Argument Against LO Comp Law Misses the Point

The mortgage industry continues to spin its tires thanks to a certain kind of sophomoric mindset: that just because consumers aren't directly harmed by a lender's actions, a certain policy or practice isn't ultimately harmful.

A video produced by National Real Estate Post attacking the Consumer Financial Protection Bureau's consent decree with RPM Mortgage perpetuates an unfavorable perception among regulators, lawmakers and the general public by relying upon inaccurate and self-serving assertions, as well as a self-contradictory analysis.

For instance, the video asserts that RPM did nothing wrong by creating expense accounts that were allegedly used only as point banks, and had no direct effect on loan officer compensation.

The CFPB has been clear since 2012 that point banks are illegal. Hence, arguing that enforcement actions against a point bank scheme is arbitrary and unfair disregards the fact that a point bank clearly violates established rules that many responsible lenders have been following for years.

Next, the video asserts the CFPB's actions were unwarranted because the bureau did not prove borrowers had actually been harmed. However, the statute plainly does not require consumer injury as a prerequisite to enforcement.

The CFPB has repeatedly stated that enforcement would be initiated to ensure a level playing field among lenders so as to avoid placing responsible lenders at a competitive disadvantage to those skirting the law. To complain that no consumer injury occurred adopts an obviously myopic view that flat-out ignores the statute.

The video goes on to claim that the CFPB was acting unfairly because RPM's point bank helped consumers. In reality, the reason a point bank is illegal is that it encourages originators to charge more to some borrowers so they can use those overages to benefit others — regardless of the stated intent that the point bank is to be used only for deserving borrowers or those with loans difficult to close.

By its very definition, some people are charged more than they need to be and those excess charges are allegedly passed on to others. Clearly, not everyone wins in that scenario. More likely, it prevents competition from driving down prices by overcharging some borrowers (typically those with less economic bargaining power).

While an argument could be made that economic bargaining power is an inherent capitalistic byproduct common in many industries, it's hard to legitimately argue a point bank is a good thing that helps most borrowers.

To be clear, I am not supporting the CFPB's actions or criticizing those of RPM. Nor am I supporting the rationale or wisdom of the compensation laws and/or regulations themselves.

However, I am criticizing commentaries that lack a true understanding of the laws, their structure, purpose and enforcement mechanisms — not to mention perpetuate misinformation that only serves to undermine the policies and practices of responsible lenders.

The video suggests that any creativity in compensation is futile, and supports an all or nothing view of compliance. Such impressions are unhelpful and inaccurate.

I have many clients that invested the resources to develop highly effective compensation systems that are also compliant.

The bottom line is that videos such as this only foster a stereotype that as an industry, we don't "get it." It is an unfavorable impression that we don't take the time, or have the willingness, to understand or have respect for the laws under which we operate.

Certainly, there are many times when harshly criticizing the actions of our government and regulators is appropriate. However, commentaries that adopt a blatant "hear no evil" attitude and that remain apparently unaware of the actual laws hurt responsible lenders and the industry as a whole.

Ari Karen is an attorney at Offit Kurman.