The Consumer Financial Protection Bureau has confirmed that Regulation Z (which implements the Truth in Lending Act) does not prohibit mortgage loan originators from participating in qualified profit-sharing 401(k) or employee stock ownership plans (Qualified Plans).
Issued on April 2, 2012, Bulletin 2012-02 addresses the loan originator compensation rule in Regulation Z adopted by the Federal Reserve Board in 2010 and which applied to mortgage loan applications received by lenders on or after April 6, 2011. Rulemaking authority for Regulation Z transferred from the Fed to the CFPB on July 21, 2011.
The rule prohibits the receipt of compensation by a loan originator that is based on the terms or conditions of a loan, or on a proxy for the terms or conditions of a loan. The Fed staff had informally advised that profits were considered a proxy for loan terms or conditions, thereby raising concerns about the legality of loan originator participation in Qualified Plans funded with mortgage lender profits. Apparently, the FDIC had informally taken the position that the compensation rule prohibited the participation of loan originators in Qualified Plans.
In the Bulletin, the CFPB advises that the current loan originator compensation rule permits “employers to contribute to Qualified Plans out of a profit pool derived from loan originations.” To emphasize the point, the CFPB also advises that the rule allows financial institutions to “make contributions to Qualified Plans for loan originators out of a pool of profits derived from loans originated by employees.”
The CFPB is currently working on rules to implement the loan originator compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. If final rules are not adopted by January 21, 2013, the Dodd-Frank provisions become self-effectuating on that date. Rather than wait for adoption of the final Dodd-Frank rules, however, the CFPB decided it was important to issue the clarification now.
The CFPB notes in the Bulletin that it has also received inquiries about how the Regulation Z compensation rule applies to profit-sharing arrangements or plans that are not Qualified Plans. The CFPB advises that it “does not believe it is practical to provide guidance in this Bulletin about such plans,” observing that many of those inquiries “have been fact-specific.” The CFPB indicates that it anticipates “providing greater clarity on these arrangements” in connection with its proposed Dodd-Frank rule on loan origination compensation.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions.
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