Chla Urges Congress To Narrow Lo Comp Rule

The Community Home Lenders of America (CHLA) is proposing that the U.S. Congress scale back the loan originator compensation rule to its original intent: prohibiting yield spread premiums, an abusive practice from the 2008 financial crisis in which lenders paid brokers more to steer borrowers into higher-rate loans.

The proposal comes as the Consumer Financial Protection Bureau (CFPB) submitted a list of rules to the Office of Management and Budget (OMB) for review in early June. Among them are potential changes to LO compensation requirements and mortgage servicing rules under the Truth in Lending Act. 

“CHLA is proposing to surgically fix the problem by asking Congress to return LO Comp to its original purpose,” Scott Olson, CHLA executive director, told HousingWire. 

Industry stakeholders have been calling on the CFPB—now under Acting Director Russell Vought—to modernize what they view as overly rigid compensation rules.

Currently, the rule prohibits any variation in compensation to a loan originator, except based on loan amount. It applies broadly, including to retail LOs. The intent was to ensure uniformity in loan terms for all borrowers and to prevent financial incentives that could harm consumers. But CHLA argues the rule has had unintended consequences.

According to the lender advocacy group, the inflexibility of the rule has made it harder for lenders to compete with better offers, discouraged LOs from working with borrowers over extended periods and disincentivized the use of state Housing Finance Agency (HFA) bond programs, which are particularly important for low-income and minority borrowers, because such loans are often unprofitable under current compensation limits.

Additionally, many banks have reduced the use of brokered loans for products not offered in-house, due to uncertainty over whether they can lower compensation in those cases.

Changes to the rule are supported by tools that better protect borrowers, like TRID disclosures and online mortgage platforms, CHLA says. The group points out that brokers, whose yield spread practices prompted the LO Comp rule, are now often able to circumvent it by flipping to borrower-paid comp, while lenders are tightly restricted.

HousingWire previously reported on LOs dramatically cutting their pays to win clients by playing with lead buckets, which is often illegal, and the regulatory risks of using pricing exceptions.  

“Lender groups have been pressing the CFPB to make targeted exceptions through regulation, but making surgical changes for more flexibility is complex and previous efforts have floundered,” Olson said. “Moreover, it is unprecedented and inappropriate to restrict compensation paid by a lender to its own loan originator employee. So, CHLA is saying LO Comp should be changed so it does not apply to payments made to your own employees.”

While the CFPB’s latest review is under way at OMB, no details have been released about what changes might be adopted.

CHLA is now calling on Congress to limit LO Comp rules to apply only between firms and to urge the CFPB to permit reduced LO pay in specific cases: to match competing offers, to originate state HFA bond loans and when brokering loans that the lender cannot offer in-house.