Rusty Brown

The Federal Reserve and Dodd-Frank bill have resulted in some significant changes regarding how mortgage loan officers get paid by his or her employer. This will have effects on interest rates, mortgage availability to borrowers and significant effects on loan officers. For borrowers seeking a home loan some of the effects of this regulation will be good, and other bad.

The Dodd Frank regulations became effective yesterday, May 6, 2011, and now all loan officers cannot be paid based upon what interest rate given to an individual borrower and compensation may not vary based upon the terms of the loan, excluding loan amount. The loan officer must be paid a fixed percentage or dollar amount of ALL loans they close, and/or can be paid a set fee per loan, salary, or bonus (based upon loan volume within a 3 month period for example). For several years most big banks have paid their loan officers a fixed percentage of the loan amount. Mortgage brokers, independent mortgage lenders, and smaller or regional banks have generally paid a commission percentage of the revenues generated on each loan generated by the loan officer. Sometimes salaries and/or bonuses are also paid to loan officers. The upfront loan revenues generally for the lender on each loan were determined by the interest rate and any upfront fees (i.e. 1% loan origination fee) provided, and frequently were controlled by individual loan officer. The new regulations apply to 1^st and 2^nd lien closed end mortgages (not equity lines).

What brought the regulations about? A trickledown effect of the recession, housing market collapse and abusive mortgage practices. I would assume the big banks lobbying power has won with Congress and the Federal Reserve, as big bank loan officer compensation structure is now basically being mandated for all mortgage lenders. The same old thing has occurred here as the high percentage of good banks, mortgage companies, and loan officers are having to pay for the small percentage of bad entities tied to the mortgage industry. Generally the big banks keep more of the loan profits in house and pay loan officers less compensation per transaction than smaller/regional banks and independent mortgage companies.

Why is this good for borrowers? It stops the bad practice of a loan officer raising the interest rate for a particular borrower, in order to make more personal income from an individual loan. Unethical loan officers have tended to abuse borrowers for their personal financial gain. Ethical mortgage lenders and loan officers did not abuse borrowers to make extra income. The interest rate with lender A will be there offering rate and lender B's rate may or may not be the same for the same loan scenario. There will be almost no negotiating on interest rates between borrowers and loan officers. Loan officers cannot steer consumers into a loan that they do not have reasonable ability to repay (predatory lending) and are now prohibited from steering a borrower to a particular loan program because it would result in the loan officer making extra income (as compared to the best loan program to fit the borrower's needs). This should have been in effect a long time ago! Any additional lender premium above a lenders standard "par" rate must be given to the borrower in the form of a credit (i.e. the lender pays for some closing costs). A borrower can get a higher than "market" interest rate from a lender, in essence any differential lender or loan officer benefit due to higher rate must now be given back to the borrower. A borrower can still buy an interest rate down with discount points. I presume the overall intent of this regulation is good, but there could be numerous bad effects for borrowers.

How could this be bad for borrowers? A loan officer no longer has the ability to vary an interest rate to give a particular borrower a good deal. The rate a loan officer is the rate as determined by the bank or mortgage company, factoring in the borrowers loan amount, credit scores, type of loan program, debt ratio, etc. If a loan officer wants to meet a competitor's offering in order to get a customer's business, the loan officer has to go to company management in order to get approval, because the company has to give now and not the loan officer. I would expect management will be less inclined to give there money away, and management generally does not respond to a competitive situation as fast as an individual loan officer. At a minimum it has cost banks and mortgage companies a lot of money to restructure compensation plans, payroll systems etc due to these regulations being implemented by the government. Loan officers will have no means of covering the costs for interest rate lock extensions, so borrowers need to make sure and lock there loans with enough time to cover the time period needed for closing, and get all documents required by the lender in a timely manner to avoid paying for lock extensions. Interest rate lock extensions cost lenders money and these fees will be passed on to borrowers. It will take time to see if these new regulations result in higher interest rates to borrowers.

Is a loan officer required to offer the borrower various loan programs, interest rates and closing cost options? Yes. There is an anti steering provision in the new regulations that prohibits loan officers from steering a borrower to a particular loan program that in not in the best interest of the borrower. The loan officer is supposed to offer the low rate

Why do realtors need to know about this change? A good realtor knows at least the basics of home financing, how to identify if there borrower are being treated fairly by the lender. Since loan officers can only be paid from the either the built in lender to loan officer compensation or borrower paid loan origination fees (points), borrowers and realtors will see a significant reduction in the number loans with borrower paid origination fees. Borrowers can still buy an interest rate down with points. The two most important factors for realtors are to see that the clients interests are protected and that the loan closes on time with minimal problems and no surprises at closing.

