The Community Home Lenders of America (CHLA) submitted a letter to the Consumer Financial Protection Bureau (CFPB) in support of changes to the loan originator compensation rule, telling CFPB Director Rohit Chopra that the current rule’s “inflexibility” in certain areas is a “detriment” to consumers.
The letter calls for increased flexibility in LO compensation restrictions, which would “[benefit] consumers without opening loopholes that would allow for anti-consumer practices,” according to the letter.
The CHLA is calling for “for flexibility from the strict prohibition against variations in LO compensation” in three areas, according to the letter: state housing finance agency (HFA) bond loans; “truly competitive situations” in order to enable a lender to match a price offer; and error on the part of the loan originator.
State HFA bond programs are more complex than other single-family loan options, which means that HFA loans are more expensive to manufacture.
Prior to the implementation of the CFPB LO comp rule, it was common for lenders to absorb the higher costs by reducing the fee to the originator. However, the CFPB rule does not currently allow for this.
“The inability to reduce loan originator compensation to offset HFA production costs under the current LO Comp rule harms consumers by discouraging lender participation in these vital programs,” the CHLA states in the letter. “Moreover, because HFA loans are generally more costly to underwrite and therefore less profitable, providing LO comp flexibility for such loans does not create financial incentives to steer borrowers to higher-priced loans.”
The CHLA also contends that “an overly restrictive limitation that compensation may not vary” interferes with the broader objective of increasing competition and consumer choice.
“Many lender groups have for some time argued for targeted flexibility for loan originators in this situation, typically asking for such flexibility when there is ‘demonstrable price competition,’” the letter states.
To address this while ensuring “demonstrable price competition,” the CHLA recommends five criteria to address concerns while also allowing for comp reductions: an agreed-upon compensation schedule between the lender and originator; facilitating borrower comparison shopping after the current lender has provided “substantial assistance” with finding the right loan option; the original lender matching the offer of the competitor; a lender not making regular use of this flexibility; and logging that all preceding requirements have been met.
In regard to comp reduction for LO mistakes, the CHLA says that a lender should have the authority to reduce compensation based on the cost incurred by the mistake.
“This is based on the simple principle that loan originators should take financial responsibility for their errors,” the letter states.
The CFPB issued an official request for comment in March as it conducts a review of Regulation Z’s mortgage loan originator rules. The goal for the CFPB is to understand the economic impact the rules have on smaller businesses in the mortgage space.