gottlieb. "But an imperfect rule contributes to uncertainty, and this creates the potential for an uneven playing field. If you ask 100 people about their loan officer compensation plans, they'll all look different based on their interpretation of how to comply with this rule."