The Broker’s Future An overview of the new commission landscape By Steven A. Milner
Disclaimer: The views expressed in the following article do not necessarily represent the views of National Mortgage Professional Magazine or the associations we represent. As a result of the new legislation that takes effect on April 1, 2011, mortgage brokerage firms and their loan officers (collectively known as “brokers”) will be faced with the game-changing decision of how to receive compensation going forward. There will be two options offered: 1. Receive compensation only from the lender in the form of a fixed percentage fee per loan (the broker will choose from multiple fixed percentage tiers); or 2. Receive compensation only from the consumer in the form of an origination fee (points).
MARCH 2011
LOUISIANA MORTGAGE PROFESSIONAL MAGAZINE
NationalMortgageProfessional.com
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the loans in the secondary market. The legislation clearly defines the loan originator and the mortgage brokerage firm as the same entity (e.g. broker = loan originator = mortgage brokerage firm). This is an issue because if the broker decides to operate under the model of receiving compensation only from the consumer (origination points), they are forbidden from passing along that income to any of the loan originators working in the brokerage firm. “Proposed § 226.36(d)(2) would provide that, if a loan originator is compensated directly by the consumer for a transaction secured by real property or a dwelling, no other person may pay any compensation to the originator for that transaction.”
Both of these compensation options are coupled with serious drawbacks and issues unique to the broker. In addition to the “The unfortunate but above choices, compensainevitable conclusion tion to the broker will no of the new loan offilonger be able to vary with To reiterate, if the concer compensation the terms or conditions of sumer pays the brokerage the loan (interest rate). This legislation is that the firm origination points, means that brokers will no broker model will no then the brokerage firm longer be able to earn cannot share that payment longer be able to additional compensation with any of its loan origiexist in its current from “up-selling” an internators. This is because the format, if at all.” est rate to a consumer, nor law prohibits sharing comwill they have the ability to pensation and further concharge more for loans that require addi- siders the loan originator is the same tional work or time spent originating entity as the brokerage firm they work them. for. This implies that loan originators Lastly, the broker will be forced to can only receive a payment outside of comply with the new anti-steering origination income collected by the broprovisions which were designed to kerage firm, such as a salary. prevent brokers from directing or Additionally, a broker will not be “steering” a consumer to consum- able to switch compensation models mate a transaction based on the fact between receiving compensation that the broker will receive greater from the consumer or the lender on a compensation versus another type of loan-by-loan basis. In a situation loan they could have offered to the where the consumer refuses to pay consumer. To comply with this rule, origination points to the broker, the brokers will be required to disclose broker will be faced with the choice three pricing options per loan to the of losing the consumer or working for consumer: free (the broker, in this case, would (i) The lowest interest rate; have already chosen the lowest fixed (ii) The lowest interest rate and point percentage tier from the lender and combination; and will not be able to go back to the (iii) The lowest rate with the least risky lender to renegotiate). features. The unfortunate but inevitable Steven A. Milner has nearly 30 years of conclusion of the new loan officer experience in the mortgage industry, compensation legislation is that the having started his career as a loan offibroker model will no longer be able cer in 1981 in New York. Currently, to exist in its current format, if at all. Milner is the founder and chief executive In fact, a broker will be at a signifi- officer of U.S. Mortgage Corporation cant disadvantage to a lending insti- d/b/a Mortgage Concepts, a highly tution (mortgage bank), since lending esteemed new York State-licensed mortinstitutions are shielded from the gage banking corporation he founded in anti-steering prohibitions and can 1994. He may be reached by phone at continue to receive compensation (631) 580-2600, ext. 114 or e-mail tied to the interest rate from selling steven.a.milner@usmortgage.com.
