Often when Congress creates a new agency, those subject to such agency’s jurisdiction anxiously await the implications. Bankers are no exception with respect to the newly created Consumer Financial Protection Bureau (CFPB). While we hope for the best, the skeptic in us naturally expects draconian consequences and inflexible policies designed to benefit consumers without consideration of the safety and soundness of the financial institution. However, a recent CFPB bulletin provides reason to be cautiously optimistic that the CFPB may be responsive to the business needs of the banking industry under the proper circumstances.
Recent modifications to Reg. Z provide “no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on any of the transaction’s terms or conditions.” Further, the official interpretations also define compensation broadly to include “any financial or similar incentive provided to a loan originator that is based on any of the terms or conditions of the loan originator’s transactions.” Given the extremely inclusive language above, one could make a strong argument that Reg. Z prohibits banks from contributing to their mortgage loan originators’ qualified profit sharing, 401(k), or stock ownership plans (Qualified Plans). The argument is that since the funds used to make contributions to Qualified Plans of mortgage loan originators are derived from bank profits that are in turn derived partly from mortgage loan originations, the contributions are impermissible compensation to mortgage loan originators.
Naturally, this position would require a number of banks to reconsider their contributions to Qualified Plans. Further adding to bankers’confusion and anxiety regarding this issue were the lack of formal guidance and informal opinions of many industry commentators, including some regulatory agencies, that Reg. Z prohibited such contributions. Under these conditions, the safest course of action would be to amend Qualified Plans to avoid the argument that the bank is impermissibly contributing to the Qualified Plans of mortgage loan originators. For example, one straightforward method of addressing the problem would be to amend the current Qualified Plan to remove mortgage loan originators as participants. The bank could then structure an alternative plan for its mortgage loan originators that is compliant with Reg. Z as interpreted above. Compliance would require a great deal of bank resources, and, to the neutral observer, the benefit to society in reducing a mortgage loan originator’s incentive (additional Qualified Plan contributions) to increase the volume of low quality mortgage loans likely would not outweigh the dramatically increased compliance costs to banks.
The banking industry organized to oppose such a broad interpretation of Reg. Z and the parallel Qualified Plan restructuring that would accompany it. The banking industry arguably had the more reasonable position on this issue. The CFPB formally weighed in through CFPB Bulletin 2012-02 (April 2, 2012) (Bulletin) stating Reg. Z “permit[s] employers to contribute to Qualified Plans out of a profit pool derived from loan originations. That is, financial institutions may make contributions to Qualified Plans for loan originators out of a pool of profits derived from loans originated by employees under” Reg. Z. One should note the CFPB must still adopt final loan originator compensation rules by January 21, 2013, and it is possible the CFPB could revisit this issue.
In issuing the Bulletin, one could conclude that the CFPB listened to the concerns of the industry, analyzed the costs and benefits to all parties, and made the rational choice to the benefit of bankers. The CFPB will issue volumes of rules over the next few years, and the Bulletin illustrates the importance of organization among bankers to voice industry concerns to rulemaking authorities. Finally, the Bulletin provides a basis for cautious optimism that the CFPB will consider industry concerns in issuing the new rules.
The CFPB issued guidance clarifying banks may contribute to Qualified Plans of mortgage loan originators without running afoul of Reg. Z, thus illustrating that the agency is willing to consider industry concerns.