Are the regulation changes good or bad for loan officers? Probably good for the loan officers that have historically made modest and reasonable fees on loans. The loan officers that have generally abused borrowers by making unusually high income on individual loans will probably take a major income hit. The abusers will probably now make less income per loan and will either have to do more loans, accept less pay, or get out of the mortgage loan origination business.

What factors should a borrower consider when shopping for a mortgage?

• Interest rate and term of the loan. Interest rate is not the sole factor in determining the best lender for a borrower.
• Loan program and is it the best program to suit the borrowers needs.
• Closing costs (fees for appraisals, underwriting, processing, closing attorney etc) can vary from lender to lender. The prepaid expenses should be the same on a specific loan, regardless of the lender.
• How long will it take the lender to close the loan, and will this timeframe meet the borrower's needs? Closing times vary greatly from lender to lender..
• Ability of the loan officer in accurately estimate the closing costs and prepaid expenses. Not all loan officers are created equal, just like any other profession. Is the estimate accurate regarding fees and is the estimate close to what will end up on the closing table, so the borrower does not have a cash due at closing surprise!
• Is the borrower better off with a lower rate higher fee loan, or higher rate lower fee loan? This is usually determined by how loan the borrower expects to keep the loan/home.
• Does the company offer all loan programs that are available? Not all banks and mortgage companies offer all programs available to the market.
• Does the borrower(s) trust the loan officer to handle this large financial transaction properly?
• Will a lender get underwriting approval for a borrower who does not have a contract and property address yet? This is a good thing for borrowers actively seeking to purchase a home.
• Any promotion (i.e. free appraisals on purchases etc)
• How did you find the loan officer? A recommendation from a realtor, friend or busienss associate who has previously used the services of the recommended individual is great way to located a lender / loan officer for your mortgage transaction.

Will these new regulations be good or bad for open market competition? Probably bad and we will see over time. If there are less lenders and loan officers in the market, then customer service will probably deteriorate, interest rates will probably rise and loan closing times may get longer. This will all be greatly influenced by the housing market purchase and refinance volume demands. The effect of this additional regulation on interest rates to borrowers is yet to be seen.

Why has the media not publicized this regulation? I have no clue. Considering the number of loan officers it could impact you would think that the media would have jumped on the story. I guess nobody wants to stand up and talk about additional government regulation and the potential negative effects this will have on borrowers looking to finance homes.

What's next? Conventional, FHA, VA, State Bond Programs (KHC), Rural Housing and other secondary market loans are still generally the best home financing option for home owners. Where will additional government intervention will go next, possibly to realtors, appraisers, home inspectors, real estate attorneys, title companies, other private industries? Are there any other private industries in the Unites States where our government dictates what basis an employee gets paid upon? What effects could it have on home loan availability and mortgage interest rates for borrowers? This regulation could drive a lot of loan officers and independent mortgage companies out of the mortgage business. There is currently a federal court case in an attempt to repeal these regulations, but the outcome is yet to be determined. The purging of bad players in any industry is a good thing and the mortgage industry definitely needed some purging due to bad players that have been in the business over the past 10-15 years. The question is how deep should our big brother reach with government regulations and will this significant mortgage industry change result in an overall net loss or gain for borrowers looking to finance a home purchase or refinance.

Any comments and loan referrals are welcome. I am available to discuss your loan needs 7 days per week. You may contact me via email at kentuckyhomeloan@yahoo.com or mobile phone (859) 312-4311. Rusty Brown - Loan officer located in Lexington, Kentucky.

CREDIT SCORING & CREDIT MANAGEMENT

Below is some information I have obtained through experience to help you manage your credit and better understand how credit scoring works, and how to get your credit into shape so that you can buy or refinance a home.

To make credit simple - You have to have positive/good trade lines on the report to offset negative trade lines (30-60-... day slow payments, collections etc.)

Credit history is credit history - the best approach is to start doings things from today forward that will impact your credit score in a positive manner, stop doing things that have negative impact, and figure out how to best clean up any errors on the credit report, starting with the most recently reported items.

