Mortgage Brokerages Boom: What the CFPB’s New Scrutiny Means for You!
Exciting times are here for the broker channel in the mortgage world! Recent estimates reveal that brokers now make up a whopping 18.2% of first-lien mortgage originations as of the second quarter of 2024. That’s a leap from 16.9% just a year prior and a dramatic rise from the all-time low of 9.8% in 2014. The momentum is undeniable!
Decoding LO Compensation
As our beloved broker channel grows, so does the spotlight on it from regulators. Industry insiders are buzzing with anticipation about upcoming audits from the CFPB, which are expected to clarify lingering questions surrounding compensation structures, particularly the unique arrangements between lender-paid and borrower-paid compensations.
With the voice of the industry, Jonathon Haddad, chairman and CEO of the Association of Independent Mortgage Experts, passionately supports these audits, declaring they’re “long overdue.” He believes this will shine a light on the high integrity of broker owners who prioritize their clients’ needs.
“The professionals I’ve talked to are committed to doing right by their clients, and I trust these audits will reflect that,” Haddad stated. “The current focus has largely been on compensation structures, a vital area that needs clarity.”
It’s essential to note that the Dodd-Frank Act allows mortgage brokers to earn their keep from lenders, but those contracts get renewed every three months. Borrowers also have the option to pay fees directly, fostering a space for negotiation and choice.
Interestingly, borrower-paid compensation often comes in at 50 to 100 basis points lower than lender-paid compensation, giving Loan Officers (LOs) a competitive edge in the bustling marketplace.
While regulations clearly ban dual compensation from both borrower and lender and forbid tying compensation to transaction terms, the murky waters remain regarding when LOs can switch between these compensation structures.
“Competition is a win for consumers, and we should empower brokers to credit consumers,” said Thuan Nguyen, CEO and founder of Loan Factory. “However, the rules are incredibly vague, creating risk for mortgage brokerages. We hope for clearer guidance from regulators.”
Colgate Selden, a founding member of the CFPB, sheds light on another facet of this evolving scenario. He notes that some firms restrict LOs from switching compensation models after key stages in the process, like after disclosures are issued, due to associated risks — a situation that hasn’t been fully explored.
The CFPB is also keeping an eye on whether brokerage firms funnel most of their loans to a single wholesale lender while claiming to shop around for the best deals.
This heightened scrutiny follows a contentious class-action lawsuit against United Wholesale Mortgage (UWM), the giant in the wholesale lending sphere, alleging deceptive practices in collusion with brokers. UWM has vehemently denied these claims, dubbing them a “sham.”
“If you’re brokering 99% of your loans to just one lender while advertising a range of options, that mirrors the kind of misrepresentation that led to the 2008 meltdown,” Selden cautioned.
Experts suggest that a smart move for brokers would be to partner with at least three different lenders — more than simply offering three products from a couple of lenders. This could truly safeguard against regulatory issues.
“We’re advocating this strategy widely,” emphasized Sweeney. “Most brokers operate this way, but it’s essential to ensure genuine competition from multiple lenders.”
As the wholesale lending market witnesses growing concentration, with UWM and Rocket Mortgage leading the charge, the demand for more diverse lender options is louder than ever. Brokers appreciate these giants for their cutting-edge technology, stellar service, and competitive pricing.
At Loan Factory, Nguyen proudly shares that his brokers collaborate with 200 lenders and leverage a pricing engine to compare various options. Yet, perplexingly, 40% of their loans end up with a single lender.
“We’re bolstering our compliance team to tackle this,” Nguyen added. “If the CFPB steps in, we’ll need to allocate even more resources to ensure compliance.”
What’s Next for the CFPB?
Industry experts speculate that significant changes could be on the horizon for the CFPB, particularly with a new administration. Even influential figures like Elon Musk have called for the dismantling of the CFPB as part of a broader critique of government spending.
“Typically, once a regulatory body initiates an examination, the incoming administration allows it to unfold,” explained Selden. However, he noted that there have been instances in the past where enforcement actions were halted. “I suspect the new administration will still want to gather data to monitor market trends.”
Yet, caution is advised.
“If any broker is hoping that a new administration will magically resolve their compliance issues, that’s a risky strategy,” warned McKay. “Changes within the CFPB are imminent, but the shifts we see in the broker channel are much more significant than any changes in regulatory behavior.”
