• CFPB Restricts Loan Originators’ Compensation
  • January 30, 2013 | Authors: David N. Anthony; Virginia Bell Flynn; Maryia Y. Jones; John C. Lynch
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office
  • On January 22, 2013, the Consumer Financial Protection Bureau (CFPB) issued the last rule in a set of mortgage regulations issued earlier this month.  The final loan originator compensation rule (Rule) amends Regulation Z, which implements the Truth in Lending Act.  At its core, the Rule prohibits various pay incentives for loan originators, which, the CFPB believes, are designed to steer borrowers into risky loans. The Rule also imposes a first-ever unified set of heightened screening and qualification standards for loan originators regardless of whether they work for a bank, thrift, mortgage brokerage or nonprofit organization.

    The rule will go into effect on January 10, 2014. Banks and other mortgage originators are encouraged to begin reviewing their policies and procedures to ensure compliance with the Rule by the due date.

    The highlights of the new Rule include:

    • Prohibition against Steering Incentives. Mortgage originators cannot receive compensation based on the profitability of a transaction, the interest rate, or any other term of a transaction. This provision is intended to prevent incentives to “up-charge” consumer on their loans. However, subject to certain restrictions, the final Rule permits certain bonuses and retirement and profit-sharing plans to be based on the terms of multiple loan originators’ transactions.

    • Prohibition against Dual Compensation. Regulation Z already provides that where a loan originator receives compensation directly from a consumer in connection with a mortgage loan, no loan originator may receive compensation from another person, such as a creditor, in connection with the same transaction. The Dodd-Frank Act codifies, and the final Rule implements, this prohibition, which was designed to address consumer confusion over mortgage broker loyalties where the brokers were receiving payments both from the consumer and the creditor.

    • No Prohibition on Consumer Payment of Upfront Points and Fees. The Dodd-Frank Act contains a section that would generally have prohibited consumers from paying upfront points or fees on transactions in which the loan originator compensation is paid by a person other than the consumer. However, the Dodd-Frank Act also authorizes the CFPB to waive or create exemptions from the prohibition on upfront points and fees. The final Rule implements the CFPB’s decision to issue a complete exemption to the prohibition on upfront points and fees while the CFPB scrutinizes several crucial issues relating to the proposal’s design, operation and possible effects in a mortgage market undergoing regulatory overhaul.

    • Loan Originator Qualifications and Identifier Requirements. The Dodd-Frank Act imposes a duty on individual loan officers, mortgage brokers and creditors to be “qualified” and, when applicable, registered or licensed to the extent required under state and federal law. The final Rule imposes duties on loan originator organizations to make sure that their individual loan originators are licensed or registered as applicable under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 and other applicable law. For loan originator employers whose employees are not required to be licensed, including depository institutions and bona fide nonprofits, the Rule requires them to meet certain character and fitness, criminal background and training standards.

    • Prohibition on Mandatory Arbitration Clauses and Single Premium Credit Insurance. The final rule also contains language implementing two other Dodd-Frank Act provisions concerning mortgage loan originations. The first prohibits the inclusion of arbitration clauses. The second provision prohibits the financing of any premiums or fees for credit insurance (such as credit life insurance) in connection with a consumer credit transaction secured by a dwelling, but allows credit insurance to be paid for on a monthly basis.

    As strongly requested by the American Bankers Association, the CFPB omitted from the final rule a “zero-zero alternative” requirement. The “zero-zero alternative” would have required lenders to offer a loan option with no discount points or origination fees any time they offered a mortgage with such payment features.