RESPA Lawyer Blog
The Federal Reserve Board’s new final rules amending Regulation Z appear to have major implications on the real estate industry effective April 1, 2011 if the final rule isn’t amended quickly. The new Fed Rule slipped in language that re-defines mortgage brokerage firms into the classification of “loan originators.” Currently mortgage brokerage firms can collect an origination fee, in-direct compensation (i.e. Yield Spread Premium), and processing fees. However the re-classification of a mortgage brokerage firm into the “loan originator” classification means that mortgage brokerage firms starting on April 1, 2011 are now prohibited from collecting both origination fee and in-direction compensation in the same transaction. The mortgage brokerage firms will only be allowed to collect processing fees and either an origination fee or in-direct compensation not both.
Creditors (i.e. lenders who fund loans in their own name) can still receive an origination fee, in-direct compensation (YSP or SRP), underwriting fees, processing fees, document prep fees, and funding fees.
So what is the issue? If you look at the operating costs for a Creditor the costs typically involve office space/rent, support staff, insurance, federal & state taxes, loan originator compensation, technology, telephone & communications and advertising. The operating costs for a mortgage brokerage firm include the same but add in National Mortgage Licensing System (NMLS) fees and continuing education expenses per the SAFE Act.
What the Fed has done effectively is significantly reduced the income that mortgage brokerage firms can receive while at the same time they will continue to have the same operating costs to manage to keep their operations in business. The 70,000 plus mortgage brokerage firms across the United States won’t be able to compete against banks who fund loans in their own name because they won’t be able to bring in enough operating capital to keep their operations afloat.
The new Fed rule will have an impact on credit unions, small bank, and mortgage brokerages across the United States who have typically third party originated (TPO) their loans. It will have an impact on TPO warehouse lines who relied on the TPO business model and on state bond loan programs who have traditionally relied on mortgage brokerage firms, credit unions, and small banks to market their bond loan programs to consumers.
One question that we have is has the Federal Reserve Board overstepped its authority in re-classifying a mortgage brokerage firm as a “loan originator” when the Secure and Fair Enforcement Act for Mortgage Licensing Act clearly defines what a mortgage brokerage firm and loan originator both are. It should be interesting to see if the Federal Reserve Board is sued over this new re-classification..
At issue is language that was buried on the bottom of page 34 and on page 35 with regards to loan compensation.
“Furthermore, the definition of “loan originator” in Sec. 226.36(a)(1) is consistent with new TILA Section 103(cc)(2), as enacted in Section 1401 of the Reform Act, which defines “mortgage originator” to include employees of a creditor, individual brokers and mortgage brokerage firms, including entities that close loans in their own names that are table funded by a third party. Consistent with Section 1401 of the Reform Act, the Board does not purport to address transactions that occur between creditors and secondary market purchasers, to which consumers are not a direct party, and appropriately does not extend the rule to compensation earned by entities on those transactions.
Existing Section 226.36(a) defining mortgage broker is revised and re-designated as new Section 226.36(a)(2). Comments 36(a)-1 and -2 regarding the meaning of loan originator and mortgage broker, respectively are adopted substantially as proposed. However, comment 36(a)-1 regarding the meaning of loan originator is amended to clarify when table funding occurs. For example, a table funded transaction does not occur if a creditor provides the funds for the transaction at consummation out of its own resources, such as by drawing on a bona fide warehouse line of credit, or out of its deposits. In addition, comment 36(a)-1 is also amended to clarify that the definition of “loan originator” does not apply to a loan servicer when the servicer modifies an existing loan on behalf of the current owner of the loan. This final rule only applies to extensions of consumer credit and does not apply if a modification of an existing obligation’s terms does not constitute a refinancing under Section 226.20(a).
Under existing Section 226.2(a)(17)(i)(B), a person to whom the obligation is initially payable on its face generally is a “creditor.” However, as noted the definition of “loan originator” in Section 226.36(a)(1) provides that if a creditor closes a loan transaction in its own name using table funding by a third party, that creditor is also deemed a “loan originator” for purposes of Section 226.36. Thus, new comment 36(a)-3 clarifies that for purposes of Section 226.36(d) and (e), the provisions that refer to a “creditor” exclude those creditor that are also deemed “loan originators” under Section 226.36(a)(1) because they table funded the credit transaction (i.e. do not provide the funds for the transaction consummation out of their own resources). New comment 36(a)-4 clarifies that for purposes of Section 226.36, managers, administrative staff, and similar individuals whose compensation is not based on whether a particular loan is originated are not loan originators.”
Example of how the definition will effect compensation:
Creditors rates & fees: (Today)
FHA –4.125% loan at 0 points plus 1 percent loan origination fee Conventional 4.25% at 0 points plus 1 percent loan origination fee
Estimated Revenue on a $200,000.00 loan
1% origination = $2,000.00 In-direct compensation =$2,000.00 Total for creditor = $4,000.00
Beginning on April 1, 2011 the total compensation for creditor will be the same
Mortgage Brokerage Firm rates & fees (Today)
FHA 4.125% loan at 0 points plus 1 percent loan origination fee Conventional 4.25% at 0 points plus 1 percent loan origination fee
Estimated Revenue on a $200,000.00 loan
1% origination = $2,000.00 In-direct compensation = $2,000.00 Total for mortgage brokerage firm = $4,000.00
Beginning on April 1, 2011 the total compensation for a mortgage brokerage firm will be:
1% origination fee =$2,000.00 In-direct compensation = $0.00 Total for mortgage brokerage firm = $2,000.00
A mortgage brokerage firm would have to charge a 2% origination fee to earn the same as a creditor with the same expenses.