Dodd-Frank Financial Reform Changes the Mortgage Industry Forever

Blogs and websites have been on fire since the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010.  Though many mortgage lenders and mortgage loan originators (MLO) are still unclear as to the total impact of this new law on their income, there are a few elements of the law that are known and will affect every mortgage loan originator.  The compensation provisions of the law go into effect on April 1, 2011 and set up new provisions for all MLOs.  Although the industry experienced new disclosure requirements with the new Good Faith Estimate (effective 1/1/2010), and the inclusion of yield spread premium (YSP) into the Origination Charges, followed by a credit of the YSP to the borrower, established the new way of disclosing these fees, the MLO still financially benefited from YSP.  That compensation process will come to an end.  Also, the ability to price a loan differently due to loan size or complexity will not be a pricing option effective April 1st.  All loan origination compensation must be computed on the loan amount and cannot be adjusted for a difficulty factor.  Additionally, origination compensation must be paid by either the borrower or the lending source, not both.

Though these changes will affect pricing policies for many mortgage companies and MLOs alike,  they are not the end of our industry, but rather a signal for the need to alter operations.  The mortgage industry over the past several decades had become bloated with under-trained individuals earning incomes that rivaled physicians and attorneys.  Unharnessed revenue structures allowed unskilled MLOs, untrained processors and managers to maintain high incomes without sufficient industry knowledge, all at the consumer’s expense.  Mortgage lenders could afford to maintain an unskilled workforce as per loan profit margins negated a need for sufficiently trained employees.  Mortgage lenders of all sizes will now need to evaluate the cost of loan originations.  A need to streamline origination and processing functions will become critical.  Each dollar saved in the process becomes an additional dollar of profit and a potential compensation dollar.  The need for a MLO to understand everything about the origination/processing procedures and to efficiently compile a closable loan file from the point of origination will be essential, if the MLO wishes to maintain a reasonable earnings per hour spent compensation.  Effective training programs for all MLOs and processors will become an equally essential part of every successful mortgage lender’s operations.  The once neglected training area will be at the forefront of every profitable mortgage lender’s staffing protocol.  The days of unskilled, under-educated production and ops staff are gone.  The ability for mortgage companies to retain employees who are sufficiently trained, will become increasing more difficult.  As per-loan revenues fall, additional profits will only be achieved through greater efficiency and higher skill set of their workforce. 

Though the Dodd-Frank Bill set out to achieve consumer protection through the establishment of compensation limits, the new law will also reach well into the operations of every mortgage lender.  Along the way the law might possibly not only change the operations of the lender, but may also ignite changes that will improve our industry forever.

One response

  1. I have been in the mortgage industry for 9 years. I love helping homeowners find a home that they can call home. Over the past two years I have experienced firsthand the turmoil that has occurred in the industry. I have seen the HVCC reform squeeze appraisers out of the industry. I have witnessed the National Licensing and testing go into effect. Now in 2011, I am in the midst of the Frank Dodd Law.

    I was frustrated when HVCC came into play because it hurt the small business appraisal companies. The rule did not set forth proper guidelines for companies to follow and ultimately this has hurt the consumers and small businesses. Larger HVCC companies have made big profits, they collect fees from the consumer, pay the appraisers a fraction of the gross fees and if they don’t agree the companies will send an appraiser three counties away to “complete the job”. As the voters how this has worked for them.

    We have had the National Licensing that went into effect. As an originator, I had to take state and national test, pay licensing fees and obtain a Federal background checks. Much to my surprise, this is only small business owners that have to comply. If you are a Federally Charter Bank, you do not need to obtain a license, take a state or a national test or pay any of the fees that a small lenders or brokers are required to do. At this time, I was very frustrated. I kept saying, I didn’t get a bailout but yet I have to be more regulated. I took this as a slap in the face! If I worked for the “Wells Fargo’s, SunTrust Mortgage, or the Citi Financials” of the world and my company needed to be bailed out because we were Federally Chartered then viola, it was done. Not the small business lenders or brokers. We had to build it back the old fashion way, by working! Oh and if I wanted to join the “Big Banks”, I don’t have to be licensed. I do not have to know the laws of mortgage originating. Really, Yes!

    So now we are in 2011 and April 1st is fast approaching. Funny, the date is fitting. April Fool’s Day! On this day, the Dodd-Frank Bill takes effect. In the bill my compensation is addressed. I find it humorous that congress was able to pass a law that will tell my employer how they can and cannot pay me. I find it humorous that congress is naive to think that a small business person’s compensation is the cause of the banking industry’s failure. The small business lenders and brokers were not the brain child behind the mortgage products being offered. We didn’t create them. We didn’t not ask Fannie Mae and Freddie Mac to approve loans at 55 percent debt to income. That was HUD requiring the agencies to purchase “affordable” loans, failing to examine the fact that they couldn’t afford the homes in the first place. It wasn’t the small business lender or broker making 2 points in yield spread premium that caused the financial crisis. I turned many clients away because they were a recipe for foreclosure. However, my competitors that were salary plus commission at the “Big Banks” didn’t have a small business approach. Time and time again they would happily approve these mortgages for consumers. Remember, the big banks received the bail outs, not the small business person.

    I feel that the Dodd-Frank Bill addressing mortgage originators income in relation to loan terms is over stepping its bounds. With the National Licensing and state standards increasing. The people that should have never been in the industry our no longer in the industry. This bill originally address Sub-Prime loans and yield spread premium. Sub-Prime loans haven’t been around in two years. This portion of the bill should have been omitted because it is no longer a valid product. As for yield spread premium, yes I am compensated by the investor we sell our loans to. This makes for a competitive environment for the consumer as well. I have not seen a case study that supports the omission of yield spread premium will ultimately reduce the overall costs to the consumer. In fact, I believe it will hurt the consumer and the small business person. I say this will all the confidence.

    To me, the message that congress is sending over and over to the small business owners is that they don’t want us. Become a Federally Chartered Bank, you won’t have to be licensed and I will pay you a salary. A salary that ultimately be paid by the consumer or the tax payer with another bailout! I urge you to have the committee review HR 87 and repeal the Dodd-Frank Bill. I urge you to support the small lenders and brokers that are left in the industry. For those that are licensed on a National and State level, I have all the confidence that they are and will continue to inform the consumer.

    In closing, I feel that the yield spread premium is and has been disclosed to the consumer and all parties involved with the reform on Good Faith Estimates. In January of 2010 the new Good Faith Estimate took effect. This required all lenders and brokers to brokers to disclose the total costs of the loan. Not just the interest rate, but your yield spread premium on all brokered deals. The consumer is given a credit for all yield spread premium and only an origination fee is charged to the consumer. Why take it a step further and tell the originator what can and cannot be made in conjunction to loan terms and rate.

    What is next? Is a car salesman going to be told he cannot make a greater commission on a Cadillac Escalade sale verses a Chevrolet Cobalt? The list goes on and on. Every commission job I can think about is based upon a sales price on goods.

    Effective 2010, the consumers are clearly disclosed to. The consumers have to provide adequate income documentation to support the purchase being made. The lenders and brokers have to adequately disclose the fees being charged. Why does congress take it a step further and say you cannot be paid based on loan amounts.

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