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The CFPB’s Proposed Rules Regarding Mortgage-Originator Compensation

September 5, 2012

 

The CFPB’s proposed loan-originator-compensation rules contain numerous complex requirements that bear close examination by mortgage lenders.

The Issue: On August 17, 2012, the Consumer Financial Protection Bureau (CFPB) released proposed regulations placing limits on compensation paid to loan originators.[1] The CFPB chose to continue allowing originators to charge points and fees, addressing some of the concerns raised by the mortgage industry.

Comment deadline and effective date: The deadline to comment on the proposal is October 16, 2012. The final regulations will be issued by January 2013. The CFPB is accepting comments on the date by which the rules must be implemented.

Payments based on transaction terms: In an attempt to prevent the “steering” of borrowers into higher-interest-rate loans, the CFPB’s proposed rules prohibit compensation based on the transaction’s terms or conditions,[2] or proxies for such terms and conditions. However, the CFPB added numerous nuances to the rule. For example, the originator’s compensation can decrease on account of unexpected increases in third-party costs.[3] There are also provisions and exemptions specific to compensation paid via pooled compensation plans, profit-sharing plans, qualified retirement plans, and non-qualified retirement plans.[4]

Prohibition against dual compensation: The proposed regulation further provides in general that if a loan originator receives compensation from the consumer, then no other party may compensate that loan originator in connection with the transaction.[5] The term “in connection with the transaction” is used so that the originator can receive base compensation, such as a salary, from his or her employer while also receiving transaction-based compensation from the consumer. Commissions from organizations employing loan originators are also allowed, so long as they are not based on the transaction’s terms.[6] But the proposed regulation identifies the circumstances under which payments made to the originator by a third party on behalf of the consumer constitute payments made by the consumer and the circumstances under which payments received from a party other than a consumer are exempted as bona-fide third-party charges.[7]

Upfront points and fees: In situations where the loan originator receives compensation from someone other than the consumer, Dodd Frank §1403[8] prohibits charging the consumer points and fees. However, the CFPB used its waiver authority[9] to modify the prohibition to allow points and fees in such situations, so long as the consumer is provided an equivalent alternative loan option with no points and fees (a “zero-zero alternative”).[10] If the consumer would not qualify for a “zero-zero” alternative loan, then the aforementioned requirement is waived.[11] For this purpose, the term “points” does not include bonafide third-party charges not retained by the loan originator or creditor.[12]

Modifications vs. refinancing: “Loan originator” is generally defined to be a person who, for compensation, takes an application, arranges, offers, negotiates, or otherwise obtains an extension of consumer credit for another person.[13] The rules make clear that a servicer can be treated as an originator for purposes of the proposed regulations if it performs the specified acts. But under the proposed rule the prohibitions on payments to loan originators do not apply when a servicer seeks to modify a loan, as opposed to refinancing the loan.[14]

Other: Other elements of the proposed regulation relate to loan-originator-qualification requirements,[15] record-retention requirements,[16] and a ban on mandatory arbitration provisions.[17]

Implications: The CFPB’s 369-page originator compensation proposal presents a complex array of rules filled with numerous clarifications and exceptions that require close and critical scrutiny. Organizations that employ loan originators should analyze the proposals between now and October 16 in order to meet the deadline for submission of comments to the CFPB. As evidenced by the CFPB’s use of its waiver authority to allow points, the CFPB has demonstrated its willingness to modify policies based on industry feedback. Nevertheless, loan originators should prepare for how to implement and monitor compliance with any final regulations.

Brian Boyle (202) 383-5327 bboyle@omm.com  
Danielle Oakley (949) 823-7921 doakley@omm.com

[1] The proposed regulations will be published in the Federal Register on September 7. __ FR _____ (Sep. 7, 2012), available here in prepublication form.
[2] Proposed 12 C.F.R. §1026.36(d)(1)(i) and comment 36(d)(1)-2.i. A factor that is not itself a term of a transaction is a proxy for the terms if (a) it substantially correlates with a term and (b) the originator can directly or indirectly add, drop, or change the factor when originating the transaction.
[3] Proposed comment 36(d)(1)-7.
[4] Proposed 12 C.F.R. §1026.36(d)(2)(iii).
[5] Proposed 12 C.F.R. §1026.36(d)(2)(i).
[6] Proposed comment 36(d)(2)(i)-1.
[7] Proposed 12 C.F.R. §1026.36(d)(2)(i)(B) and comment 36(d)(2)-2.iii; Proposed § 1026.36(d)(2)(i) and comment 36(a)-5.iii.
[8] 15 U.S.C. §1639b(c)(2)(B).
[9] 15 U.S.C. §1639b(c)(2)(B)(ii).
[10] Proposed 12 C.F.R. §1026.36(d)(2)(ii).
[11] Proposed 12 C.F.R. §1026.36(d)(2)(ii)(A).
[12] Proposed 12 C.F.R. §1026.36(d)(2)(ii)(B)(2).
[13] Proposed 12 C.F.R. §1026.36(a)(1).
[14] Proposed comment 36(a)-1.iii.
[15] Proposed 12 C.F.R. §1026.36(f).
[16] Proposed 12 C.F.R. §1026.25.
[17] Dodd Frank §1414, as implemented by 15 U.S.C.A. § 1639c(e) and proposed 12 C.F.R. §1026.36(h).