May 31, 2021|Ability to Repay/QM, CFPB, Consumer Behavior, Fair Lending, LO Comp, Mortgage Industry
Vaccinations can defeat a disease
The CDC’s website proclaims that routine smallpox vaccination among the American public stopped in 1972 after that deadly disease was eradicated in the United States. I was born in 1964, so I still have small scar on my left arm from when I got my smallpox vaccination, but my 20-something year old kids do not. I mention this because it is important to remember that once a disease is eradicated, the need for the government to impose public health requirements, like vaccinations, can be eliminated.
Mask up for…, smallpox?
Spoiler alert, I am not bringing up smallpox as an analogy for another COVID-19 public health policy discussion[1]. Rather (as you may have guessed from my headline) I’m talking about the Loan Originator Compensation Rule under TILA (LO Comp). How so, you ask? Well, in keeping with the vaccination analogy, what I’m saying is that the LO Comp Rule is like if the CDC today required vaccinated (or unvaccinated) people to wear masks…., for smallpox. Pointless, counter-productive and perhaps performative.[2]
Time to (re)visit LO Comp
Since I last penned some thoughts about LO Comp on February 2, 2020[3], a lot has happened, but those thoughts are still valid. Now, it’s usually trite or hyperbole to say, “a lot has happened since…,” but, between the pandemic, the 2020 election’s consequences (including CFPB leadership changes) and the greatest mortgage industry year since 2003, I don’t think that’s a stretch. That said, as far as LO Comp goes, the mortgage industry may be right back to February 2020, because interest rates are rising, refi’s are drying up and originators are (or soon will be) beating each other up seeking ways to compete better on price at the point of sale. Complaints about LO Comp took a break while mortgage companies were shooting fish in a barrel, but that’s about to change.
So why not revisit or, for about half of you, visit for the first time, my LO Comp thoughts. More importantly, I recently was asked by the father of industry podcaster Robbie Chrisman to write about LO Comp, so it must be timely. Readers may recall that I am very fond of the poetry of William Butler Yeats, but I will not take Yeats’ approach when asked to write something for my fellow mortgage industry community in a time of difficulty.[4] Besides, it’s not like I was asked to write a love song or anything like that.
Why do we have LO Comp?
I’ll say it again, as I did back on February 2, 2020; LO Comp is a regulatory solution in search of a problem. In 2011, when LO Comp was promulgated by the Federal Reserve, it was designed to prevent loan originators from steering consumers to higher priced (and often ill-advised) subprime and stated income loans by prohibiting compensation that varied based on loan profitability. Among other things, it means originators can’t get paid more or less based on the price of the loan, and it also prohibits originators and their employers from reducing originator compensation to provide a consumer discount. CFPB made some changes to LO Comp in its 2014 Rule, but kept the basic concepts and premise in place. More importantly, however, CFPB’s 2013 Ability to Repay Rule (QM/ATR) effectively eliminated and entirely eradicated[5]stated income loans and made subprime lending virtually obsolete. Yet, 10 years later, LO Comp still unnecessarily complicates mortgage lending and prevents lower costs for consumers by making discounting more difficult. It’s as if QM/ATR was a 100% effective vaccine against stated income and subprime lending, but we’re still wearing LO Comp masks.
In my February, 2020 Musing I expressed hope that the CFPB was going to respond positively to 2018 MBA and other trade association requests for flexibility on discounting by permitting mortgage companies to lower originator compensation in certain circumstances. Specifically, there seemed to be some CFPB sympathy to at least permit such discounts in connection with housing programs aimed at disadvantaged communities and to address originator errors. It’s unclear where the current CFPB leadership stands on those issues now, however.
LO Comp=Fair Lending?
Admittedly, I’m being a little disingenuous about the purposes of LO Comp with my mask analogy, but no more so than the Rule’s drafters. Did CFPB intend for LO Comp just to be belt-and-suspenders with QM/ATR on steering consumers into risky loan products? The drafters of the LO Comp Rule relied on the Truth in Lending Act’s stated purpose of promoting the “informed use of credit through required disclosures and substantive regulation of certain practices” to develop LO Comp. CFPB didn’t mention ECOA, Fair Housing or anything like that to support issuance of the LO Comp Rule, so it can’t be about fair lending, right?
In fact, I have heard many of my mortgage banking lawyer peers refer to LO Comp as a fair lending regulation in consumer protection disguise. While framed as a regulation to prevent “steering”, LO Comp prevents originators from varying pricing to anyone and that means no price differences based on race or another prohibited category too. Pre-LO Comp mortgage originators (like most salespeople who deal with consumers today[6]) could increase or lower the price and share in any increase or decrease in their compensation accordingly[7]. I think CFPB’s theory for LO Comp’s prohibition on pricing discretion was that minorities were overrepresented in the group of less sophisticated borrowers who would be offered higher rates; so if you take away the compensation incentive to gouge anyone (or to discount loans), it won’t happen to minorities.
Again, why do we have LO Comp?
Given LO Comp’s hostility to (i) the sales culture of mortgage originators and (ii) the normal functioning of a competitive marketplace, as I noted in February 2020, the LO Comp Rule has been quite good for the business of a mortgage banking attorney who helps mortgage lenders try to comply and remain competitive. Still, with the CFPB’s expressed focus on racial equity coupled with the virtual extinction of stated, negative amortization, and most subprime loan products due to QM/ATR, perhaps 10 years later is the right time for the CFPB to reassess the effectiveness and purpose of the LO Comp Rule as a whole. ECOA and fair lending laws (and perhaps UDAAP as well) already prohibit discrimination by charging minorities more for loans. So, the key question is whether LO Comp actually supports fairness in loan pricing for minorities or does it just make it harder for all borrowers (including minorities) to get the most competitive loan pricing? If the problem a regulation is designed to prevent no longer exists, or the regulation is duplicative of other rules, why have it at all?
Dare to disagree?
By the way, I get a lot of great positive feedback from my readers and I appreciate and welcome all of your comments. I’d like this to be even more of a dialogue than just my thoughts and opinions. Frankly, given the polarization and diversity of thought generally, I am surprised that my views aren’t challenged more often (I can’t be that right, right?). So, if you have something substantive to say to me about my Musings, even if it’s to disagree, I would welcome civil discourse.[8]
[1]Ok, I am also making a COVID analogy. CDC and public health officials should be applauded for winning the war on COVID, but they should be careful not to lose the peace.
[2]Alliteration is recurring theme of the Mortgage Musings.
[3] I had half the number of subscribers I have today back then, so many of you may have missed that one.
[4] See Yeats’ short 1915 poem, On Being asked for War Poem, A Short Analysis of W. B. Yeats’ ‘On Being Asked for a War Poem’ – Interesting Literature
[5]Alliteration alert!
[6] The auto and insurance industries successfully fought very hard to be exempted from the reach of the Dodd-Frank Act, but the mortgage industry was its prime target.
[7] This was called overage or underage.
[8] To one of my latest “subscribers”, a certain f-you @aol.com, I hope you can find a more articulate voice.