Repost From Joe Rand
A New World for Mortgage Borrowers, or Should I Say “Clients”….
Published by Joseph Rand on Saturday April 9, 2011 8:17 AM
This week, the mortgage industry changed for the better. The Federal Reserve instituted new regulations for mortgage lenders and brokers that will eliminate compensation systems that took advantage of borrowers and now require full disclosure of loan options to consumers. The rules are contained in what is called Regulation Z, which establishes practice regulations that implement the Truth in Lending Act.
Here are some of the highlights and how this is going to create better experiences for borrowers:
1. Elimination of Incentive Compensation
The Federal Reserve’s new rules eliminate financial incentives for mortgage loan originators to place borrowers in higher-rate or higher-risk loans. Essentially, loan officers can only be paid based on a fixed percentage of the actual loan volume. So if you get a loan with Rand Mortgage for $300,000, the compensation we get, and the compensation our loan officers get, is fixed as a percentage of that loan amount regardless of the rate you pay, the type of loan, or any other loan factor.
Under the old system, lenders would give brokers a “rate sheet” that would provide for different levels of compensation depending on the rate and other loan factors: the higher the rate, the higher the compensation. So loan officers had an incentive to try to get borrowers to pay as high a rate as possible, to increase their compensation.
The new rules now forbid that practice. Now, the lenders set their compensation in advance as a percentage of the loan amount (usually between one and three points on the loan volume), and will pay that compensation regardless of any changes in rate. Now, your loan officer has absolutely no incentive to upcharge a rate, because the compensation will not be affected. The banks may want those higher rate loans, but loan officers cannot be incentivized to place them. That’s a big win for the consumer.
2. Full Disclosure of Loan Options
Another major change in the rules is a new disclosure obligation that requires loan officers to provide borrowers with a full disclosure of other loan options available to them at the time they make their final “lock in” of their loan and rate terms. The new disclosure mandates that loan officers inform borrowers of other loan options with: (1) the lowest rate with “risky” loan factors like interest-only payments, balloon payments, and other terms that tend to drive rates lower but increase risks to borrowers; (2) the lowest rate available without those risk factors; and (3) the loan with the lowest borrower-paid points (which would likely be zero points in the new compensation system).
Under the old system, brokers had no affirmative obligation to provide borrowers with alternative loans that might be available to them. We wish the law was stronger, with a requirement to make that disclosure earlier in the process, since the time of last lock in is often too late for borrowers who have already gone through full loan application process to have a meaningful chance to get a new loan product that would require starting from the beginning. But at least it now requires borrowers have some sort of choice to view alternative loan products that might be more suitable for them.
3. Fiduciary Responsibilities
The most significant change in the new rules, and the one with the greatest potential for reforming the system, is the new imposition of what are essentially fiduciary obligations on mortgage lenders by requiring lenders to act in the borrower’s best interest. The banking industry fought this change, and continues to litigate against it, because the industry is afraid of what a fiduciary duty to borrowers would entail. At Rand Mortgage, we are not at all concerned about that, and in fact are embracing the transformation of a borrower from a “customer” to a “client.”
When you’re a customer, your service provider has no obligation to look out for your best interests. Think of a car dealer. When you walk into the showroom, you know you’re a customer and that the car salesman (or saleswoman) works for the dealer, not you. The salesman may be a great guy, and may want to help you out, but at the end of the day his compensation is based on getting you to pay more for the car, and his obligations are to his employer.
That’s the way the mortgage industry used to work, and hopefully won’t work anymore. Now, you’re a client, not a customer, and now your loan officer has an affirmative obligation to look out for your best interests. Now, that might not be getting you the lowest rate possible. It might be that the lowest rate involves a bank or product that the loan officer knows will not work for you. Maybe the bank is promising a low rate today, but that bank takes forever approving loans and increases your rate risk. Maybe the bank’s guidelines don’t work for you. There could be lots of reasons why a loan officer might advise you to choose a bank or loan product that has slightly higher rates, but at least under the new rules the loan officer will have to disclose them, explain them, and justify them. And throughout that process, the loan officer should be working for your interests, not the banks.
Conclusion: What does this Mean for Rand Mortgage?
We’re not sure how other brokers are handling it, or the big national banking institutions. But at Rand Mortgage, we’re embracing this new regime, particularly the fiduciary duty relationship. As the owner of Rand Mortgage, I am not only a licensed loan originator but an attorney and real estate broker. And as an attorney and real estate broker, I’m comfortable with fiduciary relationships because I’ve worked in them my whole life. Big banks might be new to fiduciary obligations, but I’m not.
I love the idea that Rand Mortgage loan officers are looking out for the interests of their clients, just like BHG Rand agents and the attorneys who handle our closings. I can see the advantage of everyone representing the client’s best interests — mortgage broker, real estate agent, attorney – to give a client the best experience possible. I don’t know that clients are going to get that treatment when they go to a big bank, who still have employees that work every day for that same bank. In contrast, Rand Mortgage loan officers work for the client, and represent the client when presenting options from multiple banks. I see these changes as something that is good for the client, and also gives Rand Mortgage a competitive advantage to provide a better and more transparent service experience for our clients.
If you would like to find out more about the new regulations, I have put together a 20-page white paper on the subject entitled It’s All Going to Be Okay: Life for Brokers after the Amended Regulation Z Broker Compensation, Steering Rules, and the Safe Harbor. It’s an industry publication, complete with footnotes and all that, but you might find it interesting
