The Consumer Finance Protection Bureau’s current proposal for loan originator compensation, while clarifying many aspects of the current rule, also could lead to violations of some state laws, or even Internal Revenue Service codes, according to a recent online event on the subject. The deadline for public comments on the proposal is Tuesday.
The presentation was made by three attorneys with the mortgage banking and the consumer financial services groups at the national law firm, Ballard Spahr LLP. They spoke during a webinar on the proposed new rule sponsored by the Washington, D.C.-based firm.
First, the definition of loan originator is “very broad” under the proposed rule, said John D. Socknat, and even includes persons who assist consumers by advising them on credit terms, preparing application packages, collecting application and supporting information, or even advertises or otherwise communicates to the public that they provide such services. The latter, he said, would include business cards, rate sheets and promotional items.
But managers and administrative and clerical staff are excluded if they do not arrange, negotiate or otherwise obtain an extension of credit for a consumer or if their compensation is not based actual loan originations.
The proposal also “finally addresses” the anti-steering safe harbor issue, said Richard J. Andreano. The key to complying, he said, is that loan originators have to present the loan with the lowest rate to consumers, even if it includes more points than they said they are willing to pay and if they qualify for that loan. The current rule does not specifically require originators to present to borrowers the loan with the lowest rate, only the one with the lowest rates and fees.
“But the originator can’t impose points and fees on a loan unless it results in a lower rate. But this only applies before the consumer has received the good-faith estimate and since this is occurring before the good-faith estimate,” Andreano pondered, “how do you determine if they may not qualify for a loan?”
He also noted all of this is in the preamble to the proposed new rule, not in the section on pricing policies. That section sets forth ties between specific increases and decreases in rates and the size of points and fees, with a specific rate reduction for each additional point.
“These are very complex proposals,” he commented.
Andreano also pointed out that the CFPB, which originally had considered a flat-fee approach to originations, with the same fee applying to all loans, now proposes a “zero-zero alternative.” Under this proposal, any originator who receives compensation from any person other than the consumer may not impose on the consumer any points or fees unless a comparable, alternative loan without points and fees is made available to the consumer.
“That’s an interesting concept,” he said.
To prevent manipulation of loan qualifications and loan availability, the CFPB, Andreano said, is considering two different alternatives that would either prevent originators from changing their underwriting standards for the purpose of disqualifying consumers from a “zero-zero alternative” or prevent originators from offering loans with points and fees unless the consumer would qualify for a comparable loan without points and fees.
The proposed rules, said Michael S. Waldron, also now address the matter of compensation paid on a borrower’s behalf by parties other than the borrower. “This was not addressed previously,” he said, but warned that such an arrangement can be impacted by state laws.
“You have to make sure you follow state law,” Waldron emphasized.
Waldron also noted that while the current rule does not expressly address the sharing of pooled compensation, the proposed rule “outright bans” pooled compensation among loan originators who are compensated differently for loans with different terms.
“Point blanks,” Waldron noted, are not expressly addressed by the current rule and may not be allowed under the proposed rule. Citing a CFPB advisory comment on the proposed rule that “there are no circumstances under which point blanks are permissible, and they there continue to be prohibited,” Waldron said, “‘Continue’ is a critical word. It truly shuts the door on point blanks.”
New conditions also are placed on contributions to both qualified and non-qualified profit-sharing plans, Waldron pointed out. When applying these, he said, loan originator participants have to make sure they do not violate Internal Revenue Codes or become non-compliant with other rules.
“There’s a lot of pitfalls when amending qualified and non-qualified plans,” he cautioned.
Finally, while under the current rule a loan originator’s compensation may not be changed based on changes to a specific loan’s terms or conditions, Socknat pointed out that the proposed rule would permit a reduction in an originator’s compensation to cover unanticipated increased non-affiliated, third-party closing costs that cause the actual amount of costs to exceed limits imposed by applicable law.
However, Socknat said, the proposed rule forbids an originator from agreeing to pay part of a borrower’s closing costs to avoid high-cost loan provisions.
The comment deadline on the proposed rule is Oct. 16.
Comments can be submitted to www.regulations.gov.
Guidance Issued on LO Comp Rule
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.