news flash
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third quarter 2010 financial results, reporting a net loss of $7.3 billion and a diluted earnings per share loss of $0.77. BofA further reported receiving $18 billion in claims about faulty home loans that it may have to repurchase. On this news, BofA stock dropped $0.54 per share, to close at $11.80 per share on Oct. 19, 2010—a one-day decline of five percent and a nearly 42 percent decline from the stock’s class period high. According to the complaint filed, the true facts, which were known by the defendants but concealed from the investing public during the class period, were as follows: BofA did not have adequate personnel to process the huge numbers of foreclosed loans in its portfolio; BofA had not properly recorded many of its mortgages when originated or acquired, which would severely complicate the foreclosure process if it became necessary; Defendants failed to maintain proper internal controls related to processing of foreclosures; BofA’s failure to properly process both mortgages and foreclosures would impair the ability of BofA to dispose of bad loans; and BofA had engaged in a practice known internally as “dollar rolling” to remove billions of dollars of debt from its balance sheet over the prior years. For more information, visit www.rgrdlaw.com.
SEC Charges Former IndyMac Execs With Securities Fraud The Securities & Exchange Commission (SEC) has charged three former senior executives at IndyMac Bancorp with securities fraud for misleading investors about the mortgage lender’s deteriorating financial condition. The SEC alleges that former Chief Executive Officer Michael W. Perry and former CFOs A. Scott Keys and S. Blair Abernathy participated in the filing of false and misleading disclosures about the financial stability of IndyMac and its main subsidiary, IndyMac Bank FSB. The three executives regularly received internal reports about IndyMac’s deteriorating capital and liquidity positions in 2007 and 2008, but failed to ensure adequate disclosure of that information to investors as IndyMac sold millions of dollars in new stock. IndyMac Bank was a federally-chartered thrift institution regulated by the Office of Thrift Supervision (OTS) and headquartered in Pasadena, Calif. The OTS closed the bank on July 11, 2008, and placed it under Federal Deposit Insurance Corporation (FDIC) receivership. IndyMac filed for bankruptcy protection later that month. “These corporate executives made false and misleading disclosures about
IndyMac at a time when the company’s financial condition was rapidly deteriorating. Truthful and accurate disclosure to investors is particularly critical during a time of crisis, and the federal securities laws do not become optional when the news is negative,” said Lorin L. Reisner, Deputy Director of the SEC’s Division of Enforcement. According to the SEC’s complaints filed in U.S. District Court for the Central District of California, Perry and Keys defrauded new and existing IndyMac shareholders by making false and misleading statements about IndyMac’s financial condition in its 2007 annual report and in offering materials for the company’s sale of $100 million in new stock to investors. In early February 2008, IndyMac projected that it would return to profitability and continue to pay preferred dividends in 2008 without having to raise new capital. In late February 2008, Perry and Keys knew that contrary to the rosy projections released just two weeks earlier, IndyMac had begun raising new capital to protect IndyMac’s capital and liquidity positions. Specifically, Perry and Keys regularly received information that IndyMac’s financial condition was rapidly deteriorating and authorized new stock sales as a result. Yet they fraudulently failed to fully disclose IndyMac’s precarious financial condition in the 2007 annual report and the offering documents for the new stock sales. The SEC further alleges that Perry knew that rating downgrades in April 2008 on bonds held by IndyMac Bank had exacerbated its capital and liquidity positions to the extent that IndyMac had no choice but to suspend future preferred dividend payments by no later than May 2, 2008. This material information was not disclosed in IndyMac’s ongoing stock offerings. Perry also failed to disclose in various SEC filings or a May 2008 earnings conference call that IndyMac would not have been “wellcapitalized” at the end of its first quarter without departing from its traditional method for risk-weighting subprime assets and backdating an $18 million capital contribution. According to the SEC’s complaint, Abernathy replaced Keys as IndyMac’s CFO in April 2008. He similarly made false and misleading statements in the offering documents used in selling new IndyMac stock to investors despite regularly receiving internal reports about IndyMac’s deteriorating capital and liquidity positions. The SEC also alleges that in summer 2007 while serving as IndyMac’s executive vice president in charge of specialty lending, Abernathy made false and misleading statements about the quality of the loans in six IndyMac offerings of residential mortgage-backed securities (RMBS) totaling $2.5 billion. Abernathy received internal reports each month revealing that 12 to 18 percent of IndyMac’s loans continued on page 10