The CFPB has issued a final rule to incorporate Dodd-Frank requirements into the existing Regulation Z loan originator compensation rule that applies to mortgage loans. The final rule, issued January 20, 2013, also implements Dodd-Frank qualification requirements for bank employee mortgage loan originators, as well as the Dodd-Frank prohibition on mandatory arbitration clauses for mortgage credit agreements. The final rule is effective January 10, 2014, although the mandatory arbitration prohibition is effective June 1, 2013.
The final rule does not address the Dodd-Frank provisions that require the CFPB to adopt regulations prohibiting steering and various related types of conduct. The CFPB advises that because Dodd-Frank expressly requires the adoption of regulations to establish the prohibitions, the CFPB “believes that the substantive prohibitions cannot take effect until the regulations establishing them have been prescribed and taken effect.” The CFPB indicates that it will address such regulations in a future rulemaking.
Term of the Transaction
The current loan originator compensation rule prohibits basing compensation on a term or condition of a transaction or a proxy for a term or condition of a transaction. An exception permits basing compensation on a fixed percentage of the transaction amount, and the compensation may be subject to a minimum and/or maximum dollar amount.
The final rule continues the prohibition and exception, although the final rule removes the reference to a “condition” of the transaction and defines a “term” of a transaction as any right or obligation of the parties to a credit transaction. A term would include, for example, a consumer being steered by a loan originator to purchase required title insurance from an affiliate of the loan originator, because the borrower would be obligated to purchase title insurance in connection with the loan.
The following fees or charges are a term of the transaction, if the fees or charges must be disclosed in the Good Faith Estimate or Settlement Statement under RESPA (or in any integrated TILA/RESPA disclosure adopted in the future by the CFPB):
- Loan originator or creditor fees or charges for the credit or for a product or service provided by the loan originator or creditor that is related to the extension of credit
- Fees or charges of other parties for any product or service required to be provided as a condition of the extension of credit
Nevertheless, a requirement to disclose a fee or charge in the Good Faith Estimate or Settlement Statement, by itself, does not make the fee or charge a term of the transaction.
The final rule provides greater detail regarding what constitutes a "proxy" concerning the prohibition under the existing rule against basing compensation on a loan term or a proxy for a loan term. Under the final rule, a factor is a proxy for a loan term if it consistently varies with a transaction term over a significant number of transactions and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. The final rule includes illustrations demonstrating a factor that is and is not a proxy, and removes from the current rule the example of a credit score being a proxy.
Complete Exemption Adopted in Lieu of Zero-Zero Alternative Proposal
Consistent with the existing loan originator compensation rule, Dodd-Frank prohibits the receipt of compensation by a loan originator from both the borrower and the creditor. Dodd-Frank further provides, however, that if a creditor pays a loan originator, the consumer may not pay any discount points, origination points, or origination fees, other than bona fide third-party fees that are not retained by the creditor, loan originator, or affiliate of either, unless the CFPB adopts an exemption.
In the proposed rule, the CFPB included a conditional exemption for creditor-paid compensation situations that would preclude the creditor from offering a loan with any points or fees unless the creditor also offered the borrower a loan without points and fees (provided the borrower would qualify for such a loan). The proposal was known as the "zero-zero alternative" and was widely criticized by industry representatives.
The CFPB decided not to adopt the zero-zero alternative. It adopted a complete exemption under which a creditor may impose points and fees on a consumer in cases in which the creditor will pay compensation to a loan originator, as long as the consumer does not also pay a loan originator. The CFPB plans to study further issues regarding a creditor’s imposition of points and fees when the creditor pays loan originator compensation. Future rulemaking in this area is possible.
Compensation-Based Multiple Originators' Transactions or Profits
The CFPB believes that the compensation of a loan originator should not be based on the terms of such originator’s credit transactions or the credit transactions of multiple originators, and views compensation based on mortgage-related profits to be compensation based on multiple loan originators’ transactions. The final rule expressly prohibits compensation based on multiple transactions of a single loan originator or multiple transactions of multiple loan originators (including compensation based on profits), but contains certain exceptions to this provision.
