CFPB Proposes Changes to Points and Fees, Loan Originator Compensation Provisions

by Ballard Spahr LLP
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As we reported in CFPB Monitor, the Consumer Financial Protection Bureau proposed changes earlier this week to the mortgage rules adopted in January 2013. Comments on the proposal are due July 22, 2013. Among other matters, the proposed modifications address the items that are included in points and fees under the ability-to-repay and high-cost loan rules, who is considered a loan originator for purposes of the January 2013 loan originator rule, and the effective date of the loan originator rule.

Points and Fees

In general, the revised concept of points and fees applicable to both the January 2013 high-cost loan rule and ability-to-repay rule does not provide that a covered item must be paid by the consumer to be included in points and fees. One exception is that compensation paid by a consumer directly to a mortgage broker is included in points and fees, unless the amount is already included in points and fees as part of the finance charge.

The CFPB proposes that charges falling within the definition of points and fees be treated as points and fees even if paid by a third party. For example, in situations involving the relocation of an employee, if an employer pays finance charges that are included in the definition, the charges would be treated as points and fees.

The CFPB also proposes the same approach for charges paid by the seller, with an exception. Based on the existing exception from the finance charge for seller's points, the CFPB proposes to exclude from points and fees seller's points to the extent that they are excluded from the finance charge under existing guidance. This guidance provides that "seller's points. . . include any charges imposed by the creditor upon the noncreditor seller of property for providing credit to the buyer or for providing credit on certain terms."

Existing guidance also provides that other finance charge items paid at or before consummation on the consumer's behalf by a noncreditor seller should be treated as seller's points, and thus excluded from the finance charge, if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. Further CFPB guidance is needed on exactly what constitutes a seller's point that may be excluded from points and fees, and on the interrelation of the exclusion for seller's points and the exclusion for bona fide discount points.

Regarding creditor-paid charges, the CFPB proposes that, subject to an exception, such charges are not included in points and fees. The exception is for compensation paid by a creditor to a loan originator that is not an employee of the creditor. Under the proposal, if, for example, the creditor paid title charges to an affiliated title company, the charges would not be included in points and fees.

Loan Originator

Based on industry input, the CFPB is proposing to modify the guidance in the January 2013 loan originator rule regarding the dividing line between administrative activities and loan originator activities.

  • Under the January 2013 rule, an employee of a creditor or loan originator does not become a loan originator by providing to a consumer contact information for a creditor or loan originator, if the employee does so in response to a request of the consumer, does not discuss particular credit terms available from a creditor, and does not, based on the employee's assessment of the consumer's financial characteristics, refer the consumer to a particular creditor or loan originator. The CFPB proposes to remove the requirement that the contact information be provided at the request of the consumer, and make additional changes that focus on whether the employee discusses certain loan terms, or directs the consumer to a particular creditor or loan originator, based on an assessment of the consumer.
  • As proposed, an employee providing contact information would not be a loan originator as long as the employee did not discuss particular credit terms selected based on the consumer's financial characteristics, and did not direct the consumer, based on the employee's assessment of those characteristics, to a particular creditor or loan originator seeking to originate loans to consumers with those characteristics. The proposed revision would, for example, permit a non-loan originator employee, such as a bank teller, to inquire if a consumer would be interested in speaking with someone about a mortgage loan, and simply provide the consumer with contact information for a single point of contact, such as the name and number of a sole individual or mortgage unit to which the employee could direct consumers for mortgage loans. If, as proposed, the CFPB removes the condition that the employee respond to the consumer's request, it should modify the heading to the applicable commentary section, which currently provides, "Responding to consumer inquiries and providing general information."
  • Under the January 2013 rule, an employee of a creditor or loan originator does not become a loan originator by providing a consumer with a loan application form at the consumer's request. The CFPB proposes to revise the guidance to remove the condition that the consumer request the application.
  • The CFPB also proposes to modify the January 2013 rule to make clear that discussing or advising a consumer on particular credit terms selected based on the consumer's financial characteristics constitutes loan originator activity. The CFPB explains in the preamble to the proposal that the concept of loan originator activity "does not extend to a person's discussion of general credit terms that a creditor makes available and advertises to the public at large, such as where such person merely states: 'We offer rates as low as 3% to qualified customers.'" For example, if an employee of a creditor merely mentions to a consumer general credit terms offered by a creditor, that would not make the employee a loan originator. It would be helpful if the CFPB expressly included this clarification in the rule itself.

Effective Dates of Loan Origination Rule Provisions

The January 2013 loan originator rule provides for an effective date of January 10, 2014. The CFPB proposes to move the effective date for most of the provisions to January 1, 2014, and set forth a revised approach to which transactions are subject to the rule. As proposed, the effective date for the various provisions would be as follows:

  • Section 1026.36(d), which includes prohibitions against compensation paid on loan terms or a proxy for loan terms, exceptions for contributions to tax-advantaged plans and payments under non-deferred profits-based compensation plans, and a prohibition against dual compensation. The provisions would be effective January 1, 2014. Except for section 1026.36(d)(1)(iii) regarding contributions to designated tax-advantaged plans, the provisions would apply to transactions that are consummated, and for which the creditor or loan originator organization paid compensation, on or after January 1, 2014. The date the application was received would be irrelevant. The rationale is that for purposes of compensation under non-deferred profits-based compensation plans, all transactions consummated in 2014 could be considered for paying compensation based on such a plan, even if the application was received in 2013.
  • Section 1026.36(d)(1)(iii), which provides the exception for contributions to designated tax-advantaged plans, would apply to transactions for which the creditor or loan originator organization paid compensation on or after January 1, 2014, regardless of when the transactions were consummated or the applications were received. The CFPB believes the change would clearly reflect its intent to allow payment of compensation related to designated tax-advantaged plans during 2013 under CFPB Bulletin 2012-2, and thereafter under the January 2013 rule.

The effective date for the following provisions would be January 1, 2014, regardless of when the application was received:

  • Section 1026.36(a)—definitions
  • Section 1026.36(b)—scopeSection 1026.36(e)—anti-steering provisions
  • Section 1026.36(f)—loan originator qualification requirements
  • Section 1026.36(j)—compliance policies and procedures for depository institutions

  • Section 1026.36(g), which addresses the requirement to include the loan originator name and identifier on loan documents, would be effective for applications received on or after January 1, 2014.

  • Section 1026.25(c)(2), which addresses specific record retention requirements for the January 2013 rule, would be effective January 1, 2014, although the CFPB does not address if the date the application is received is a factor.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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