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Robert Nusgart: Compensation change could hurt consumers

A major change is coming to the loan officer’s world beginning April 1, and it’s no April Fool’s Day joke.

On that date, the method of how loan officers in the mortgage industry get paid will change drastically, and it will be interesting to see how it will affect consumers.

Mortgage bankers and brokers have had a number of different formulas to compensate their loan officers throughout the years. A few were on salary, but most were on commission. However, after the mortgage meltdown, there evolved an outcry about seedy loan officers overcharging customers for loans or leading unsuspecting consumers into loans that they shouldn’t have been in because those loans carried a bigger payday. Lawmakers were going to do something about this, and they have at the expense of every loan officer in the industry.

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Reserve has implemented a rule that will prevent compensation to a loan originator based on a loan’s interest rate, prevents compensation — with few exceptions — to come from both the consumer and the lender for the same transaction, and prevents an originator from steering a consumer to a specific product to receive greater compensation.

The above may seem confusing to most consumers. But if a borrower is not being charged a loan origination fee, how is the loan officer being compensated? In these instances, it comes from what is called “yield spread premium.” The “YSP” — for all practical purposes — is money paid to the lender from the investor offering the program based on the interest rate agreed to by the consumer. Consumers typically don’t want to pay points for a loan, so the recourse for the loan officer is to absorb his commission ultimately into the interest rate that carries enough “YSP” so that he can make a living.

Sometimes, it comes down to a combination of origination fee and YSP when a borrower is seeking a lower rate. That aspect will now be a thing of the past, as will, I think, the competition among lenders to offer the lowest rates, since individual loan officers won’t be influenced by what a rate will pay.

And the scenario of steering a customer to an individual product because it pays more to the loan officer is laughable in today’s marketplace. Prior to 2007, there were hundreds of mortgage products in the lender superstore. Today, there are Fannie, Freddie and FHA along with some portfolio lenders — none of whom are offering exotic products.

I think a lot of loan officers are trying to figure out how all of this is going to play out, not only for their livelihood, but for the consumer as well. In my business over the years, there have been a number of times where I have cut into my commission to make a deal work for a consumer or used “yield spread premium” to offer a slightly higher interest rate but use the additional revenue to subsidize a consumer’s closing costs, making for what would be called a “no cost” mortgage transaction. This gave me much more control over what I could offer a consumer.

Sometimes it was good enough to get the deal, sometimes it wasn’t because another loan officer would cut more. But that’s OK, that is capitalism and the marketplace working at its finest.

Most compensation plans are tied to overall loan volume produced by the originator. Do more loans and your compensation percentage tied to the loan amount will increase to whatever tiers the organization sets. That is generally the way loan officers will be compensated.

Regardless, it is worthy to note that through government regulation, the earning power of a loan officer has been altered and stifled somewhat. Some will say the industry got what was coming to it. But if the government can limit through regulation the earning power of one business segment, then it also may be a lesson for other businesses as well. Ultimately, as this new chapter of the mortgage industry unfolds, it will be interesting to see if all of these reforms ultimately help or hinder consumers.

Robert Nusgart is a loan officer with Prospect Mortgage LLC., which is associated with The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at Robert.Nusgart@prospectmtg.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.