The final rule permits compensation to a loan originator in the form of a contribution to a defined contribution plan, or a benefit under a defined benefit plan, which is a designated tax-advantaged plan, such as a 401(k) plan. A contribution to a defined contribution plan, however, may not be based on the terms of the individual loan originator’s transactions.
The CFPB initially provided guidance in this area by issuing Bulletin 2012-02 in April 2012. The Bulletin provides that loan originators may participate in tax-advantaged retirement plans, such as 401(k) plans, in which their employers make contributions from mortgage business profits. The industry may continue to rely on the Bulletin pending the effective date of the final rule.
The final rule also permits a loan originator to receive payments under non-deferred profits-based compensation plans, provided that the compensation is not directly or indirectly based on the terms of the individual loan originator’s transactions and either the compensation under the plan does not exceed 10 percent of the individual loan originator’s total compensation for the applicable period, or the individual loan originator was an originator for no more than 10 transactions during the preceding 12 months.
This approach varies from the proposed rule, under which the CFPB proposed that a loan originator could receive compensation from a bonus or other plan as long as mortgage-related profits were no more than either 25 percent or 50 percent of the profit pool, or the loan originator was an originator for no more than five transactions during the preceding 12 months.
Compensation for Non-Loan Origination Activities
The final rules clarifies that amounts received by a company that acts as a mortgage broker in a transaction (which is referred to as a “loan originator organization”) and its affiliates for non-loan origination activities are not compensation for purposes of the rule. The final rule provides that compensation does not include a payment received:
- By a loan originator organization for bona fide and reasonable charges for services it performs that are not loan origination activities
- By an affiliate of a loan originator organization for bona fide and reasonable charges for services it performs that are not loan origination activities
- By a loan originator organization for bona fide and reasonable charges for services that are not loan origination activities when those amounts are not retained by the loan originator but are paid to the creditor, its affiliate, or the affiliate of the loan originator organization
The industry had urged the CFPB to take this approach, arguing that the consumer is protected based on the requirement that the charge for the non-loan origination activity, such as a charge for title insurance, must be bona fide and reasonable.
The final rule includes an exception to the prohibition against reducing a loan originator's compensation to offset a cost in connection with a transaction. Loan originators may reduce their compensation in certain cases to cover an unexpected increase in a settlement cost that was previously disclosed or an unanticipated settlement cost that was not previously disclosed.
Originator Qualifications/ID Numbers on Loan Documents
Dodd-Frank amended the Truth in Lending Act to require that loan originators be “qualified” and, where applicable, registered or licensed under the SAFE Act and other applicable law, and include their identification number assigned by the National Mortgage Licensing System and Registry (NMLSR) on loan documents.
Under the final rule, each loan originator that is not required to be licensed and is not licensed as a loan originator under federal or state regulations implementing the SAFE Act (e.g., a loan originator employed by a depository institution) must be subject to criminal background standards and financial responsibility, character, and general fitness standards similar to those that apply to licensed loan originators. Such a loan originator also must receive training covering federal and state law requirements that apply to the loan originator’s loan origination activities. The final rule includes special provisions regarding circumstances in which a criminal conviction disqualifies an individual from serving as a loan originator, and when a criminal background or credit check is required.
The final rule requires the inclusion of a loan originator’s name and NMLSR identification number on the credit application, note, or loan contract, and security instrument. The CFPB had proposed that the NMLSR identification number also be included on the Good Faith Estimate, Settlement Statement, and early and final Truth In Lending Act disclosure statements.
The CFPB is working on the integrated disclosure rule that will replace those disclosures with new combined disclosures. It decided not to require that creditors make additional modifications to the existing disclosures to incorporate the loan originator’s name and NMLSR identification number. The final integrated disclosure rule will address the inclusion of the loan originator’s name and identification number in the combined disclosures.
The final rule implements the Dodd-Frank prohibition on the inclusion of a mandatory arbitration requirement in any contract or other agreement for a consumer credit transaction secured by a dwelling.