LO Comp change is in the air

For many of our clients, the fall colors have already come and gone, but here in LBA Ware’s home state of Georgia, they’ll hit their peak in the coming weeks. While the turning leaves transform our physical landscape, Tuesday’s mid-term elections will bring changes to our political landscape, and even the clocks are changing; Daylight Savings Time ends this coming Sunday.

Seasonality is nothing new to the mortgage lending and housing industries.  This year, though, seems reminiscent of years past and change is all around us.  Mergers, asset acquisitions, layoffs, and talks of LO Comp restructuring are topics on the monikers at recent industry events. One topic we’ve been closely following is the proposed changes to the LO Comp rule recently submitted to Consumer Financial Protection Bureau Acting Director Mick Mulvaney.

What began on September 26 as an open letter signed by a dozen industry trade groups (including the Mortgage Bankers Association) has gained further momentum with the additional signatures of 250 mortgage banking executives on October 17. A copy of the letter was hand delivered to Mr. Mulvaney on stage at MBA Annual by Robert Broeksmit, CEO of the MBA, after Mr. Mulvaney stated he had not yet had a chance to review it.

The topic remained top of mind with conference attendees during a session I moderated later that day on staffing for 2019 and beyond.

As founder of the leading automated compensation platform for mortgage lenders, CompenSafe, I’m often asked where I stand on changes to the LO Comp rule. First, here’s a recap of the three proposed adjustments:

1. Allow loan originators to voluntarily lower their compensation (in order to pass the savings along to the consumer) in response to competition.
2. Allow lenders to reduce LO compensation when the originator makes an error.
3. Allow variable compensation for loans made under state and local housing finance agency (HFA) programs.

Rules are good — I’m an engineer and a big believer in structure — but certain aspects of the LO Comp rule, however well intentioned, have hamstrung mortgage lenders and, in so doing, undercut their ability to serve the very consumers the rule was designed to protect.

For instance, as long as LOs are prohibited from reducing their own compensation (as they are under current LO Comp rules) they will only be able to respond to competition in one of two ways: by adjusting other elements of the deal to create a loan that is attractive for the consumer, but unprofitable for the lender; or by declining to compete, which is bad for both the lender and the consumer. The first proposed change could help make the mortgage market operate like the free, competition-driven marketplace it’s meant to be.

Another conundrum is that loan programs (like HFA down payment assistance and first-time home buyer loans) designed to expand access to affordable housing tend to be complex and time-consuming to originate. The current LO Comp schema does not reward originators for the extra effort and hours they pour into these loans, creating a financial disincentive to originate them. The third proposed change would give lenders a financial incentive to help more consumers get into affordable home loans – a win-win.

I’m looking forward to seeing how the CFPB responds — and I’m always happy to talk shop, whether it’s about industry-wide LO Comp issues or the compensation challenges that are causing expense overruns. Drop me a line at lori.brewer@lbaware.com.