Summary

The CFPB issued final rules reducing the financial incentives for loan officers and brokers in "risky and high-cost" consumer loans and toughening qualification standards for loan originators. In addition, the final rules restrict mandatory arbitration clauses, thereby curtailing certain class-action defenses.

On January 20, 2013, the CFPB issued its final rule amending Regulation Z and implementing key provisions of the Dodd-Frank Act governing mortgage loan originator compensation and qualification requirements. This rule follows on the heels of recent CFPB rules concerning mortgage servicing standards. According to the CFPB, the rule aims to protect consumers by reducing incentives for mortgage brokers and loan officers to steer consumers toward loans with particular terms, and to ensure that loan originators are sufficiently qualified.

TILA's Regulation Z already prohibited basing a loan originator's compensation on the terms and conditions of the loan transaction. It also prevents a loan originator from receiving compensation directly from the consumer in connection with a mortgage loan and from another party (e.g., the creditor) in the same loan transaction. The CFPB's amendment nevertheless stiffens Reg. Z's standards to include the following:

• Prohibiting loan originator compensation based on any term of a loan transaction. For example, a mortgage broker's compensation may not be based on the interest rate or steering the consumer to purchase title insurance from the broker's affiliate.
  • The rule also prohibits financing premiums or fees for credit insurance in connection with consumer loan transactions secured by a dwelling.
• Prohibiting "dual compensation" from the consumer and another person in a single loan transaction except to allow brokers to pay their employees or contractors' commissions. Nevertheless, these commissions may not be based on the terms of the loans they originate.
• Prohibiting loan originator compensation based on a "proxy" for a term of a transaction. To prevent "upcharging" customers, compensation may not be based on the profitability of a transaction or pool of transactions. Certain bonuses and retirement and profit-sharing plans are permitted, however, subject to certain restrictions so long as they are based on the terms of multiple loan originators' transactions.
• Prohibiting mandatory arbitration clauses in residential mortgage loans or home equity lines of credit. Consumers may not be barred from initiating a claim in court in connection with an alleged violation of federal law.
• Requiring loan origination organizations to ensure that loan originators are licensed or registered under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), where applicable, and under other applicable law.
  • For organizations not subject to the SAFE Act, loan originators must meet character, fitness, and criminal background standards similar to SAFE Act licensing standards and must satisfy training requirements consistent with their origination activities.

The final rule takes effect on January 10, 2014, except for the prohibitions on mandatory arbitration clauses and credit insurance financing, which take effect on June 1, 2013. The final rule can be found on the CFPB's website, http://www.consumerfinance.gov/regulations. Saul Ewing's Financial Services and Public Finance team monitors all developments in connection with this rule and the CFPB generally, and our lawyers are available to help you understand the expectations and transition your team to compliance.