How Mortgage Loan Officers Are Paid Could Affect Homebuyers

The way in which mortgage loan officers are compensated may be changing if rules proposed by the mortgage industry are adopted, and that could affect how much homebuyers pay in loan costs.

In 2014, the Consumer Financial Protection Bureau (CFPB) changed the rules for loan officer compensation by reducing financial incentives for loan officers to steer consumers toward riskier loan products that came with increased pay for the loan officers.

For example, mortgage loan officers couldn’t receive any compensation based on interest rate, loan terms or by recommending a customer to an affiliate third-party such as an appraisal or title insurance service. They also couldn’t receive money from a borrower and a related party for the same transaction.

As of late 2018, the Mortgage Bankers Association (MBA) asked in a letter to the CFPB to change the rules for how they pay their loan originators, which could ultimately affect how much buyers pay. The executives argued that the current rules make it harder for consumers to shop for a mortgage.

The 250-plus mortgage bankers represented in the letter asked for three changes:

The first would allow voluntary reductions by loan officers to their compensation as a way to increase competition. Currently, a lender will be forced to decide against making a loan if it’s unprofitable because it’s a discounted loan and the loan originator must be paid full compensation. This can result in a more expensive loan for consumers, the bankers say.

The second request is to be able to reduce loan originator compensation when the loan officer makes an error in the loan process. The present rule prevents creditors from holding employees financially accountable for mistakes. Greater accountability will reduce errors and make the market more transparent for consumers, the executives say.

The third change request is to vary pay for loans made under Housing Finance Agency (HFA) programs. The current rule forbids varying compensation for different loan types or products, including HFA loans.

“HFA programs are particularly important for underserved borrowers such as first-time homebuyers and low- to moderate-income families who often encounter difficulty accessing credit elsewhere,” the mortgage bankers wrote.

But HFA loans are expensive to produce, they say, with robust underwriting, tax law-related paperwork, yield and fee restrictions, and other requirements.

If changes occur to loan officer compensation, homebuyers would see them reflected in the estimated closing costs in the Loan Estimate document they receive when applying for a mortgage, and in the Closing Disclosure document they get upon closing.

This article is intended for informational purposes only and should not be construed as professional or legal advice.