LO Comp Flexibility to Increase Consumer Choice and Savings


2101 Wilson Boulevard, Suite 610


Arlington, VA 22201


(571) 527-2601


April 8, 2019



Ms. Kathy Kraninger Director


Consumer Financial Protection
Bureau


1700 G Street, NW Washington, DC
20552


Dear Director Kraninger:


The Community
Home Lenders Association (CHLA) is writing to offer recommendations on how to
provide targeted flexibility on Loan Originator (LO) Compensation in an
objective manner that would benefit consumers without opening up loopholes that
would facilitate steering or other anti-consumer practices.


This letter
builds on a September 26, 2018 letter sent to the Consumer Financial Protection
Bureau (CFPB) by the major national groups representing mortgage lenders which advocated
for flexibility under the CFPB’s LO Comp rules in three specific circumstances
which would “help consumers and reduce regulatory burdens.”


The LO Comp
statutory provision and the rule implementing it generally prohibit LO
compensation from varying based on the terms of the loan (other than amount of
the principal). The purpose is to protect consumers from steering and to
eliminate financial incentives to push borrowers into higher rate loans.
However, as the September 26 letter explains, the inflexibility of the rule in
a few areas actually works to the detriment of consumers.


From the
perspective of CHLA, there are four important criteria that need to be met in
evaluating whether CFPB should make the types of changes outlined in this
letter:


1. CFPB has authority within the language of the statute to make the change.


  • Consumers would benefit from the change


  • The change would not open up loopholes
    to create new financial incentives to steer consumers
    to higher price loans


  • The change includes a bright line test for
    regulatory compliance purposes.


This letter addresses the three
proposals in the context of these criteria.


Authority to Reduce
Compensation When a Loan Originator Makes an Error


The CFPB
should permit the customary compensation a loan originator receives from its lender
employer to be reduced by the costs associated with an error made by that same
loan originator.


This is a simple bright line test
that does not involve compensation varying based on the terms of the loan.
Lenders should be given guidance to ensure accountability via documented policy
and procedure. If a lender reduces compensation due to error, the lender should
be required to document the incident and maintain a log of such incidents – and
track all corrective action including but not limited to the originator
entering training programs to ensure repeat offenses do not occur.


There is only a benefit, no
downside, to the consumer.  Moreover, it
is only fair that the loan originator, not the lender, should absorb such
costs.  Allowing this change also facilitates
financial accountability on the part of the loan originator, which should
result in fewer loan errors, which in turn will reduce a lender’s operational
costs, which can be passed along to the consumer.


In order to exercise this
flexibility, the lender should be required to document:


  • the error made in every instance in which
    compensation is reduced,
  • that
    the Loan Originator received training and guidance before the error was made, and
  • that
    this is not just one transaction, but represents multiple mistakes.


Authority to Reduce Compensation on
Housing Finance Authority (HFA) Loans


The arguments
for this flexibility are also simple. In a June 19, 2018 letter to the CFPB,
the National Council of State Housing Agencies (NCSHA), the trade group for
state HFAs, noted that “Because of robust underwriting, tax law-related
paperwork, yield restrictions, and other program requirements, HFA loans are
often more expensive to produce”
and further that covering such higher
costs “is particularly difficult given that many HFA programs include limits
on the interest rates and fees that may be charged to borrowers.”


The letter
further notes that before the LO Comp rule, it was common for the lender to
absorb some of these additional costs by paying their loan originators a
smaller fee for an HFA loan than for a non-HFA loan. However, the LO Comp rule
has put an end to that.


The NCSHA
letter concluded that “The inability to reduce loan originator compensation to
offset HFA production costs under the current Loan Originator Compensation rule
harms consumers by reducing the
availability of these vital programs
.” [Our bolding for emphasis].


The logical
conclusion is that consumers would benefit from such flexibility. In addition,
because HFA loans are generally more costly to underwrite and therefore less
profitable, this does not create financial incentives to steer borrowers to
higher priced loans.


Compensation
would not vary based on the terms of a loan, but instead on whether a loan is or
is not an HFA loan (and the prohibition against varying compensation among all
of a lender’s HFA loans could be retained). Creating flexibility for this
category of HFA loans is a simple bright line test.  By providing a singular exemption for HFA programs similar to the exemption
granted to open end credit transactions such as HELOC’s and HELOC HECM transactions, it should be easy to
provide clear guidance and oversight to ensure steering is not occurring.


