CFPB Issues Final Rule on Loan Originator Compensation Requirements

by Ballard Spahr LLP
Contact

The CFPB has issued a final rule to incorporate Dodd-Frank requirements into the existing Regulation Z loan originator compensation rule that applies to mortgage loans. The final rule, issued January 20, 2013, also implements Dodd-Frank qualification requirements for bank employee mortgage loan originators, as well as the Dodd-Frank prohibition on mandatory arbitration clauses for mortgage credit agreements. The final rule is effective January 10, 2014, although the mandatory arbitration prohibition is effective June 1, 2013.

The final rule does not address the Dodd-Frank provisions that require the CFPB to adopt regulations prohibiting steering and various related types of conduct. The CFPB advises that because Dodd-Frank expressly requires the adoption of regulations to establish the prohibitions, the CFPB “believes that the substantive prohibitions cannot take effect until the regulations establishing them have been prescribed and taken effect.” The CFPB indicates that it will address such regulations in a future rulemaking.

Term of the Transaction

The current loan originator compensation rule prohibits basing compensation on a term or condition of a transaction or a proxy for a term or condition of a transaction. An exception permits basing compensation on a fixed percentage of the transaction amount, and the compensation may be subject to a minimum and/or maximum dollar amount.

The final rule continues the prohibition and exception, although the final rule removes the reference to a “condition” of the transaction and defines a “term” of a transaction as any right or obligation of the parties to a credit transaction. A term would include, for example, a consumer being steered by a loan originator to purchase required title insurance from an affiliate of the loan originator, because the borrower would be obligated to purchase title insurance in connection with the loan.

The following fees or charges are a term of the transaction, if the fees or charges must be disclosed in the Good Faith Estimate or Settlement Statement under RESPA (or in any integrated TILA/RESPA disclosure adopted in the future by the CFPB):

  • Loan originator or creditor fees or charges for the credit or for a product or service provided by the loan originator or creditor that is related to the extension of credit
  • Fees or charges of other parties for any product or service required to be provided as a condition of the extension of credit

Nevertheless, a requirement to disclose a fee or charge in the Good Faith Estimate or Settlement Statement, by itself, does not make the fee or charge a term of the transaction.

Proxies

The final rule provides greater detail regarding what constitutes a "proxy" concerning the prohibition under the existing rule against basing compensation on a loan term or a proxy for a loan term. Under the final rule, a factor is a proxy for a loan term if it consistently varies with a transaction term over a significant number of transactions and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. The final rule includes illustrations demonstrating a factor that is and is not a proxy, and removes from the current rule the example of a credit score being a proxy.

Complete Exemption Adopted in Lieu of Zero-Zero Alternative Proposal

Consistent with the existing loan originator compensation rule, Dodd-Frank prohibits the receipt of compensation by a loan originator from both the borrower and the creditor. Dodd-Frank further provides, however, that if a creditor pays a loan originator, the consumer may not pay any discount points, origination points, or origination fees, other than bona fide third-party fees that are not retained by the creditor, loan originator, or affiliate of either, unless the CFPB adopts an exemption.

In the proposed rule, the CFPB included a conditional exemption for creditor-paid compensation situations that would preclude the creditor from offering a loan with any points or fees unless the creditor also offered the borrower a loan without points and fees (provided the borrower would qualify for such a loan). The proposal was known as the "zero-zero alternative" and was widely criticized by industry representatives.

The CFPB decided not to adopt the zero-zero alternative. It adopted a complete exemption under which a creditor may impose points and fees on a consumer in cases in which the creditor will pay compensation to a loan originator, as long as the consumer does not also pay a loan originator. The CFPB plans to study further issues regarding a creditor’s imposition of points and fees when the creditor pays loan originator compensation. Future rulemaking in this area is possible.

Compensation-Based Multiple Originators' Transactions or Profits

The CFPB believes that the compensation of a loan originator should not be based on the terms of such originator’s credit transactions or the credit transactions of multiple originators, and views compensation based on mortgage-related profits to be compensation based on multiple loan originators’ transactions. The final rule expressly prohibits compensation based on multiple transactions of a single loan originator or multiple transactions of multiple loan originators (including compensation based on profits), but contains certain exceptions to this provision.

The final rule permits compensation to a loan originator in the form of a contribution to a defined contribution plan, or a benefit under a defined benefit plan, which is a designated tax-advantaged plan, such as a 401(k) plan. A contribution to a defined contribution plan, however, may not be based on the terms of the individual loan originator’s transactions.

