Mortgage brokers are concerned that in the coming months wholesale lenders will impose more restrictions on their operations as a result of the Federal Reserve's new compensation rules for loan officers.
"We're hearing that some wholesalers are looking to negotiate totally different, more restrictive contracts with their third-party originating sources," said Bill Kidwell, the former president of the Colorado Association of Mortgage Brokers who is now a consultant.
He said brokers are hoping to open a dialogue with wholesalers to prevent any unnecessary restrictions. "As it relates to your wholesale distribution channel, we don't think the wholesalers have to change what they are doing," Kidwell said. This includes rate sheets as well, he said.
Now the president of IMMAAG LLC, Kidwell recognizes that loan officers at brokerage firms have to accept a set percentage of the loan amount in a mortgage transaction with a floor and a ceiling, which must be spelled out in contract terms with the employer.
Under the Fed rule, the broker, for example, could receive 1.5% of the loan amount as compensation, but not make less than $2,000 and no more than $10,000 on the deal.
With the broker's compensation stated up front, borrowers can review the rate sheet, pick the interest rate and determine how much of the closing costs they want to pay out of pocket, if any. The broker would take borrowers through a break-even analysis, allowing them to know what interest rate would cover all their closing costs.
Currently, the brokerage can add its standard fee to the broker's fees, according to Kidwell — or the company could charge the broker a flat fee for a desk, computer systems and overhead. "As long as the compensation package is not based on terms and conditions of the loan, they get to keep that money," Kidwell said.
However, he is concerned wholesalers might modify the contract, allowing them to only pay the brokerage company a set amount that isn't subject to change much. "We don't believe that's supported anywhere in the regs," he said.
Rod Alba, senior regulatory counsel at the American Bankers Association, said the Fed's compensation rule prohibits compensation that varies with interest rate or any proxy for the interest rate, such as the credit score.
"You can no longer compensate your sales people in accordance with how much money they bring in," he said.
However, compensation can be based on the loan amount, the volume of loans or the performance of loans over time.
The Fed's compensation rule requires wholesalers to retain two types of records to demonstrate compliance.
First, they have to keep a record of the compensation agreement with the mortgage brokerage firm. Second, they have to keep a record of the actual amount of compensation paid to the brokerage or loan officer for two years.
"This rule has a lot of complications," Alba said. "We are still analyzing it, but I think the brokers will still be able to navigate and make money. We are just going to have to recalibrate these fees."
The Fed's compensation rules go into effect April 1, forcing lenders to change the way they compensate their loan officers involved in retail and correspondent lending. But Kidwell said the new compensation rules do not have to change the way wholesale lenders deal with mortgage brokerage firms.
"At the end of the day, lenders have to recognize that they don't have to change their rate sheets to deal with their wholesale distribution channel," he said.