Friday, August 16, 2013

Broker v. Banker: Regulation Forces Consumers to Choose Higher Priced Loan Options

Double Counting of Fees and Misleading Disclosure Rules Lead Consumers to Choose Higher Priced Mortgage Options

Due to "double counting" of fees under the Dodd/Frank final rule, published in the Federal Register June 12, 2013, effective January 10, 2014, consumers will be driven to choose higher priced loan options when selecting between independent originators and lenders.  "Double counting" in this description, defines what occurs when compensation is included in the rate AND the concurrent originator compensation for the purposes of calculating disclosures and regulatory limits.  

Higher Rates for Consumers

this shows that mortgage lenders and mortgage brokers compensation affects the disclosure of rate that consumers receive
This example is based on 1.5% loan originator compensation.  While the Dodd-Frank Rule intends to create transparency, it only impacts loans originated by a small percentage of originators, leading consumers to choose higher rate mortgages.  The mathematics of this issue are discussed in detail on the IMMAAG website here.

Consumer confusion causes the customer to choose between the higher of two identical loans.   This scenario offers a moderate comparison of the costs; at 5%, the total payments are $347,860 while at 5.125% the total payments are $352,847 - a difference of $4,967 in extra costs to the borrower.

Higher Fees for Consumers

This chart shows how undisclosed mortgage lender compensation results in higher costs for consumers
The mathematics of the compensation rule and the challenges posed are discussed in detail on the website

Consumers are forced to choose higher priced mortgage options under the new rules.  This is required by the disclosure of originator compensation under the CFPB Final Rule, and limits of compensation under Qualified Mortgage Standards (Truth-in-Lending Act, Regulation Z), by including non-borrower paid costs in the disclosures and limits.

The Devil is in the Details

These illustrations represent the facts and not exaggerations.  As clear examples of unintended consequences, one can see that the issue results from misunderstanding the technical details of the workings of the mortgage business.  In attempting to regulate every aspect of the mortgage industry at a granular level, the well-meaning Congress and the Consumer Financial Protection Bureau have lost sight of their goal: "How do we help consumers?"  

"If it Ain't Broke..."

The pre- Dodd-Frank Reform disclosures did this effectively for 50 years.  The pre-2010 Good Faith Estimate allowed consumers to see the interest rate, the loan terms and the bottom line costs.  A consumer could choose between two competing offers and decide which one suited his or her needs best. 

One reform helped all industry participants.  HUD's "Lock-in" of closing costs, once disclosed, ended the practice of giving one disclosure initially that bore no resemblance to the final closing costs.  Congress, HUD, Sean Donovan, and the CFPB could have stopped there and declared victory.  

Today's disclosures do more to conceal costs than they do to illustrate them. The 2010 Good Faith Estimate does not provide a breakdown of the total monthly payment.  It includes costs that the borrower or buyer does not pay, and excludes costs and fees that borrowers do pay.  The new Truth-in-Lending disclosure rules require advanced algebra to understand.  I am a mortgage industry professional, an instructor and author - I have a hard time understanding the rules.  How does this help consumers?  

Congress has an opportunity to roll-back these provisions before they become effective.  Contact your Congressman and Senator and express your disappointment at the new rules.  If he or she is an advocate of transparency and fairness, they will support HR 1077 and S.949.  In addition, they should advocate for the abolition of the Qualified Mortgage under Dodd-Frank, as it simply costs consumers too much money.  


  1. Excellent analysis. All facts.
    Mike in Portland

  2. Can you provide a regulatory citation for the requirement for "double counting" fees?

    Also, the example of fees over 3% doesn't make the loan "illegal", rather it is just not considered a qualified mortgage. Which would actually provide the customer with more ammunition to bring a lawsuit against the lender if they cant repay than they would have if the loan was considered a QM.

    1. "Double-Counting" isn't a regulatory phrase that I can cite. It illustrates what occurs what occurs when rate AND compensation are both considered in the APR equation. In other words, for a broker to get to a -0- point loan, the originator has to add to the rate in order to generate that above par. That component is added to the consumer's rate. It is added again when the lender has to compute the APR and includes the Originator's Compensation as a borrower fee: Effectively "Double Counting". It wouldn't happen on a borrower paid transaction, but the market isn't seeing a lot of borrower-paid transactions...

      Also, excellent point on the illustration. Exceeding QM limits does not make the loan illegal, just makes the lender liable. I changed it. Thanks for the feedback.

  3. Perhaps the consequences are intended. Keep in mind that banks pay lobby fees second only to health care.

    1. I'm all for a good conspiracy theory, and there is certainly enough misinformation around to lead anyone astray. Unfortunately I think this has more to do with shaking brokers out of masquerading as lenders, and I don't say that in a bad way. Brokers need to be brokers, not pretend they are lenders...

      Look at what the bankers have to do, and then tell me how well those lobbying dollars were spent.

    2. Brokers never created a mortgage product, yet they took the black eye for the industry. Bankers were supposedly failing and needed to be bailed out, then 6 months later were making billions in profits. Business has been pushed toward banks by th enew rules. Magically, brokers are licensed by states to do mortgage business and banks are exempt from that. Brokers are required to disclose that they are brokers, and all fees on a GFE whiles banks can hide information on the very same form. Do you have a state mortgage license?

    3. I prefer not to argue about the past. Like I said, there is enough misinformation about the meltdown, the mortgage business, past and current regulatory scheme, and other perceived or real inequalities to fill a blog... wait a minute, that's what I'M doing!

      "Brokers are required to disclose that they are brokers, and all fees on a GFE whiles banks can hide information on the very same form."

      I agree!!! So why are all these brokers trying to pretend to be lenders using mini-corr, table funding, net branches and other artifices? You capitulate to that deceptive, opportunistic business model when you take this tack. The message should be EMBRACE brokers! They are the honest, transparent financing source in the marketplace. BANKS are hiding fees and real costs!

      If you read my article on the Future of the Mortgage Broker Business is in it's past you will see that the point is: If you are a broker BE A BROKER. If you want to be a lender BE A LENDER. Don't complain about what you're not. You'll do a lot more business, make more money, and be happier if you are what you are!

      NMLS ID 195333

  4. You miss the point Thomas. I'm not hiding from the fact that I'm a broker. I'm VERY proud of it. I've always been able to beat the banks in pricing; usually by a wide margin. The problem with the QM Rule is that even if I'm beating BOA, CHASE, or Wells Fargo by a wide margin, my offer to a borrower will not be considered a Qualified Mortgage (my lender compensation alone is 3%), but my closing costs could be $8,000 less and my rate .25% better... Sorry borrower, your forced to go with CHASE.

    J. Davis