The Consumer Financial Protection Bureau announced yesterday that it will propose residential mortgage loan origination standards this summer, with a goal of adopting final rules in January 2013. The standards will address the compensation of loan originators, the charging of discount points and origination points and fees, and uniform qualification requirements for individuals who are loan originators.
The proposal will implement a portion of the loan originator compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which are similar in some respects to a loan originator compensation rule adopted by the Fed in 2010 under the Truth in Lending Act.
Although the CFPB proposal will address the compensation of loan originators and certain other issues, it will not address the Dodd-Frank provisions that prohibit steering by loan originators. The CFPB plans to address the anti-steering provisions “at a later time.”
The important elements of the proposal under consideration by the CFPB are:
Under the SAFE Act loan originator employees of depository institutions must be registered and loan originator employees of non-depository institutions must be licensed, and the requirements for licensing are more onerous. In particular, to obtain a license an originator must (1) not have a felony conviction, (2) demonstrate appropriate character, fitness and financial responsibility, (3) satisfy education requirements and (4) pass a test.
The CFPB is considering requirements that originators employed by depository institutions must meet character, fitness, and criminal background standards equivalent to the standards for obtaining a license, and that the depository institutions provide appropriate training to the originators commensurate with the size and mortgage lending activity of the institution.
Points and Fees
Dodd-Frank provides that a consumer may pay a loan originator’s compensation, but a creditor could not pay a loan originator’s compensation unless the consumer did not pay any loan originator compensation and also did not pay any upfront discount points, origination points or fees, other than bona fide third-party charges, except as permitted by a regulatory exception.
The CFPB is considering an exception under which a creditor could pay loan originator compensation as long as (1) the consumer does not pay any originator compensation, (2) if the consumer pays any discount points, the points must be bona fide (pursuant to standards that the CFPB is developing under the ability to repay requirements) and the creditor also must offer the option of a no discount point loan, (3) if the consumer pays any origination fees, the fees are “flat” and cannot vary with the size of the loan, and (4) any upfront fees paid to an affiliate of the creditor or loan originator are also “flat” and cannot vary with the size of the loan, except payments for title insurance which can vary based on the loan size.
The CFPB, thus, is considering an exception that would prohibit the common percentage-based loan origination fee in cases in which the creditor paid compensation to a loan originator. It is unclear if the CFPB understands that it is common practice for lenders to offer a range of rate and discount point combinations for a given loan.
The existing loan originator compensation rule prohibits the compensation of a loan originator based on the terms or conditions of a loan, or on a proxy for the terms or conditions of a loan. The CFPB acknowledges the uncertainty created by the proxy restriction, and is considering establishing a test for whether a factor is such a proxy.
Under the test, a factor would be a proxy for a loan term or condition if (1) the factor substantially correlates with a loan term, and (2) the loan originator has discretion to use the factor to present a loan to the consumer with more costly or less advantageous term(s) than the term(s) of another loan available through the originator for which the consumer likely qualifies. It appears that further guidance will be needed for companies to better understand how to assess factors under the test.
Compensation Based on Profits
The Fed staff interpreted the existing loan originator compensation rule to prohibit the compensation of loan originators based on mortgage-related profits. The CFPB is considering proposals that would permit loan originators to be compensated based on mortgage business profits subject to various restrictions, but compensation to a loan originator based on profitability of the loans he or she originates would not be permitted consistent with guidance provided in Bulletin 2012-02.
The CFPB is considering an exception for various qualified retirement and related plans. The CFPB also is considering exceptions that would permit compensation through bonuses, or through qualified or non-qualified plan contributions, based on profits if the total mortgage revenue portion of the profits was limited, and/or both the number of loans made by an originator and the proportion of the originator’s loans as compared to the loans made by the company were below certain levels (no specific levels are proposed).
Under the existing loan originator compensation rule, a loan originator may not reduce his or her compensation or pay for a borrower cost as a method of providing a pricing concession to the consumer. The CFPB is considering a proposal that would allow a loan originator to cover unanticipated increases in third party settlement charges, if the charges are not controlled by the originator, creditor or an affiliate of either, and the charges exceed or are in addition to amounts disclosed in the Good Faith Estimate.
The Fed staff interpreted the existing loan originator compensation rule to prohibit various arrangements, often called “point banks,” under which a loan originator could apply credits to adjust the standard pricing on a loan. The CFPB is considering a proposal that would define point bank arrangements as “compensation” for purposes of the loan originator compensation provisions, and that would provide guidance on circumstances in which the awarding of points to originators would not violate the provisions.
The CFPB is considering an approach under which a creditor could contribute to a point bank if (1) the creditor does not base the amount of the contribution for a given transaction on the terms or conditions of the transaction, (2) the creditor does not change its contributions to the point bank over time based on terms or conditions of the originator’s loans, or on whether the originator overdraws the point bank, and (3) if the originator may overdraw the point bank, the creditor does not reduce the originator’s commission on a transaction when he or she does so.
The CFPB interprets the Dodd-Frank loan originator compensation provisions to prohibit a mortgage brokerage firm from paying compensation to a loan originator employee based on a specific loan transaction, such as a commission based on the loan amount, if the consumer pays compensation to the brokerage firm. The CFPB is considering an exemption that would permit a mortgage brokerage firm to pay compensation to a loan originator employee based on a specific transaction as long as the conditions noted above on upfront points and fees that would permit a creditor to pay originator compensation are met.
A summary of the issues being considered by the CFPB is set forth in an outline to be used by a Small Business Review Panel being convened pursuant to the Small Business Regulatory Enforcement Fairness Act.
The CFPB also presents questions on which it seeks comments from small business representatives.
The issues being considered by the CFPB will be addressed during a Loan Originator Compensation presentation at the upcoming MBA Legal Issues Conference in Palm Springs, California, May 20 to 23, 2012, and Richard J. Andreano, Jr., a Practice Leader of the firm’s Mortgage Banking Group, will participate in the presentation.
Ballard Spahr's Mortgage Banking Group 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. It is part of Ballard Spahr’s Consumer Financial Services Group, 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 (including pioneering work in pre-dispute arbitration programs).
The Consumer Financial Services Group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments.
For more information, please contact one of the Practice Leaders of the Mortgage Banking Group—Richard J. Andreano, Jr., at 202.661.2271 or firstname.lastname@example.org; John D. Socknat at 202.661.2253 or email@example.com; or Michael S. Waldron 202.661.2234 or firstname.lastname@example.org.
Copyright © 2012 by Ballard Spahr LLP.
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