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Brokers Warn of Job Losses

Dodd-Frank bill prohibits dual compensation

July 16, 2010

By staff

Mortgage brokers warn that they will be laying off employees as a result of new requirements under financial regulatory reform legislation passed by Congress this week. At issue is dual compensation -- where the borrower pays some of the loan fees and the wholesale lender pays some of the fees. But brokers and lenders will have another chance to impact the regulation through the rulemaking process.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the Senate this week and is expected to be signed by President Barack Obama.

The bill is considered to be the most sweeping financial regulatory legislation since the Great Depression.

Among the provisions in the bill is the prohibition of payments to originators based on the loan terms, except for the loan amount, according to Patton Boggs LLP Partner Richard Andreano. That effectively means the elimination of yield-spread-premiums and payments to brokers for prepayment penalties.

In addition, the legislation eliminates dual compensation; the originator can either be paid directly by the borrower or by the lender -- but not both.

"If you get compensation from the lender, in addition to the consumer not also being able to pay, the other restriction is ... the consumer can't make any upfront payment of discount points, origination points or fees other than bona fide third-party charges," Andreano said in a phone interview.

The new law will increase costs for borrowers while hurting the mortgage broker industry, according to a news release from NAMB - The Association of Mortgage Professionals.

"Despite NAMB's efforts to spotlight the adverse consequences of some of the provisions contained in the bill, the provisions remain that will cause more harm than good," NAMB President William Howe said in the statement. "The unfortunate consequence of this bill will be higher costs to the consumers and continued job loss for small businesses in the mortgage industry."

NAMB claims borrowers will now be forced to finance all costs through higher rates -- which will end up costing them interest on the fees themselves.

"Consumers will only have two choices at the closing table: to come up with thousands of dollars to pay for closing costs out of their pocket at the closing table or to roll all of their closing costs into their interest rate," the trade group warned. "No longer will they have the opportunity to enjoy the benefits of utilizing both at the closing table."

The brokers say that no evidence has been shown to support provisions in the bill that tie an originator's compensation to a borrower's ability to repay a mortgage.

Patton Boggs' Andreano did note, however, that the consumer financial protection bureau -- which was created as part of the Federal Reserve through the legislation -- will be able to waive or create an exemption to the dual compensation restriction "if it's deemed to be both in the interest of consumers and then also more broadly in the public interest."

NAMB said it will lobby the regulator as part of the rule-writing process.

Andreano expects lenders will also work with the regulator to create an exemption.

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