The Consumer Financial Protection Bureau ("CFPB") proposed rules August 15 to implement provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") dealing with mortgage loan originator compensation and qualification requirements for loan originators. The proposed rule is subject to a comment period until October 16, 2012. A final rule is expected early in 2013.

Under the proposed rule, before a lender or mortgage broker could impose upfront points and fees on a consumer in a closed-end mortgage transaction, the lender or broker would have to make available a comparable, alternative loan with no upfront discount points, origination points, or origination fees (the "zero-zero alternative"). This requirement would not be triggered by charges that are passed on to non-affiliated third parties, nor would it apply where the consumer is unlikely to qualify for the zero-zero alternative. In transactions not involving a mortgage broker, if at any time prior to loan application the lender provides a consumer with a quote for a mortgage loan that includes upfront points and/or fees, there is a safe harbor if such lender also provides a quote for a zero-zero alternative.

In transactions that do involve a mortgage broker, there is a safe harbor if lenders provide quotes for all their zero-zero alternatives to the mortgage broker and such broker presents such zero-zero alternatives when presenting different loan options to consumers.

The proposed rule also clarifies that employers may make contributions from general profits derived from mortgage activity to 401(k) plans, employee stock plans, and other "qualified plans" in which loan originators participate, notwithstanding the general Dodd-Frank Act ban on loan originator compensation that is based on mortgage loan transaction terms. In addition, the proposed rule would permit employers to 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 past 12 months; or (2) the company’s mortgage business revenue is limited to a certain percentage. In this regard, the CFPB is proposing two alternatives for this revenue limitation: 25 percent or 50 percent of total revenues.

The proposed rule would require that all loan originators and their employers be "qualified" and put their license or registration numbers on certain specified loan documents. In particular, where a loan originator is not already required to be licensed under the SAFE Act (e.g., depository institution employees), the proposed rule would require the employer to ensure the loan originator meets character, fitness, and criminal background check standards that are the same as would apply under the SAFE Act, and that such loan originator is appropriately trained. In this regard, employers would be required to ensure that their loan originator employees are licensed or registered under the SAFE Act where applicable.

Finally, the proposal prohibits mandatory arbitration provisions in mortgage loan agreements and the financing of premiums for credit insurance.