"Point Banks" will not be allowed with new Fed Rule.

A mortgage industry proposal to create "point banks" that loan officers can tap to grant price concessions to borrowers will not be allowed by Federal Reserve Board staff. The days of the loan officer paying for a closing cost item at the closing tabel to save a deal are over.

The Fed's loan officer compensation rule does not allow loan officers to lower their commission to cover a concession – which led to an industry proposal to take 10 basis points from every loan transaction, put that cash in a "point bank" or use overages to offer borrowers a better deal.

The Federal Reserve staff concluded that overages are tied to the terms and conditions of the loans, which would violate its new compensation rule, which goes into effect April 1.


Taking 10 bps from every loan transaction amounts to spending the loan officer's previously earned compensation. That would violate the rule because the LO is bearing the cost of the price concession, according to Fed senior attorney Paul Mondor. "We have yet to hear a variation on the theme of point banks that we think really can succeed under this rule," Mondor said during Thursday's Fed webinar on LO comp.

This interpretation also makes it difficult for managers to penalize LOs for mistakes and errors. The Fed has ruled that mortgage companies cannot dock a loan officer's compensation if they incorrectly calculate closing costs and exceed the tolerances of the RESPA good faith estimate.

If RESPA "forces you" to lower the closing costs to the consumer – that's a pricing concession to the consumer, Mondor said. "A loan officer or originator cannot be made to bear that cost," he added.