Many mortgage companies last year were saying that the Federal Reform Bill was a joke. Well, it launches on April 1st and it ain’t April Fools. Or is it? The Fed responded a couple of weeks ago to the legal complaint by the NAMB and made it very clear they are not going to repeal it.
For the most part, the spirit of the reform is transparency.
There are national licensing requirements for mortgage loan originators, as well as much more accurate disclosures on the "good faith estimate" of closing costs that is presented to a borrower at the time a loan application is submitted. Many states have ramped up their oversight of the industry.
From Dan Brown’s book The Lost Symbol:
Since the days of Michelangelo, sculptors had been hiding the flaws in their work by smearing hot wax into the cracks and then dabbing the wax with stone dust. The method was considered cheating, and therefore, any sculpture “without wax” - literally sine cera - was considered a “sincere” piece of art. To this day we still sign our letters “sincerely” as a promise the we have written “without wax” and that our words are true.
What the Fed is attempting to do is to essentially remove all the “hot wax” from the mortgage process. In the past a mortgage broker could be compensated by both the lender and the borrower, which allowed the mortgage broker the flexibility to fashion a loan product; based upon the complexity of the loan, the borrower's credit, and a variety of other factors. The compensation that flowed from the lender side, an amount previously unknown to the borrower but now disclosed on the good faith estimate, is referred to in the lending business as the "yield spread premium." This additional compensation often allowed for the reimbursement of closing costs, payment of seller closing concessions, and more importantly additional income to the mortgage broker. Right or wrong, and however you might characterize the nature of this compensation received from the lender, the "YSP" was a key component of how residential lending functioned and how folks in the lending industry made a living. But no more.
The compensation plan must be based upon only a percentage of the loan, not to exceed three percent, no matter how large or small the loan amount may be or the difficulty in clearing the loan for closing. In essence, it's one size fits all. Furthermore, the mortgage broker must provide the borrower with the lowest interest rate options and a variety of available loan products, to avoid "steering" the borrower to higher interest rate loans, a practice that benefited only the originator by providing a greater yield level.
In order to build your mortgage business you will need to focus on volume. The only other way a lender could compensate might be the satisfaction of the client or maybe the quality of the file the loan officer submitted. So at the end of the day we as an industry can still be compensated on the amount and quality of work we do on a daily basis. This is part of the magic that attracted me to this business and thank God it still allowed.
Sincerely,
Greg Goodman
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