The new year has brought a potentially scary new regulation for many mortgage brokers from the Consumer Financial Protection Bureau. The policy, which took effect in January, has caught the eye of many in the industry because it puts into place some pretty tough – though confusing and debatable – standards that might impact their bottom line.
One of the stickier points of the new Qualified Mortgage rule is the debt-to-income ratio requirement being set at 43 percent and a 3-percent cap on some of the fees associated with closing costs charged by parties that are affiliated with each other.
The fees are capped at 3 percent only if the loan is more than $100,000. If the loan is between $60,000 and $100,000, the cap is set at an even $3,000. But if there’s a small loan between $20,000 and $60,000, the fees can go up to 5 percent.
Kerry Gelbard of LA Mortgage in Beverly Hills, Calif., says some of these small loan caps could become an issue on deals for big homes – with big escrows and title fees – because they can be structured in a way where the buyer puts up millions in cash and finances to try and force those fees down into the cap.
But the main segment of the business that will likely be affected, explains Gelbard, are the full-service companies that rely on controlling all aspects of the deal by providing affiliated real estate agents, mortgage brokers and title services.
“If it’s a one-stop shop, it’s going to be difficult to stay under 3 percent,” says Gelbard, a mortgage broker affiliated with Rodeo Realty. “The intent is to stop builders from forcing their other services on the buyer. It gives consumers more options.”
He says he expects to have to deny some loans under the new QM rules, but it shouldn’t have too much of a drag on his business.
“I don’t think the impact is going to be as great as everybody thinks,” Gelbard says. “If they’re charging 3 percent, they’re going to have to adjust their fees, (but) those who are charging reasonable fees shouldn’t have a problem.”
Loan originator (LO) compensation was one of the main issues that first came up as regulators spent months trying to get feedback from the industry as it sought to implement the Dodd-Frank Act of 2010. Changes were made in response to an outcry from industry insiders and fear that the regulations would slow lending even further just as the nation is trying to come back from a major credit crisis. Now, to avoid double-counting payments that are already included in the APR, the following types of LO compensation are excluded from the 3-percent cap:
• Compensation paid by a creditor to its loan officers
• Compensation paid to a mortgage broker when that payment has already been included in the points and fees threshold
• Compensation paid by a mortgage broker to its employees, because that compensation is already included in the points and fees paid by the consumer or by the creditor to the broker
• More changes could be made to the cap on fees as the QM rules play out over their inaugural year, but the lower debt-to-income ratio has some mortgage brokers taking a harder look at their business practices.
Anthony Casa, president of Garden State Home Loans, Inc., a New Jersey-based mortgage brokerage that specializes in conventional mortgages in New Jersey, Pennsylvania, Delaware, and Connecticut, says that when the QM rules became public, he began researching how it would affect his business. What he found was alarming.
