Big Changes in Loan Originator Compensation – What Next?
New final Reg. Z changes, effective April 1, 2011 (no April Fool’s prank here), are meant to, in the Fed’s words, “protect consumers in the mortgage market from unfair or abusive lending practices that can arise from certain loan originator compensation practices.” These regulations will also apply to auto dealers acting as loan originators for their customers.
So what does this mean? It means dramatic changes in how you compensate originators (internal or third-party) for consumer-purpose mortgage loans. In short, compensation cannot be based on terms or conditions of the loan, other than the principal amount. Also prohibited will be compensation paid by anyone to an originator if the consumer pays the originator directly.
There are also some steering prohibitions in here, which means originators can’t direct consumers to loans “not in their interest” where the originator will get paid more.
Wake up this will affect the Auto Dealer!
This new regulation for mortgage brokers will soon in my opinion affect motor vehicle dealers. My reasoning for making this statement is simple, look at how they submit a loan application through a mortgage broker or through an auto dealer both processes basically involves the same type of transactions.
Quoting Nicole Frush Munro Law Partner Hudson Cook, LLP who recently posted her article entitled “A Formidable Advocate” 02/02/2011. “She stated in her article: I attended the CFSC winter meeting in Naples, Fla. For three days, I and about 175 other attorneys listened to hours of programming where speakers attempted to explain the impact of the Dodd Frank Act and the Consumer Financial Protection Bureau (CFPB) on industry and consumers.
One particular session comes to mind when I refer to disruption in the industry. I was sitting with a bunch of lawyers getting ready for the next presentation. An industry lawyer, a representative from the FTC, and a representative of a large consumer advocacy group joined a panel to discuss the future of federal and state regulation of automobile finance.
Each panelist reviewed what they believed to be the potential impact of Dodd Frank, the CFPB and their organization’s role in finding solutions to today’s motor vehicle sales and finance problems. The industry lawyer—my partner at Hudson Cook, Michael Benoit—emphasized the importance of dealer and finance company compliance with current law, and the need to keep abreast of changes that would invariably come. The FTC representative detailed the FTC’s role in enforcement and indicated that the FTC plans to engage in a number of fact-finding “town hall” type meetings across the United States to determine what “issues” consumers have with dealers.
Industry and regulators aside, creditors do have something (or someone) to fear. The panelist serving as the representative of the consumer group is a brilliant attorney, a zealous consumer advocate and a formidable opponent to certain practices within the automobile finance industry. Congress, federal regulators and the future CFPB will likely consider her opinion and the opinion of her organization when looking toward new regulations. On her list of potential “wrongs” needing fixing are spot delivery, negative equity financing and dealer participation.
Consumer advocates, and this advocate in particular, have a name for “spot delivery” transactions – they call them “yo-yo” sales. They picture a consumer who is in a position of vulnerability on a string with the dealer holding the other end, yanking the consumer back to the dealership when the dealer can’t find the financing he originally anticipated or the financing he found fell through. Arguing that the practice of spot delivery should be banned, these consumer advocates call on Congress and regulators to severely restrict post-sale changes in financing terms.
Finally, consumer advocates, and this legal source in particular, would like to ban dealer participation, analogizing the difference between the contract rate and the buy rate to yield spread premiums in the mortgage market. In testimony before Congress, this lawyer’s organization, the Center for Responsible Lending (CRL), claimed that “in the mortgage market, we know that perverse market incentives encouraged brokers to steer their clients toward more expensive loans than the borrower would qualify for, because the brokers could increase their own compensation by doing so. ”The CRL and other consumer advocacy organizations have made car buyers and house buyers synonymous”. Reference this statement on their web site:
“Borrowers who finance their auto loan through a dealer are vulnerable to a litany of predatory practices. When a dealer arranges financing for a loan, they then assume a dual role: seller of the vehicle and broker of the vehicle financing.”
I personally believe that the Federal Reserve Board will apply the same type of rules to auto dealers brokering auto loans that they have for mortgage brokers, brokering homes loans. The new rules that apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders will also apply to the dealership, the finance and insurance manager, the sales manager and or their lenders.
Mark my words the Tsunami is coming and dealers and their advisors need to prepare for it and quite fooling themselves.
Bill Fowler
President E-Net Financial Services, Inc.
1-360-437-5098