Authority to
Reduce Compensation in Order to Match a Competitor’s Offer for a Consumer that the
Loan Originator Has Been Assisting


The CFPB has
encouraged mortgage loan competition and consumer price shopping.  However, an overly restrictive limitation that
compensation may not vary can interfere with that objective.


Lenders are
currently permitted to respond to a consumer conducting price shopping by
lowering the rate on the loan being offered. However, the prohibition against
reducing (varying) LO compensation discourages such actions, since a lenders’
profit would be reduced or eliminated without the commensurate ability to
reduce compensation being paid to LOs.


The impact is
to reduce a lender’s willingness to engage in such a competitive process. The
September 26 letter argues for targeted flexibility for loan originators to
lower their compensation voluntarily, in order to facilitate a more competitive
offer and “pass along the savings to the consumer.” On its face, this is
clearly potentially beneficial to the consumer.


CHLA
appreciates the need for an objective standard for what constitutes “demonstrable
price competition.”
CHLA is sympathetic to this concern and appreciates
that it cannot be a general standard that any lender can merely assert – e.g. a
mere claim that the market is “competitive.” 
Without an objective standard, flexibility could be used broadly to
allow compensation to vary based on what the traffic might bear, with higher
rates and fees for less sophisticated borrowers.


Following is
a detailed proposal that addresses these concerns, by identifying objective and
targeted circumstances necessary to meet a standard of demonstrable price
competition and avoid a lender using this flexibility to adjust rates and terms
based on different types of borrowers. Specifically, CHLA recommends the
following conditions to meet this criteria:


  1. The
    lender has an agreed upon compensation schedule for the loan originator and has provided a loan estimate, with
    specific rates and terms, to a potential borrower.


  • After
    some period of time that the loan originator has worked with the borrower, the borrower
    requests that the lender improve
    upon the rate or terms of that loan estimate offer,
    citing a better offer from a different lender.
  • In
    response to this request, the lender improves the rate or loan terms of its original loan estimate.


  • The lender
    does not make regular use of this flexibility [here, the CFPB could set some
    general standard or percentage cap to prevent
    its indiscriminate use].


  • The
    lender must maintain a log or in some other way provide documentation that it
    has met all of the four preceding requirements.


It is not
uncommon for a lender that offers a loan estimate to a borrower to have its
loan originator work closely with that borrower, potentially for an extended
period of time – assisting the borrower with things like pre-qualifying the
borrower, helping the borrower improve their credit standing, and helping to identify
the best loan option that fits their needs. 


CHLA is happy
to provide representative examples of this, and for illustration purposes,
cites an actual case from one of our members of a consumer that a loan
originator assisted over the course of four months to pre-qualify and help the consumer
make purchase offers on several homes. 
On the fourth such offer, the consumer entered into escrow on a home and
completed a loan application and the lender provided a loan estimate. 


Using the
right to shop, the consumer then obtained a loan estimate from a different
lender, with a lower rate.  Without the
loan originator’s ability to reduce its compensation, the lender’s profit would
have been eliminated by matching the competing offer, so the lender did not do
so.  Therefore the loan originator lost
the loan and the consumer as a client – even though the loan originator was willing
to accept reduced compensation in order to close the loan and maintain a long
term relationship with the consumer.


Thus, current
CFPB rules often discourage a loan originator and the lender that employs that
LO from matching loan offers and retaining clients that they have worked with
for some time to assist.  This fact
pattern is not uncommon – and it can occur for various reasons, including
having mortgage rates decline after the original loan estimate. 


This outcome is
manifestly unfair to the consumer who wants to consummate the loan with the
original lender, but cannot justify the inferior terms.  This outcome is manifestly unfair to the
lender and its loan originator that spend time assisting the borrower with the
loan process, but end up losing the loan. 
To make matters worse, the consumer may end up with a negative
impression of the lender’s failure to match the terms, as understandably a
borrower may be skeptical about the explanation that CFPB rules make matching
the offer more difficult.


In place of
this, our proposal provides a more objective standard for “demonstrable
price competition”
and ensures
that cost savings achieved by reducing compensation are passed along to the
consumer.  It does not result in
variations in compensation based on loan terms, but instead on the targeted and
limited circumstances that meet the criteria we are suggesting. 


We appreciate the opportunity to present our views and recommendations on this subject, and would welcome the opportunity to discuss them with you and your staff.


Sincerely Yours,

Scott Olson, Executive Director                    Matt VanFossen, Absolute Home Mortgage 

Community Home Lenders Association     Member, Community Home Lenders Association