New federal regulations concerning mortgage broker compensation aren’t set to kick in until April 1, but they’ve already got brokers worried. Some are even going so far as to speculate the reforms could be the final straw for the brokerage model itself.

“The reason people came to the brokers was service, and our ability to give service has been affected all over the board,” said Victor Manganiello, owner of First Boston Mortgage in Woburn. “There’s really a question about whether the broker model will even work in 2011. Right now there’s not a very good prognosis.”

The rules take aim at the longstanding industry practice of paying yield spread premiums, or varying the rate at which a broker is compensated depending on the terms of the loan.

Critics say tying broker paychecks to yield spread premiums led to widespread consumer exploitation during the housing boom, with fast-talking brokers beguiling consumers into loans with hefty prepayment penalties and other non-consumer-friendly features. Federal regulators seem to agree, issuing rules this summer mandating lenders pay brokers fixed fees which do not vary with interest rates. In this way, supporters of the reforms argue, there is no incentive for brokers to talk consumers into more expensive loans.

But brokers say that used properly, yield spread premiums are a vital tool, helping borrowers close loans without laying out tons of cash in upfront fees – enabling them to take a higher rate in exchange for lower closing costs.

Under the new rules, borrowers will still be able to pay points to obtain lower interest rates, but they’ll have to front more of the broker’s fee themselves.

What Happens In Vegas

But of greater concern to brokers are the ways in which the rule will change the relationship between them and their investors. Little guidance on how to implement the new rule has been forthcoming from regulators, brokers say.

“Even though this regulation is coming down April 1, it’s all up in the air,” said Jaclynn Sulfaro, president of the Massachusetts Mortgage Association.

That leaves it up to lenders to decide what criteria they’ll use to judge broker performance, and compensation. In recent weeks, lenders have begun to reach out to brokers to let them know how they’re interpreting the new rules, brokers told Banker & Tradesman. Though much remains to be decided, brokers say many lenders they work with have indicated they’re planning to judge broker performance by volume.

But the volatility of the mortgage market makes that an unfair metric, said Sulfaro.

“It’s like going to Las Vegas to try and determine what your loan volume’s going to be per month,” she said. “The economy’s a factor, property values are a factor [and] interest rates are a factor.”

Complicating matters is the fact that each investor seems to be coming up with its own criteria.

“Some of our investors have said, ‘we’re going to look at what your gross income has been over the year, we’re going to then divide that with your total volume that you’ve done in millions of dollars,’” with rates to be recalculated on a rolling basis every 90 days, said Richard Bettencourt, manager of Mortgage Assistance Co. in Danvers.

‘Enough’s Enough’

But compensating brokers based on the amount of loans they close for a certain lender means those same brokers will likely be less open to working with new entrants into a given marketplace.

“A bank that may be coming into the market that is aggressive, maybe has better rates, [but if] I haven’t used them and don’t have a broker compensation plan with them, I don’t know how they’re going to pay me because I’ve never done work with them before,” Bettencourt said. “Whereas, if I have an established relationship with an investor that I’ve done business with for years, I know what my compensation’s going to be.”

Worse still, basing compensation purely on volume will make it harder for small, independent brokerages.

“It really takes the small business people out of the picture, if the larger players get better structures,” because they have more volume, said Manganiello.

Brokers said the uncertainties have made it difficult to hire, even during the recent refi boomlet, and they feel beleaguered.

“Who is the government to determine how much money you make? Are they going to regulate football player and baseball players and say ‘You can’t make $10 million a year’? It really is ludicrous,” said Sulfaro. “It’s like someone’s out to get the brokers and get rid of them all together. Enough’s enough."