The credit bureaus all weigh things differently, and the details of their particular scoring methods are proprietary information. Nobody has all the answers, neither I nor anyone else!

By current US law, mostly due to identity theft issues of our modern day world, you are entitled to one free credit report annually (at no charge without scores) from each of the 3 major credit bureaus. Go to www.annualcreditreport.com, or call 877-322-8228. These reports are direct from the credit bureaus and can be used to dispute credit report errors. You are also legally able to obtain a copy of your credit report used by a creditor (within a certain timeframe) anytime you are denied credit. All banks and mortgage brokers are required to disclose your credit scores when they pull credit.

The #1 best, or worst thing for your credit score is mortgages. A 30 or 60 day late payment can severly reduce your credit scores. Likewise paying a mortgage with no late payment for 12-24 months can do wonders for your score.

The #2 best, or worst thing is installment loans. Use banks for installment loans (i.e. auto) if possible, rather than "finance" companies.

The #3 best, or worst thing is revolving accounts (i.e. credit cards). Per what i have read at the bureaus websites, revolving accounts can contribute to up to 30% of your credit score. You take credit score hits (lowers your scores) for the number of revolving accounts open, especially for an excessive number of open accounts. You take score hits when the credit card balance goes over 25%, 50% 75% and over the credit limit - hits getting progressively worse. Paying balances below thresholds can quickly improve credit scores. This can have significant impact on your credit scores. 2 revolving accounts are ideal for best credit scoring, 0 or 1 or 3 or 4 result in a score hit. 5 or 6 give you a bigger hit, 7 or 8 etc - too many revolving accounts will negatively impact your scores. A person who has several credit cards with balances over 75% of the respectivew account limits will drastically reduce there credit score. Never close a credit card unless you have the balance paid in full. Adding yourself as an authorized user to someone else's credit card (who has a good pay history on the account) will no longer raise your credit score! The quick way to bounce your score in 30 days is to pay down credit card blances below 75, 50 or 25% of the account limits.

Collections will tank your score, so do pay attention to the medical bills in the mail etc as to avoid collections on your credit reports.

Anyone can fix their own credit (legally) for $0 online, by phone or mail with the credit bureaus. It just takes some time. The credit bureaus are required by law to respond to your disputes with 30 days. You do not have to pay someone to legally cleanup, or improve your credit profile. Some people prefer to pay a third party to repair there credit. Use causion if you do this.

You quite often can negotiate your interest rates and collection balances directly with the creditors - make a phone call when you are ready to pay or settle. I suggest you thoroughly check out any service that says they can repair your credit - all you can do is clean negative things up and build your credit score back up with positive trade lines and time. Some credit repair companies do thing legally, and some don't. If a credit bureau senses that a third party is involved in a credit dispute, they have the right to ignore the dispute in question!

New accounts do result in a temporary dip in credit score. Old trade lines (with a good payment record) do help your score (longer credit history and / or accounts opened for longer periods of time help). The longer the "good" credit history, the better.

Most recently reported negative items have the most impact (i.e. the last 6 months, then months 7-12, then 13-18, then 19-24). Depending upon the particular credit profile mix, items last reported over 24 months ago may have minimal impact on the credit score.

Any activity on your credit report can potentially cause the score to change, up or down.

Excessive credit inquiries temporarily pull down your score. Some credit pulls are ok, but excessive pulls will bring down your scores. This is tracked for the last 90 days and the last 12 months by the bureaus.

Nobody knows-it-all about credit scoring except for the credit bureaus themselves. All I, or anyone else can do, is provide you advice based upon personal experience and past observations!

I suggest you go to the three credit bureau websites for additional information on understanding and managing your credit - www.transunion.com , www.experian.com , and www.equifax.com. Also go to www.ftc.gov/ftc/consumer.htm for a government brochure on how to dispute credit report errors. Utilize the website www.annualcreditreport.com to get your free reports (without credit scores) once every year.

My objective is to help all clients obtain the lowest interest rates possible and the mortgage loan program that best fits their individual needs! The above credit advice is offered as a courtesy with no guarantees for results given or implied. The above information is offered as a courtesy to assist individual in understanding and managing their credit. Please call or email if I may be of assistance, and I hope you will rely on me to assist you with your next mortgage!

I do residential home loans in all 50 US States. Purchase or refinance single family and 2 unit. Please email or call if you have any questions. Rusty Brown mobile (859) 312-4311 email: kentuckyhomeloan@yahoo.com

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