The CFPB announced changes to its Spring 2012 proposals regarding loan originator (LO) compensation rules and mortgage origination requirements in a proposal published on August 17, 2012. After hearings with consumers, creditors, and small businesses, the CFPB decided to depart from rules that would prohibit consumers from paying discount points and fees to buy down their interest rate and would allow brokerage firms paid by consumers to pay their loan originators a commission. The proposed rule also addresses LO qualification requirements that would level the playing field between LOs that work for a bank and those that work for a non-bank mortgage lender or broker. Comments on the proposed rule, which can be found here, must be received by October 16, 2012. The CFPB has stated it intends to finalize the rule by January 2013.
Upfront Point and Fee Restrictions
In May 2012, the CFPB proposed a rule that would prohibit mortgage brokers from offering consumers the option of paying discount points and fees to reduce the interest rate on their mortgage loan and prohibited non-flat fees. After speaking with consumer groups that voiced their support for more consumer options, however, the CFPB’s new proposal would allow originators to offer consumers a loan option with upfront points or origination fees as long as the discount points are bona-fide and will result in a lower interest rate, and the originators also offer a comparable alternative loan without any points and fees that are retained by the creditor, broker or an affiliate of either (a “zero-zero” alternative). The CFPB maintained that “[t]hese options would enable a consumer buying or refinancing a home to better compare competing offers from different creditors, better able to compare loan offers from a particular creditor, and decide whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.” The requirement would not apply where the consumer is unlikely to qualify for the zero-zero alternative. The new rule is a deviation from the Dodd-Frank Act, which specifically prohibits the payment of upfront points and fees for most mortgages.
The proposed rule would provide a safe harbor in transactions that do not involve a mortgage broker, if, any time prior to application the creditor provides a consumer an individualized quote for a loan that includes upfront points and/or fees, the creditor also provides a quote for a zero-zero alternative. In transactions that involve mortgage brokers, the proposed rule would provide a safe harbor under which creditors provide mortgage brokers with the pricing for all of their zero-zero alternatives. Mortgage brokers then would provide quotes to consumers for the zero-zero alternatives when presenting different loan options to consumers.
The Mortgage Bankers Association (MBA) was critical of the flat origination charges outlined in the original CFPB proposal, noting that the effect of discount points can vary from loan to loan for a number of reasons, including “the present value of the dollar; the shape of the interest rate curve and where the note rate falls on the interest rate curve (as determined in the secondary mortgage markets); the particular pool the loan is to be assigned to, as well as the value and type of the loan.” The new approach seems to be more acceptable to the industry, with MBA president David Stevens noting that the proposed rule “moves in the right direction.”
The proposed compensation rule would revise the anti-steering compensation rules promulgated by the Federal Reserve Board in April 2011, but would provide some flexibility. While the proposed rule would continue the general ban on paying or receiving commissions or other loan originator compensation based on the terms of the transaction (other than loan amount), it would allow reductions in loan originator compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances and would clarify when a factor used as a basis for compensation is prohibited as a “proxy” for a transaction term.
The proposal would also clarify and revise restrictions on pooled compensation, profit-sharing, and bonus plans for loan originators, depending on the potential incentives to steer consumers to different transaction terms. Employers would be permitted to make contributions from general profits derived from mortgage activity to 401(k) plans, employee stock plans, and other “qualified plans” under tax and employment law. In addition, employers could pay bonuses or make contributions to non-qualified profit-sharing or retirement plans from general profits derived from mortgage activity if either (1) the loan originator affected has originated five or fewer mortgage transactions during the last 12 months; or (2) the company’s mortgage business revenues are limited. The Bureau is proposing two alternatives, 25 percent or 50 percent of total revenues, as the applicable test.
The proposed rule would continue the general ban on loan originators being compensated by both consumers and other parties but would allow mortgage brokerage firms that are paid by the consumer to pay their individual brokers a commission, so long as the commission is not based on the terms of the transaction. It would also clarify that certain funds contributed toward closing costs by sellers, home builders, home-improvement contractors, or similar parties, when used to compensate a loan originator, are considered payments made directly to the loan originator by the consumer.
The CFPB proposal would also level the playing field between LOs that work for depository institutions and those that work for non-depository mortgage lenders. In the past, LOs that worked for depository institutions were exempt from the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), which establishes licensing requirements, including 20 hours of training, passing a national exam, and extensive credit and criminal background checks. Under the proposal, the CFPB would require that employers of LOs not required to be licensed by the SAFE Act ensure that the LO meets the character fitness, and criminal background check standards of the SAFE Act and receives appropriate training.
The proposal would also implement certain other Dodd-Frank Act requirements applicable to both closed-end and open-end mortgage credit, including a ban on mandatory arbitration and a ban on the financing of premiums for credit insurance.