QUESTION
We are a Mini-Correspondent located in the Northwest. We mostly originate QM loans. When we do non-QM loans, we broker them. We've been in business for almost twenty years, and there are eight of us. All our compensation comes from the originating.
I am interested in all the talk about how Congress plans to change the LO compensation regulations. Frankly, what I've read is complicated. I want to know what issues are involved. And, I want to know how Congress is planning to deal with those issues.
My mortgage broker
organization has put out some information about their position. And the lenders'
organization has taken a position. But I am not sure what all the complaining
is about. I'm not saying that some change is not needed. I just can't figure
out what the change is supposed to be.
SOLUTION
Loan Officer Compensation Policy
RESPONSE
The arguments and proposals for loan officer compensation reform are somewhat complicated. So, trying to navigate their implications can be daunting. The Community Home Lenders of America (CHLA) recently released a white paper advocating for reforms to the loan originator (LO) compensation rule, specifically calling for Congress to narrow the scope of the current regulations.[i] The CHLA argues that the current rules, designed to prevent predatory lending practices, have unintended consequences that harm consumers and stifle competition within the mortgage industry.
I'll provide you with some of the positions outlined in the CHLA's white paper. We are tracking these suggested reforms, as we do virtually all other federal and state regulatory compliance matters that affect banks and non-banks involved in residential mortgage loan origination and servicing. When appropriate, we will issue updates and alerts through our newsletters.
I will outline the reform issues by outlining some of the main concerns, the proposed reforms, and the actions suggested to effectuate change. My outline contains sections and subsections to reduce the complexity of the subject issues. In the last section, I will delve a bit deeper. Keep in mind, though, there is considerable complexity, and my explication is not meant to be comprehensive.
The CHLA's Main Concerns
The CHLA has expressed several concerns. The following four, in broad strokes, are perhaps the main concerns.
Harm to Consumers
The CHLA argues that the current LO compensation rules, which restrict how much lenders can pay their loan originators, can effectively prevent lenders from matching competitors' offers and potentially result in borrowers missing out on better deals.
Stifled Competition
The CHLA claims that these rules create an uneven playing field, where brokers can offer more flexible compensation structures than retail lenders, hindering competition and limiting borrower choices.
Unintended Consequences
The CHLA contends that the rigid regulations discourage loan officers from working with borrowers over extended periods and make it less attractive for lenders to offer loans through State Housing Finance Agency (HFA) bond programs, which are crucial for low-income and minority borrowers.
Focus on Inter-Firm Compensation
The CHLA suggests that the original intent of the Dodd-Frank Act's LO compensation rule was to address yield spread premiums between firms, not to restrict compensation within a lender's own organization.
the CHLA's Proposed Reforms
Allow Matching Competitor Offers
The CHLA proposes allowing lenders to reduce compensation to their loan originator employees to match a competing offer for the same borrower.
Flexible Compensation for HFA Loans
The CHLA aims to permit varied compensation structures and levels for loans funded through State Housing Finance Agency bonds, acknowledging the distinct nature of these programs.
Flexible Compensation for Brokered Loans
The CHLA suggests permitting lenders to have different LO compensation structures for loans they choose to broker out, acknowledging the differences between brokered and retail lending.
Addressing LO Errors
The CHLA proposes allowing lenders to reduce compensation for loan originators who make errors on loans, creating an incentive for more diligent underwriting.
Suggested Actions
Congress
The CHLA is urging
Congress to revise the Dodd-Frank Act to limit the scope of the LO compensation
rule to compensation practices between firms, not within them.
CFPB
The CHLA is also asking the Consumer Financial Protection Bureau (CFPB) to issue guidance that prioritizes enforcement of LO comp rules in specific areas, like matching competitor offers and state bond loans.
Since you mentioned your interest in industry organizations' responses to the CHLA proposal, I will offer the following feedback from NAMB and the MBA.
NAMB's Response
The National Association of Mortgage Brokers (NAMB) has expressed support for many of the CHLA's proposals, particularly those related to allowing lenders to match competitor offers and addressing the imbalance between broker and retail lending compensation structures.
For instance, NAMB supports the Yield Spread Premium (YSP), now known as Lender Paid Compensation, believing it can be a legitimate and consumer-beneficial method for structuring mortgage transactions when disclosed transparently. And NAMB agrees with CHLA that current rules can negatively impact consumer choice and disproportionately affect state housing finance agency (HFA) programs.
MBA's Response
The Mortgage Bankers Association (MBA) has shown a nuanced position on various proposals championed by the Community Home Lenders of America (CHLA). The MBA has supported the effort to address the problems caused by the LO Compensation rule by creating exceptions for situations like competitive loan offers and state bond loans.[ii]
However, in other areas, like calls to eliminate the Dodd-Frank Act's LO compensation rule's applicability to compensation between firms, the MBA's position appears to differ from CHLA's recommendations.[iii] While advocating for changes to the existing loan officer compensation regulations, the MBA's overall stance seems to align with the CHLA's efforts to ensure market clarity, particularly in addressing issues such as varying compensation based on competitive offers or for different loan types.
Diving Deeper
I can summarize some of the salient details of the reforms to the LO compensation rule being advocated by the CHLA.
Background
The existing LO compensation rule prohibits compensation based on loan terms to prevent steering consumers into higher-cost loans.
However, CHLA argues that the current rules are overly broad and create unintended negative consequences, hurting competition and flexibility within the mortgage industry.
Key Recommendations
The CHLA's White Paper proposes several changes to address these issues:
· Statutory Change
The most significant recommendation calls for Congress to amend the Dodd-Frank Act's LO compensation statute to limit its application to compensation practices between different entities (i.e., lenders and brokers) while allowing flexibility in how a lender compensates its own employees.
· Regulatory Changes (by the CFPB)
1. Allow
lenders to reduce compensation to their LO employees when matching a competing
offer for a borrower.
2. Allow
different LO compensation structures for State Housing Finance Agency (HFA)
bond-financed mortgage loans.
3. Allow
flexible LO compensation when lenders choose to broker out loans they don't
originate in-house.
4. Permit compensation reduction for LO errors to incentivize diligent underwriting.
· CFPB Guidance
Issue guidance indicating the CFPB will deprioritize enforcement of LO compensation rules in these areas until Congress or further regulatory changes can be implemented.
Reasoning and arguments
CHLA believes the existing rule, while intended to curb practices like yield spread premiums between firms, inappropriately restricts how lenders compensate their own employees.
Another key argument is that the current restrictions harm consumers by limiting competition and flexibility in various scenarios, including competitive loan situations, State bond loans, and when mortgage bankers choose to broker out loans.
CHLA highlights the discrepancy where mortgage brokers, whose actions originally prompted the rule, can often circumvent it by switching to borrower-paid compensation, while lenders are heavily restricted.
In essence, CHLA's White Paper argues that the existing LO compensation rules are overly prescriptive and hinder legitimate business practices in the mortgage industry. The purpose of the reform appears to be encouraging both legislative and regulatory changes to create more flexibility and competition, thereby benefiting both consumers and lenders.
Jonathan Foxx, PhD, MBA
Chairman & Managing Director
[i] CHLA Releases White
Paper on LO Comp Reform, June 26, 2025, Press Release, Community Home
Lenders of America
[ii] The MBA also supports
the Senate passage of the trigger leads bill, the Homebuyers Privacy Protection
Act (S. 1467), following the advancement of similar legislation in the House
Financial Services Committee.
[iii] It is important to
note that the MBA's positions are often influenced by the overall interests of
the mortgage industry, which can sometimes align with and sometimes diverge
from the specific concerns of community lenders like those represented by CHLA.
