A concept introduced at a Federal Reserve Webinar on the loan officer compensation rule has lenders rushing to comply with next month’s deadline. The Fed also addressed yield spread premiums, clarified compensation to mortgage brokers with multiple locations and offered an alternative to borrower-paid fees.
With the April 1 compliance deadline fast approaching, lenders and brokers are struggling to draft and implement loan originator compensation plans that are both compliant with the new compensation and anti-steering provisions in Section 226.36 of Regulation Z and consistent with the regulatory interpretation of the rule.
On Thursday, staff members from the Federal Reserve Board’s Division of Consumer and Community Affairs provided their interpretation of the rule’s requirements and restrictions related to a number of common questions they have received in recent months. While many of the topics covered were consistent with the industry’s understanding of the rule, certain guidance provided in the Webinar sent much of the industry scrambling to revise compensation plans that were assumed to be in final form in the final two weeks of the implementation period.
In particular, the Fed staff opined on the “point bank” concept, sending lenders and brokers back to the drawing board.
Up until the Webinar, the general belief was that some form of point bank was permissible under the rule. Some plans would have allowed for loan originators to accrue credits in their point banks by charging overages; others would have credited the loan originator’s point bank on a closed loan basis. In either scenario, the loan originator would have had the ability to “withdraw” credits from his or her point bank, up to a certain amount on a given transaction, in order to offer pricing concessions to consumers in a competitive situation.
According to the Fed staff, neither approach is compliant with the rule because the funding of a point bank constitutes originator compensation. The first instance would not work because the point bank (again, compensation) is being funded based on the terms or conditions of a loan.
The funding of the point bank in the second example is not a violation because the credits are earned on a fixed percentage of the loan amount — a permissible means of compensation — but the use of the credits from the point bank to give a consumer pricing concessions will result in the reduction of originator “compensation” (i.e., the point bank balance) based on loan terms or conditions.
In short, Fed staff stated they had “yet to hear a variation on the theme of point banks that [they] think really can succeed under this rule.”
Another item clarified by Fed staff in the Webinar was the issue of compensating mortgage broker entities with multiple branches. Many were under the impression that compensation could vary by geographic location based on permissible factors, such as cost of living adjustments. While this may be the case for retail loan originator compensation, creditors now know that they must structure their compensation plans so that a mortgage broker is paid on the same compensation plan by a given creditor regardless of the location from which the broker originates the loan.
For example, if Broker A has two branches, one in an area with a high cost of living and one with a low cost of living, Creditor A must pay Broker A in the same manner for loans originated in the higher cost area as for loans in the lower cost area.
Fed staff confirmed their position regarding loan originator compensation by mortgage brokers in consumer-paid transactions. Specifically, Fed staff has not changed their view that if a consumer pays a mortgage broker in a transaction, the broker cannot pay its loan originator employee who worked on the transaction any amount other than a standard salary or hourly wage.
While this interpretation presents difficulty in structuring a plan where the consumer will pay a mortgage broker directly, Fed staff suggested that the issue could be resolved by the consumer paying points to the creditor from which the creditor could pay the broker entity. In this case, the broker would be paid by the lender and could compensate its employees in accordance with their compensation plans without running afoul of the dual compensation provisions of the rule.
One point of clarification made in the Webinar is that yield spreads to pay third party fees are not prohibited provided there are sufficient third party costs to which the excess funds can be applied. If a consumer is paying a mortgage broker directly, the yield must be less than or equal to closing costs to prevent a dual compensation situation. As explained by Fed staff, if the consumer pays the broker directly and the yield exceeds the closing costs, the excess is “problematic” because a refund of the excess to the consumer would result in a dual compensation violation. The argument is that if the consumer pays the broker and the creditor refunds money that the consumer pockets, the broker has been paid from two sources.
In response to one of the questions posed regarding the anti-steering safe harbor, Fed staff provided clarification on whether an originator must provide the consumer with options for loans with more discount points than the loan originator believes the consumer would qualify to pay. In this case, the loan originator would only need to present the required loan options for transactions that the loan originator believes the consumer would qualify for.
On the other hand, if the consumer expresses a desire not to pay more than two discount points, but the loan with the lowest rate that the consumer would qualify for has more discount points, the loan originator must still present the lowest interest rate option to the consumer.
In this first scenario, presenting the consumer a loan for which he or she will not qualify is not going to meet the requirements of the safe harbor; in the second scenario, presenting the consumer with a loan with a higher rate than he or she would otherwise qualify merely because the consumer had expressed a preference not to pay more than two discount points would not satisfy the safe harbor.
Section 36(d)(2) of the rule provides that a loan originator may not receive compensation from the consumer and any party other than the consumer in the same transaction. Fed staff clarified that it is treating seller contributions as consumer payments. Essentially, the seller contribution is considered to be preexisting funds of the consumer that the consumer is choosing to use to compensate the loan originator. By this logic, a seller contribution will not result in a 36(d)(2) violation.
According to Fed staff, many questions have arisen related to the provision in the rule that treats affiliates as a single party. In particular, a common question has been whether a mortgage broker must be paid by the consumer in a transaction in which the consumer obtains title insurance from the broker’s affiliated title company and pays the premium for that insurance directly to the title company.
The concern was that Fed staff was interpreting the payment to the affiliated title company to constitute direct consumer payment to the broker since the affiliate relationship results in the entities being viewed as one in the same under the rule.
Fed staff clarified that in this case, the payment by the consumer to the affiliated title company for the title premium will not constitute direct consumer payment to the broker as long as the third party service (i.e., the title policy) is a genuine, legitimate, ancillary service and the third party charge is bona fide and reasonable in a amount. In that case, that portion of the charge is not part of originator compensation and is not subject to the rule.
Many other points were reiterated or clarified in the Webinar. To listen to the Webinar in its entirety, click here.
