Sorry I’ve been away for so long. The Mortgage industry lately has been very tumultuous. There are a whole slew of regulations slated to take effect in the next 30 to I don’t know how many days.

Under the guise of protecting consumers, new loan officer compensation rules which were slated to take effect on April 1, have been delayed, by industry lawsuits and a granting of  a Temporary Stay until at least April 5th. These new rules are going to have an incredible impact on how loans are originated and how consumers will shop for loans over the coming years.

The premise of these rule changes are legitimate. However, the effect of these changes is  that loan officers will be the only job in America and under Capitalism where the federal government is telling us how much money we can earn, regardless of how many hours we work on a particular file.

Currently for many loans, a loan officer’s compensation is tied to the interest rate.  And what that means is that depending on your interest rate a loan officer may earn more or less money on a given loan.  Now what is wrong with that?   The MOST important thing to note is that when I quote a rate, there is NO obligation for a borrower to complete their loan transaction with me.  They can get quotes from as many lenders as they choose and if I am not competitive, then I will not get the deal.

Virtually every other industry in America is given license to determine how much their time and expertise is worth. When you go to an attorney and explain your case to him, he may charge an hourly work rate or may take your case on a contingency basis. If an hourly rate, the attorney determines how much work he may have to do and what that case might be worth to him when quoting you a price. You’re free to shop other attorneys to determine whether that price is fair or if you might be paying a little bit more because this attorney is top-notch and has the experience that you need to make sure that your case is handled correctly and efficiently.

Dentists, medical specialists, auto mechanics, plumbers, real estate agents, and countless other businesses determine their pricing based on the job at hand and what is required.

So why the change?

Because of this pay structure, in the past some unscrupulous loan officers and mortgage brokers steered borrowers to higher interest rate loans so the loan officers could earn more money.   Additionally, the borrowers may have qualified for another loan, but it was determined that some loan officers weren’t making the clients aware of these other loans that didn’t pay the loan officers as well.  This is known as steering. How big an issue it was is anyone’s guess.  BUT, many borrowers who were caught up in the feeding frenzy that became house appreciation of the late 1990s to mid-2000s, wanted the smallest monthly payment because they expected their house to appreciate in value. Interest-only loans, no money down loans, option arm loans became the product of choice because they allowed borrowers to afford more home and spend less money. Wall Street, who created many of these loans and was always seeking more market share, incented loan officers and mortgage brokers at a higher rate of commission on these profitable products. At least they were profitable until the housing market busted and all these bad loans came home to roost. Because there were more exotic and subprime loans available, borrowers, Wall Street and loan officers were happy to take advantage of these products.

However, the loan market has changed dramatically since the mortgage market meltdown. Virtually anybody applying for conventional loan these days must fit into a box. Borrowers must be able to document their income, have steady employment with at a two-year history, meet debt to income ratio tolerances and have good credit. Because these loans are more of a commodity, lenders have become much more competitive in their interest rate pricing.

These new loans however are not simple. Yes, they are traditional 30 year fixed, 15 year fixed, and  five year arm mortgages to name a few, however, the tightening of guidelines has made it more important than ever that when a borrower seeks financing they find a truly competent and educated loan officer.

So with all these new rules and regulations one would think that consumer would be more protected. I guess that depends on who you talk to. Loan officers associated with non-depository lenders, now known as creditors under the new regulations, must pass national and state licensing exams, take pre-licensing education and annual continuing education, are subject to background checks, credit report analysis and fingerprinting. Licensed loan officers have a fiduciary responsibility to their clients. This means that I have to have your best interests at heart whenever I quote a loan for you. 

Personally that’s not an issue because I always have my client’s best interests at heart. If I don’t quote correctly and competitively, clients are free to shop anywhere they want and I would be losing loans left and right.

But here’s the rub, I been doing this for over eight years, have my MBA, was in corporate finance prior to this, studied for and passed my national exams and passed five state exams at my expense.

Loan officers at large lending institutions i.e. NATIONAL  BANKS that spend billions on advertising, took billions in taxpayer bailouts, are not required to be licensed. So when you walk into your local retail bank and you speak to a loan officer there, you really don’t know what their qualifications are. My licensing information is public record and can be obtained by anybody by going to be NMLS website.

This is just another example of how banks deemed “too big to fail” are shaping the political rhetoric and economic policies of this country. They are opposed to having their loan officers licensed.  Now what I foresee is that eventually non-depository institutions, small banks and those now considered as creditors may be forced out of the industry. This is a way for those banks too big to fail to regain market share. What happens when competition is driven out of the industry? Prices rise, or in this case consumer costs and interest rates will rise and the banks will make even more money than they are currently making.

I could go on for several hours but I don’t want to bore you, however there are many other regulation changes upcoming that will have a significant impact on anyone applying for a loan. So my next post will talk about how the Department of Labor decided to change the job classification of loan officers from exempt to non-exempt and what the ramifications to the consumers are as a result of that.

As always,  I look foward to your comments and please email me at dgaffin@greenparkmortgage.com if you need any loan information.