The CFPB initially provided guidance in this area by issuing Bulletin 2012-02 in April 2012. The Bulletin provides that loan originators may participate in tax-advantaged retirement plans, such as 401(k) plans, in which their employers make contributions from mortgage business profits. The industry may continue to rely on the Bulletin pending the effective date of the final rule.

The final rule also permits a loan originator to receive payments under non-deferred profits-based compensation plans, provided that the compensation is not directly or indirectly based on the terms of the individual loan originator’s transactions and either the compensation under the plan does not exceed 10 percent of the individual loan originator’s total compensation for the applicable period, or the individual loan originator was an originator for no more than 10 transactions during the preceding 12 months.

This approach varies from the proposed rule, under which the CFPB proposed that a loan originator could receive compensation from a bonus or other plan as long as mortgage-related profits were no more than either 25 percent or 50 percent of the profit pool, or the loan originator was an originator for no more than five transactions during the preceding 12 months.

Compensation for Non-Loan Origination Activities

The final rules clarifies that amounts received by a company that acts as a mortgage broker in a transaction (which is referred to as a “loan originator organization”) and its affiliates for non-loan origination activities are not compensation for purposes of the rule. The final rule provides that compensation does not include a payment received:

  • By a loan originator organization for bona fide and reasonable charges for services it performs that are not loan origination activities
  • By an affiliate of a loan originator organization for bona fide and reasonable charges for services it performs that are not loan origination activities
  • By a loan originator organization for bona fide and reasonable charges for services that are not loan origination activities when those amounts are not retained by the loan originator but are paid to the creditor, its affiliate, or the affiliate of the loan originator organization

The industry had urged the CFPB to take this approach, arguing that the consumer is protected based on the requirement that the charge for the non-loan origination activity, such as a charge for title insurance, must be bona fide and reasonable.

Pricing Concessions

The final rule includes an exception to the prohibition against reducing a loan originator's compensation to offset a cost in connection with a transaction. Loan originators may reduce their compensation in certain cases to cover an unexpected increase in a settlement cost that was previously disclosed or an unanticipated settlement cost that was not previously disclosed.

Originator Qualifications/ID Numbers on Loan Documents

Dodd-Frank amended the Truth in Lending Act to require that loan originators be “qualified” and, where applicable, registered or licensed under the SAFE Act and other applicable law, and include their identification number assigned by the National Mortgage Licensing System and Registry (NMLSR) on loan documents.

Under the final rule, each loan originator that is not required to be licensed and is not licensed as a loan originator under federal or state regulations implementing the SAFE Act (e.g., a loan originator employed by a depository institution) must be subject to criminal background standards and financial responsibility, character, and general fitness standards similar to those that apply to licensed loan originators. Such a loan originator also must receive training covering federal and state law requirements that apply to the loan originator’s loan origination activities. The final rule includes special provisions regarding circumstances in which a criminal conviction disqualifies an individual from serving as a loan originator, and when a criminal background or credit check is required.

The final rule requires the inclusion of a loan originator’s name and NMLSR identification number on the credit application, note, or loan contract, and security instrument. The CFPB had proposed that the NMLSR identification number also be included on the Good Faith Estimate, Settlement Statement, and early and final Truth In Lending Act disclosure statements.

The CFPB is working on the integrated disclosure rule that will replace those disclosures with new combined disclosures. It decided not to require that creditors make additional modifications to the existing disclosures to incorporate the loan originator’s name and NMLSR identification number. The final integrated disclosure rule will address the inclusion of the loan originator’s name and identification number in the combined disclosures.

Mandatory Arbitration

The final rule implements the Dodd-Frank prohibition on the inclusion of a mandatory arbitration requirement in any contract or other agreement for a consumer credit transaction secured by a dwelling.

Ballard Spahr’s Mortgage Banking Group is examining the final rule and will cover the rule, among others, in our January 30, 2013, webinar, “Top 10 Takeaways from the Ability-To-Repay/QM, Servicing, and Loan Originator Compensation Rules.”

The Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr’s Consumer Financial Services Group, which produces CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right.

For more information on the loan originator compensation rule, contact Richard J. Andreano, Jr. at 202.661.2271 or andreanor@ballardspahr.com, John D. Socknat at 202.661.2253 or socknatj@ballardspahr.com, or Michael S. Waldron at 202.661.2234 or waldronm@ballardspahr.com.

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.