The relationship between the regulated and the regulator is not often a good one. Those who are regulated want to do things – wild things, irresponsible things, untenable things, which is why they need someone with a good waggly finger. And those who are regulators cry out, “Egad!” and industriously scribble down prohibitions against doing anything even remotely interesting.

This, of course, explains why for the past three years mortgage loan originators have been unable to pay out of their own pocket small expenses for borrowers.

Let’s say, for example, that a consumer gets hit late in the closing cycle with a $45 fee for an extra look at the credit report. The MLO thinks that’s going a little overboard, and wants to cover the cost for the borrower. No dice: there are federal rules against that sort of thing.

When the Dodd-Frank Act came into play, regulators trussed up MLO compensation tighter than Snidely Whiplash roping Nell to the train tracks. To be fair, there was a bit of concern that, over the years, some mortgage originators had steered some borrowers toward higher cost loans, because they were given big financial incentives to do so. (There’s one of those wild, irresponsible, untenable things.)

So, once Congress got smart to the idea that commissioned salespeople would drift toward the biggest commissions possible, they quickly put the kibosh on that for mortgage salespeople. Congress has so far left consumers at the local Ford dealership or Best Buy to fend for themselves.

In straight-jacketing MLOs, though, the regulators have mostly left a lot of common sense behind. For argument’s sake, let’s accept that originators should be made agnostic over what kind of mortgage a consumer gets. The MLO benefits strictly on the amount of money financed, not on the interest rate, other fees charged, or on anything else. Take the amount of money financed, apply the commission rate, and that’s what the MLO takes home. Period.

It’s the period that’s causing the problem.

Mortgage Monsters

Unlike the Grimm’s Fairy Tale version of mortgage originators as beastly ogres waiting to feast on the bones of Hansel-and-Gretel Homebuyer, most are decent people who take pride in helping clients achieve their dream of buying a house. They work hard to get people loans, and then they work even harder to get those loans through the processing mill, all the way to closure.

Throughout the application ordeal, they’re talking to their customers, easing them through the stressful situation, helping them understand why the underwriters want copies of their grandmothers’ immigration records. The potential borrowers have been supplied a Good Faith Estimate showing the closing costs and fees. And then, near the end, some functionary somewhere sends in a couple extra bills for a credit review, or photocopying charges, or because it’s Tuesday. And rather than sock the nervous borrowers with an extra $50, or even $150, charge, the loan originator agrees to simply lower his commission by the amount.

Only he can’t. Because that’s not how the law works these days.

This is, of course, a ridiculous situation; yet that’s what happens with Big Omnibus Bills like Dodd-Frank. Everything gets thrown in without full understanding of the implications, and then we get to spend years bringing it all back to common sense.

In Congress, California Rep. Gary Miller is trying to push through a bill that would make it legal for loan originators to pay as much as 30 percent of their earned compensation toward the borrower’s costs. In addition to setting up the ridiculous need for a bill like Miller’s, Dodd-Frank also created the Banker’s Bogeyman, more formally called the Consumer Financial Protection Bureau.

In recent hearings, Miller pressed CFPB Director Richard Cordray on the topic, since the CFPB is finalizing the ins-and-outs of the compensation rules. No one in the financial community expects the bureau to be anything other than a stickler for every regulation imaginable. But Cordray was reasonable, and pithy.

“On its face, it sounds fairly sensible,” he said simply.

If any change does get made, it won’t be until next January. But in the meantime, maybe MLOs can find hope in another recent move from the bureau.

Since originators can’t get compensation from any part of the loan that isn’t based solely on the loan amount, they’ve also been barred from participating in their company’s qualified profit sharing, 401(k) and employee stock option plans. If the company is funding those plans with profits made from things like, oh say, the interest charged on a mortgage, then the originator can’t get any of it.

While it’s possible that some firms might set up bogus “bonus pools” to skirt the MLO comp rules, they certainly wouldn’t use qualified profit-sharing and retirement funds (it’s too hard to get the money out). And on April 2, the CFPB came out and said just that. It’s now allowing hardworking mortgage salespeople to contribute to a qualified company retirement plan without fear that they’re going to be pilloried.

For once, a regulator actually scribbled out prohibitions against the regulated. Egad!

Vincent M. Valvo is president of Agility Resources Group. Email: vvalvo@agilityresourcesgroup.com