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Guidance Issued on LO Comp Rule

CFPB proposes rules on fees, originator qualifications and originator compensation

Aug. 17, 2012

By Mortgage Daily staff


New rules on loan fees and interest rates have been proposed, while another proposal seeks to eliminate some of the disparity between bank and non-bank loan originators. In addition, changes are being proposed to the existing loan originator compensation rule that should alleviate some industry concerns.

On mortgages where a mortgage broker or creditor pays a loan originator a transaction-specific commission, the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits up-front discount points, origination points or fees that are retained by the creditor, broker or affiliate. While bona fide up-front payments to independent third parties such as appraisers are still being permitted, the change would result in a restructuring of current pricing practices in the vast majority of transactions.

But the Consumer Financial Protection Bureau is proposing to use its exemption authority to allow the origination of loans with up-front fees and/or points as long as certain other options are made available to prospective borrowers.

The proposed rules would require that before up-front fees or points -- excluding those from non-affiliated independent third parties -- are imposed, lenders provide prospective borrowers with a loan option that has no discount points or origination fees. The option is intended to make it easier to compare offers from competing lenders. It would also make it easier to compare multiple offers from the same lender and determine whether the amount of the payment reduction is adequate when up-front fees are paid.

An exception to the proposed rule would be cases when the consumer won't qualify for no-fee loans.

In addition, the CFPB is proposing that the interest rate is reduced when borrowers do pay up-front fees or points.

According to the regulator, without the proposed rules -- the Dodd-Frank act would prohibit up-front points and fees for most home loans even if the borrower prefers a lower interest rate with some up-front costs. The CFPB's approach is expected to benefit consumers and the mortgage industry.

A safe harbor would be provided under the rule for lenders that offered a quote for a loan with up-front fees or points before the application, while the rule would also provide a safe harbor when creditors provide brokers with the pricing for all of their zero-zero alternatives.

"The proposed approach would promote stability in the mortgage market, which otherwise would face radical restructuring of its existing pricing structures and practices to comply with the new Dodd-Frank act requirement," according to the bureau.

The CFPB is seeking feedback on whether it should adopt a bona fide requirement to ensure consumers receive value in return for paying up-front fees and points and how such a requirement should be structured. It also wants comments on whether changes to how affiliate fees are treated would make it easier for consumers to compare offers between multiple lenders.

Feedback is also sought on a potentially different approach when consumers don't qualify for the zero-zero alternative, whether advertising should include information about the zero-zero alternative and whether such disclosures should be required within three days of the application.

Also being proposed are changes to existing rules governing mortgage loan originators' qualifications and compensation.

The CFPB is proposing to eliminate the disparity in standards between loan originators who work for financial institutions, mortgage brokerages and nonprofit organizations. If the originator is not subject to the Secure and Fair Enforcement for Mortgage Licensing Act, then equivalent SAFE act requirements would be imposed.

Regardless of their charter type, originators would be subject to the same standards for character, fitness, and financial responsibility. Each would need to have a criminal background check to screen for felony convictions. They would also be required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.

Employers are responsible for ensuring that their originators who are subject to the SAFE act are licensed or registered. The license or registration number of the employer and the originator on a transaction will need to be noted on certain key loan documents.

"In its proposal, the bureau describes rule text that may be included in the final rule to implement a Dodd-Frank act requirement that the bureau require depository institutions to establish and maintain procedures to assure and monitor compliance with many of the requirements described above and the registration procedures established under the SAFE act," the CFPB stated.

Mortgage Bankers Association President and Chief Executive Officer David H. Stevens issued a statement that said, "Consumers benefit from a vibrant and competitive mortgage market with a diversity of players, and this rule, as it relates to loan originator qualification and screening, should ensure a level playing field for originators regardless of business model."

A rule issued in 2010 by the Federal Reserve Board intended to end the practice of steering borrowers into higher priced loans with the sole objective of earning more compensation. A similar provision in the Dodd-Frank act prohibited the practice of varying loan originator compensation based on interest rates or other loan terms.

One adjustment being proposed by the consumer regulator is allowing originators to reduce their compensation to cover unanticipated increased closing costs from non-affiliated third parties in some circumstances.

In addition, the CFPB seeks to clarify and revise restrictions on pooled compensation, profit-sharing and bonus plans for originators. The proposal would allow contributions from general mortgage activity profits to 401(k) plans, employee stock plans and other qualified plans under tax and employment law as long as profits aren't based on the terms of transactions generated by the originator. It would also allow contributions to non-qualified profit-sharing or retirement plans as long as the originator hasn't originated more than five mortgages during the prior 12 months or the company's mortgage business revenues are limited to no more than half of total revenues -- though a 25 percent limitation is also being considered.

While originators would still be banned from being paid by both the borrower and other parties, mortgage brokerage that are paid by the consumer would be able to pay individual originators a commission as long as the commission isn't based on the terms of the transaction. However, originator compensation paid by sellers, home builders, home improvement contractors or other similar parties will be considered to be payments made by the consumer directly to the originator.

MBA's Stevens applauded the efforts to protect borrowers by eliminating steering.

Another proposal would implement Dodd-Frank provisions that prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums on mortgages and home-equity loans.

The CFPB says that the rules will bring greater accountability to the mortgage loan origination market and make it easier for consumers to understand mortgage costs and compare loans.

Comments are being accepted at www.regulations.gov until Oct. 13 on the proposals, which are expected to become final in January 2013.

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