Loan Officer Compensation - Term Paper Example

Loan Officer Compensation It all started in the fall of 2008; the main starter of the chain reaction was the financial crisis that hit the market. The regulatory system was drastically under review and changes were made to ensure that these sorts of problems will not repeat in the future. In 2010 the congress passed a bill that involved the federal governments into the markets, their role was drastically increased with new legislations that took control of the market rather than the previous system in which there was very limited interference in the Wall Street, it ended by the mistrust of the financial markets in their dealing, it resulted in a huge crash in the mortgage industry which in turn left the whole economy to crumble by its effects. The republicans were in the opposition sector of the bill; in 2010 mid elections the republicans took control of the House. They were the ones who initiated the drive to end the bill, but unfortunately their efforts were gone wasted when most of the republicans joined the other side of the argument in May 2010, this happened when the senate passed a broadly similar bill. Four republicans changed their sides by supporting the new bill passed by the senate; only two republicans were left in the opposition side; however they could not generate enough influence to repeal the bill (New York Times) Loan Officer Compensation rule has been one of the hottest topics of debate in the real estate industry for several months. The changes were mainly designed to be in the favor of the consumer rather than the banks or financial institutions. The main opposition body of this rule consisted of the National Association of Mortgage Brokers (NAMB) and the National Association of Independent Housing Professionals (NAIHP), they first filled a stay order that was initially denied by the courts, later they their appeal helped them in granting an emergency stay but eventually it was also dissolved by the courts. The main reason why the courts rejected their appeal was the fact that they were unable to provide the courts with the appeal that was up to the standards of the courts to grant a stay order (Kraus) The new rule for the Loan Officer Compensation took effect on 1st April 2011, this rule was an amendment to the original (Reg Z). The rule was intended to limit the originators or the brokers from increasing their compensation at an expense of a disadvantage of the borrower, the primary aim was to incorporate consistency in the compensations paid to the brokers, previously the compensations were not found to be consistent between the transactions, they were dependent upon the broker’s ability to negotiate terms between the borrower and the lender, which at times resulted in a situation that was deemed to be in the favor of the broker and the lender, but not the borrower. The main reason behind the fact is that the borrowers are not always aware of the culture and customs of the borrowing industry, which left them with an obvious disadvantage. There were several problems that were highlighted by the critics of the industry that were present in the changes made by passing the new rule. The very first problem that was highlighted was the fact that the new rule would dramatically decrease the competition in the mortgage industry. It is analyzed as a change that was more favorable for the larger banks rather than the smaller banks of the industry; this was taken as a discrimination factor by the industry. An improvement factor for the whole economy is the one that will promote smaller businesses to flourish in their activities and increase their scale. The second issue that was raised by the group was a prediction that the change will bring about an increase in the borrowing rate for the consumer in the long run as result from the decreased competition One of the biggest changes that were brought about by the new rule was the fact that the originators compensation is limited to one source only. Before the new rule took effect, the originator was able to receive dual compensation in exchange for providing his services in arranging loans. The new rule dictates that the loan originator will receive compensation from either the consumer (borrower) or the lender; the originators are restricted from receiving compensation from both the parties. There are implications for the new rule for the brokers, before the new rule came into existence brokers income was quite high than compared to the new scenario, these incomes were sometimes used to negotiate the contracted deals that made it more affordable for the borrower, however the new rule has lifted this opportunity from the loan officers or the brokers hands. The income levels after the new rule has been vastly decreased which makes it quite impossible for the brokers to devise planes that could accommodate the borrower’s needs by adjusting some of the broker’s compensation in the package. The changes are not restricted to the brokers only; they have provisions that limit the compensation to the loan officers that are employed by the brokers. Previously the employees of brokers were able to receive commission on the sales contracts they bring to the brokerage, this arrangement was quite common in the brokerage firms, it helped motivate the employees to grow further in their field of expertise to earn more commission. However under the new rule this arrangement has been made illegal, no brokerage firms are allowed to pay commissions from the compensations they receive from the borrower as a result of the contract they help devise between the lender and the borrower. The only option left open for the brokers to offer to their customers is fixed salary or hourly waged employment. This change was a major change in the common practice of the industry; the current employees have to face a reduction in their pay scale as a result of the change, it will also reduce the motivation on the employee’s part to improve their selling abilities to earn more income out of their job. The main reason why this change was brought about was the fact that these employees tried their best to make sure that the borrower and the lender would com to some sort of agreement, even if the contract is not in the interest of the borrower, this change enabled the borrowers to choose for themselves, without much pressure from their loan officer. The second provision in the new rule states that the compensation of the loan officers can no longer be based on the contracted terms and conditions of the loan, yet again this was a common practice in the industry of brokerage, compensations were negotiated between the borrower and the broker to arrive at a figure that were custom designed according to the terms and conditions of the contract. However the new law has left the amount of the loan as an exception to the general rule, the amount of the loan can be used to base the compensation of the broker. The last and final provision of the new rule is that the brokers cannot influence the decisions of the borrowers unless it is in the best interest of the borrower, the basic concept is that the originator of the loan should not benefit more in the expense of devising a contract that is not deemed to be in the best interest of the borrower. This change was made due to the fact that previously the brokers had the ability to negotiate their compensation based on the terms and conditions of the contract which resulted in a possibility that the brokers might steer the borrower into a loan that is not in the best interest of the borrower, rather the contract was more beneficial to the broker to devise as the contract terms might be in the favor of the lender which in turn will offer the broker a higher compensation to motivate him into influence the borrower to sign the contract (Williams) The new rules have left the small brokers with very little choice when it comes to running their business successfully; the financial benefits have been fairly restricted to the point that limits the broker’s ability to function properly in the market. Most of the brokers who were running their business quite successfully are not left with much choice but to close down their businesses. The earnings they expect to receive in return for their services have drastically decreased as a result of this rule. They are unable to compete with the giants in the market. The brokers will slowly start to shut down their activities due to the reason of low or even no earning in this industry at their low level (Fingerman) The effect on the consumers of the market is predicted to be positive, however there are reservations to the fact that these changes will prove to do so, the main reason behind the reservation is the fact that the people who were able to clinch up a deal with the brokers that enabled them to negotiate their terms and conditions that somehow were favorable to them while comparing with the giant banks, this possibility is now eliminated. With the income levels of the brokers will be on a dramatic fall, it is hard to imagine this industry to last long, there might be a time when the industry of these brokers might come to an end. After this happens the only options available for the consumers will be for them to take loans from the banks that might not provide them with the services that these brokers would have been able to provide. Although it should not be ignored that the ratio of the people better off with the new rule will be expectedly greater than the previous rules on compensation, if the industry finds a way to work with the current situations. Works Cited Nytimes.com. New York Times, 7 June 2011. Web. 27 June 2011. Kraus, Michael. Totalmortgage.com. Total Mortgage, 6 Apr, 2011. Web. 26 June 2011. Williams, Fowler. Mycrescent.net. Crescent Mortgage, 26 March 2011. Web. 27 June 2011. Fingerman, Tina. Tampabay.com, 14 Feb, 2011. Web. 26 June 2011 Read More