The 3% Rule – Part Two

As a follow up to the article about the 3% rule

(http://divorce-mortgage.blogspot.com/2013/07/the-we-didnt-think-this-one-through-rule.html), we have received a clarification. The CFPB has recently announced that Loan Officer Compensation (LO Comp) will not count against the 3% limitation for bankers but it will count against the limit for brokers. This is the proverbial “nail in the coffin” for the broker industry. No one is expected to attend the funeral. Since we do not have parallel universes, consumers will not miss the broker because there will be no measuring stick. Two bits of information might be helpful (in understanding our current plight) while it does nothing to truly help any consumer. First of all, according to the preeminent researcher for the banking and broker industry – Tom LaMalfa – independent mortgage brokers provided lower rates and fees for consumers than their mammoth competition, the big banks. Secondly, according to J. D. Power & Associates, consumers were more satisfied with brokers than they were with the big banks. One reason was because brokers provided alternatives and choices. They were, in effect, one-stop shops. You could stick with a good broker for life. Well, for life until Chris Dudd and Barney Freak killed ‘em. To be honest, brokers were under attack from George Bush’s HUD Secretary, Mel Martinez who, interestingly enough, had been head of the Texas Savings and Mortgage Lending Department under W.

Nevertheless, brokers will no longer exist after January 1^st, 2014. Oh yes, to be considerate of time lines, the CFPB moved the date of the announced changes from January 14^th to January 1^st because changing the books in the middle of the month would be unhelpful. So glad they’re watching out for us.

Oh! You want to know why brokers cannot exist under the new 3% rule, eh? I suppose I should explain. With a 3% cap on closing costs, lower loan amounts will be subject to higher rates and, many times, loan denials because there simply is not enough room in the 3% cap to include all of the costs of doing a loan; and the rate will have to be raised in order to recoup costs through the higher yields that higher rates bring in the secondary market.  For brokers, their compensation – anywhere from .750 to 2.00% generally – the 3% cap becomes a 1% - 2.250% cap because we have the broker has to subtract his/her compensation from the 3% and make all costs fit under that amount. This is simply impossible for loan amounts lower than about $350,000. In theory, brokers who service high dollar markets – loan amounts of not less than $300,000 or so – can still operate. The problem is that so few of them will be able to operate that the lenders/banks who received loans from them will no longer keep a broker line (called “wholesale”) open for the few remaining brokers. In fact, major banks like Wells Fargo and Bank of America shut down their broker lines a few years ago.

Why whine and complain and moan about the loss of the broker industry? Politically, it’s important because it demonstrates that our government cares less about what is truly good for the consumer and more about the lobbyists (like the big banks) who wrote the rules and monopolized the lending industry. Practically, it’s important because fewer people can obtain mortgages and fewer still will be able to shop for good service. Very soon, the borrowing public will have a choice between about 3-5 major banks. You know, those banks that cannot be allowed to get “too big to fail.” Personally, I have minimized the impact upon me because for almost 4 years now, I have been a “banker” and needed “broker” outlets only occasionally. So, the rule affects me and my colleagues only minimally. (A few of our loans are brokered because we have broker agreements as opposed to “correspondent” agreements with certain lenders who, from time to time, are able to do loans that our “correspondent” lenders cannot or will not do). The consumer will be more hurt than we will be.

Within our industry, here’s the buzz...I mean, the spin. “Let’s quit complaining about the regulatory changes, the loss of income or the increased work load because of compliance. The good news is that masses of people have exited the industry which leaves only the strong standing. If you’ve made it this far, guess what – consumers out there don’t have as many options. Your competition has vanished!”

What a perverted way to make a living.  

Personally, I’ve never been bothered by competition. It’s never occurred to me that I should be in the enviable position of the monopolist. Competition is good for the consumer and ultimately good for the industry. Competition encourages excellence, efficiency and lower costs. But, I’m naïve. And my government is astute to its own devices and designs. So, the consumer suffers without knowing that the difficulties need not be so difficult.

Repeal Dodd-Frank. Return this country to constitutional government. Eradicate monopolies and uneven regulations which are designed to enrich political allies and impoverish political “nobodies.”