The CFPB has released a final rule amending Regulation Z to implement provisions of the Dodd-Frank Act restricting loan originator compensation and establishing qualifications, and registration and licensing requirements, for loan originators. The final rule published on January 18 revises or provides additional commentary on Regulation Z’s existing restrictions on loan originator compensation, including application of these restrictions to prohibitions on dual compensation and compensation based on a term of a transaction, and on recordkeeping requirements. The Dodd-Frank Act and Regulation Z prohibit compensation to a loan originator based on any of the transaction’s terms or conditions. The final rule defines “a term of a transaction” as “any right or obligation of the parties to a credit transaction.” The final rule also establishes tests for when loan originators can be compensated through certain profit-based compensation arrangements. The Dodd-Frank Act and Regulation Z provide 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 in connection with the same transaction. The final rule provides an exception to allow mortgage brokers to pay their employees or contractors commissions, although the commissions cannot be based on the terms of the loans that they originate. The final rule becomes effective on January 10, 2014, except for provisions banning mandatory arbitration clauses and financing single-premium credit insurance, which become effective on June 1, 2013.

Nutter Notes: In order to prevent evasion of the prohibitions on compensation based on loan terms, the final rule prohibits compensation based on a factor that is a “proxy” for a term of a transaction. The definition of a proxy focuses on whether the factor consistently varies with a transaction term over a significant number of transactions and whether the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. The final rule also prohibits loan originator compensation from being reduced to offset the cost of a change in transaction terms (sometimes called a “pricing concession”). An exception to this restriction allows loan originators to reduce their compensation to defray certain unexpected increases in estimated settlement costs. In order to prevent incentives to up-charge consumers, the final rule prohibits loan originator compensation based on the profitability of a transaction or a pool of transactions. The final rule provides guidance on the application of this prohibition to various kinds of retirement and profit-sharing plans. For example, mortgage-related business profits can be used to make contributions to certain tax-advantaged retirement plans, such as a 401(k) plan, and to make bonuses and contributions to other plans that do not exceed 10% of the individual loan originator’s total compensation. The final rule also provides an exemption to Section 1403 of the Dodd-Frank Act, which otherwise prohibits the payment of upfront points or fees, as long as the loan originator does not receive any compensation directly from the consumer.