|Closer Look at Proposed LO Compensation RuleWebinar discusses CFPB proposal
Oct. 15, 2012
By JERRY DeMUTH MortgageDaily.com
|The Consumer Finance Protection Bureau’s current proposal for loan originator compensation, while clarifying many aspects of the current rule, also could lead to violations of some state laws, or even Internal Revenue Service codes, according to a recent online event on the subject. The deadline for public comments on the proposal is Tuesday.
The presentation was made by three attorneys with the mortgage banking and the consumer financial services groups at the national law firm, Ballard Spahr LLP. They spoke during a webinar on the proposed new rule sponsored by the Washington, D.C.-based firm.First, the definition of loan originator is “very broad” under the proposed rule, said John D. Socknat, and even includes persons who assist consumers by advising them on credit terms, preparing application packages, collecting application and supporting information, or even advertises or otherwise communicates to the public that they provide such services. The latter, he said, would include business cards, rate sheets and promotional items.
But managers and administrative and clerical staff are excluded if they do not arrange, negotiate or otherwise obtain an extension of credit for a consumer or if their compensation is not based actual loan originations.The proposal also “finally addresses” the anti-steering safe harbor issue, said Richard J. Andreano. The key to complying, he said, is that loan originators have to present the loan with the lowest rate to consumers, even if it includes more points than they said they are willing to pay and if they qualify for that loan. The current rule does not specifically require originators to present to borrowers the loan with the lowest rate, only the one with the lowest rates and fees.
“But the originator can’t impose points and fees on a loan unless it results in a lower rate. But this only applies before the consumer has received the good-faith estimate and since this is occurring before the good-faith estimate,” Andreano pondered, “how do you determine if they may not qualify for a loan?”
Healso noted all of this is in the preamble to the proposed new rule, not in the section on pricing policies. That section sets forth ties between specific increases and decreases in rates and the size of points and fees, with a specific rate reduction for each additional point.
“These are very complex proposals,” he commented. Andreano also pointed out that the CFPB, which originally had considered a flat-fee approach to originations, with the same fee applying to all loans, now proposes a “zero-zero alternative.” Under this proposal, any originator who receives compensation from any person other than the consumer may not impose on the consumer any points or fees unless a comparable, alternative loan without points and fees is made available to the consumer.
“That’s an interesting concept,” he said.To prevent manipulation of loan qualifications and loan availability, the CFPB, Andreano said, is considering two different alternatives that would either prevent originators from changing their underwriting standards for the purpose of disqualifying consumers from a “zero-zero alternative” or prevent originators from offering loans with points and fees unless the consumer would qualify for a comparable loan without points and fees. The proposed rules, said Michael S. Waldron, also now address the matter of compensation paid on a borrower’s behalf by parties other than the borrower. “This was not addressed previously,” he said, but warned that such an arrangement can be impacted by state laws.
“You have to make sure you follow state law,” Waldron emphasized.Waldron also noted that while the current rule does not expressly address the sharing of pooled compensation, the proposed rule “outright bans” pooled compensation among loan originators who are compensated differently for loans with different terms.
“Point blanks,” Waldron noted, are not expressly addressed by the current rule and may not be allowed under the proposed rule. Citing a CFPB advisory comment on the proposed rule that “there are no circumstances under which point blanks are permissible, and they there continue to be prohibited,” Waldron said, “‘Continue’ is a critical word. It truly shuts the door on point blanks.” New conditions also are placed on contributions to both qualified and non-qualified profit-sharing plans, Waldron pointed out. When applying these, he said, loan originator participants have to make sure they do not violate Internal Revenue Codes or become non-compliant with other rules.
“There’s a lot of pitfalls when amending qualified and non-qualified plans,” he cautioned.Finally, while under the current rule a loan originator’s compensation may not be changed based on changes to a specific loan’s terms or conditions, Socknat pointed out that the proposed rule would permit a reduction in an originator’s compensation to cover unanticipated increased non-affiliated, third-party closing costs that cause the actual amount of costs to exceed limits imposed by applicable law. However, Socknat said, the proposed rule forbids an originator from agreeing to pay part of a borrower’s closing costs to avoid high-cost loan provisions. The comment deadline on the proposed rule is Oct. 16.
Comments can be submitted to www.regulations.gov.
The CFPB has proposed rules two sets of rules on July 9.
The first set of rules proposes combining required disclosures under TILA and RESPA pursuant to sections 1032(f), 1098 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Highlights of the major portions of the Rules are provided below.
Full text of proposed disclosure rules: http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf
View proposed disclosures as well as a summary of the proposals:
Scope. The CFPB has noted that the Rules will only affect closed-end mortgage loans. It does not appear that home-equity lines of credit (HELOCs) and reverse mortgages would be affected by the Rules.
