New Rules for Home-Loan Brokers, by Amy Hoak, WSJ.com


New rules governing how mortgage loan officers are paid for their work in originating home loans are meant to protect consumers and make it clearer how the mortgage professional is making money off the loan.

But some in the industry say the rules are creating new problems.

The Federal Reserve’s rules are aimed at limiting predatory lending. They prohibit loan officers from being compensated based on the loan’s terms and conditions other than the loan amount. For example, a loan officer can’t earn a higher commission for selling a mortgage with a 5.25% rate versus a 5% rate, says Tom Meyer, chief executive of J.I. Kislak Mortgage, a mortgage lender based in Miami Lakes, Fla.

Mortgage brokers and loan officers are prohibited from “steering” people into mortgages based on the compensation they’d receive. Another element effectively creates a rule on who pays a mortgage broker: Either the lender pays the broker directly or the consumer does — but both can’t pay for the services.

With the new rules, “consumers shouldn’t have to worry about brokers putting their own financial interest in front of the consumer’s,” says Kathleen Keest, senior policy counsel for the Center for Responsible Lending, a nonprofit consumer advocacy group. Unlike some in the industry, she says she doesn’t think the rules will increase borrowers’ mortgage costs.

Some in the industry also claim that the rules’ nuances put mortgage brokers at a competitive disadvantage — giving them less flexibility on compensation than large banking institutions — and it will ultimately usher more business to larger banks.

It’s a matter that held up the implementation of the new rules, which were supposed to go into effect April 1. The U.S. Court of Appeals issued an emergency stay at the last minute, in response to requests from industry trade groups. But after additional review, the rules went into effect April 5.

“I like the idea of a level playing field. I like the intent of structuring what is realistic for a loan officer to make,” says Lisa Schreiber, executive vice president of wholesale lending at TMS Funding, based in Milford, Conn. But some elements of the new rules, she says, could end up costing consumers more. A wholesale mortgage operation provides underwriting decisions and makes funding available to mortgage brokers.

One example of how consumers might be affected: A broker will lose some flexibility in altering his or her compensation, if it’s being dictated by the lender, Ms. Schreiber says.

“Say for whatever reason — maybe you were having a hard time getting documentation and you had to wait — the loan took longer than expected. There may be costs associated with that extra time. That was usually taken care of by the broker — that broker has been able to reduce his or her compensation,” Ms. Schreiber says. “With the new regulation, you as a consumer will have to pay for any fees. The broker will legally not be able to help you pay.”

Consumer advocacy groups, however, say these rules were needed to help protect consumers from unscrupulous loan officers unfairly trying to profit from mortgage loans, Ms. Keest says. It’s a practice that played a role in the mortgage mess that rocked the country, according to the Center for Responsible Lending.

“The new rules should mean that [the mortgage process is] more competitive, more transparent and should mean, overall, that it won’t be more costly for the simple reason that more transparency and lack of conflict of interest should mean it’s less costly,” Ms. Keest says.

Cameron Findlay, chief economist for LendingTree, an online marketplace that connects consumers with lenders, says compensation issues didn’t create the mortgage crisis.

“The crisis was created not by the origination of loans but the creation of loan types and securitization and sale of those structures to investors. Compensation was fuel on the fire, but did not create the fire,” he says.

Consumers in the market for a loan need to be extra vigilant about comparison shopping in the weeks ahead — making sure that what they’re being quoted and offered is competitive, Mr. Meyer says.

“In the short term, [the rules are] going to be so novel and so uncertain there may be a short-term cost to the borrowers,” he says. “I expect this is going to be a fluid environment in the next couple of months, with confusion about what is permissible and what is not.”

But this isn’t the only change the mortgage industry faces in the near future.

A proposal presented by federal regulators in March laid out a way to require banks to retain more “skin in the game,” or financial capital, when packaging and selling mortgage loans — a move to prevent some of the lending problems that arose and led to a meltdown in the credit markets. Also this year, there was a proposal on the future of Freddie Mac and Fannie Mae, the two government-sponsored enterprises currently under government conservatorship.

Both proposals, if and when they come to pass, may affect consumers, industry experts say. And one result may be that mortgages get more expensive.

Write to Amy Hoak at amy.hoak@dowjones.com

SBA opens 504 refinancing to more firms, by Kent Hoover, Portland Business Journal


The U.S. Small Business Administration will allow more businesses to refinance their commercial real mortgages through its 504 loan program.

The SBA initially restricted this new refinancing option to small businesses that faced balloon payments on their mortgages before Dec. 31, 2012. Beginning April 6, it will open the 504 refinancing option to businesses with balloon payments due after that date.

“With the collapse of the real estate bubble, many small business owners have found themselves unable to refinance as a result of inflated real estate values at the time they took out their mortgage,” SBA Administrator Karen Mills said. “SBA’s temporary 504 refinancing program was first made available to those small businesses with the most immediate need. Today’s step opens this critical assistance to more small businesses, giving them the opportunity to restructure their debt and free up capital that will be essential to keeping their doors open and also their future ability to grow and create jobs.”

The Small Business Jobs Act, which was enacted last September, allowed the 504 program to be used to refinance existing loans on owner-occupied commercial real estate through September 2012. To be eligible for refinancing, the mortgage must be at least two years old, and the business must be current on their payments for the past 12 months. Borrowers can refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower.

The SBA’s 504 loans are used to finance fixed assets, primarily real estate. Typically, a 504 project includes a first mortgage from a private-second lender that covers 50 percent of the cost, an SBA-guaranteed second mortgage from a certified development company that covers 40 percent of the cost, and 10 percent equity from the small business borrower.

Read more: SBA opens 504 refinancing to more firms | Portland Business Journal