The Loan Estimate. The Rules propose replacing the RESPA-mandated GFE and the TILA-mandated “TIL” form with a single new disclosure entitled the Loan Estimate. The Loan Estimate must be provided no later than three (3) business days after a consumer submits a loan application, and may be provided by either the broker or the lender, although the lender retains responsibility for ensuring the Loan Estimate’s accuracy. No person is permitted to impose a fee on a consumer in connection with an application until the consumer has received the Loan Estimate and has affirmatively indicated his or her intent to proceed with the transaction, although an exception exists for a fee to obtain a credit report.
The Closing Disclosure. In addition to the Loan Estimate, the Rules would replace the HUD-1 with the Closing Disclosure. It would have to be provided to the consumer no later than three (3) business days before the consumer closes on the loan. If changes occur between provision of the Closing Disclosure and closing, the consumer generally must be given a new, updated Closing Disclosure and the closing must be delayed for another three (3) business days in order to give the consumer time to review the Closing Disclosure (with some exceptions, such as changes resulting from negotiations between the buyer and the seller after a final walk-through, or changes that result in less than one hundred dollars ($100) in increased costs). Additionally, the CFPB has proposed two alternatives for who may provide the Closing Disclosure. Under the first alternative, the lender alone may deliver the document. Under the second alternative, the lender may rely on the settlement agent to provide the document; in that event, however, the lender would still be responsible for the accuracy of the Closing Disclosure.
As with the current GFE and HUD-1 requirement, there would be limits on closing cost increases associated with the Closing Disclosure. Generally, the Rules provide that the following charges could not increase from the amount disclosed on the Loan Estimate: (A) the lender’s or broker’s charges for its own services; (B) charges for services provided by an affiliate of the lender or broker; and (C) charges for services for which the lender or broker does not permit the consumer to shop. Generally, charges for all other services could not increase by more than ten percent (10%). Exceptions to these restrictions could arise when: (A) the consumer asks for a change; (B) the consumer chooses a service provider not identified by the lender; (C) information provided at application was inaccurate or becomes inaccurate; or (D) the Loan Estimate expired.
Finance Charge. In addition to the new disclosures, with respect to closed-end loans the Rules would replace the current definition of “finance charge” under TILA with (in the CFPB’s words) a “simpler, more inclusive” test. Under the Rules, a fee or charge would be included in the finance charge amount if: (A) it is “payable directly or indirectly by the consumer” to whom the credit is extended; and (B) it is “imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” Fees or charges paid in comparable cash transactions would continue to be excluded, as would late fees and other similar default or delinquency charges, seller’s points, amounts required to be paid into escrow accounts if they would not otherwise be included in the finance charge, and premiums for property and liability insurance if certain conditions were met. However, the Rules would include in the definition of “finance charge” most of the charges that are currently exempted from that definition for closed-end transactions.
The CFPB has indicated in the Rules that it is aware that this broader proposed definition of “finance charge” would potentially have negative consequences, such as exposing more loans to the HOEPA “high-cost” prohibitions due to APR or points-and-fees triggers or disqualifying more potential mortgages from the “qualified mortgage” definition under the proposed ability to repay rules, again due to points-and-fees triggers. The CFPB in response has proposed two different methods of reconciling the expanded definition of the finance charge with existing APR or points-and-fees triggers, and has asked for comments on this topic (as noted above) by September 7, 2012.
Comment Due Dates. Public comments on certain portions of the Rules (most importantly, the revised definition of “finance charge”) are due by September 7, 2012. All other public comments , including comments on when the Rules should become effective, are due by November 6, 2012.
Rules Regarding High Cost Mortgages. On the same date, additional rules were proposed that regulate and expand the definition of high-cost mortgages under HOEPA and the TIL Act.
The proposed rule (http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf) would implement an expansion of HOEPA rules approved by Congress when it passed the Dodd-Frank Act. The proposal would:
- Ban “potentially risky” features. For mortgages that qualify as high-cost based on their interest rates, points and fees or prepayment penalties, the proposed rule would generally ban balloon payments and would ban prepayment penalties.
- Ban and limit certain fees. The proposed rule would ban fees for modifying loans, cap late fees and restrict the charging of fees when consumers ask for a payoff statement.
- Require housing counseling for high-cost mortgages. The proposed rule would require consumers to receive housing counseling before taking out a high-cost mortgage. In addition, the CFPB’s proposal would implement Truth in Lending counseling requirements for first-time borrowers taking out certain mortgage loans that permit negative amortization. The proposal would also implement an amendment to RESPA to generally require that a list of housing counselors or counseling organizations be provided to all mortgage applicants
From National Mortgage News: Mortgage brokers are complaining to the Consumer Financial Protection Bureau that the loan officer compensation rule is making it more expensive and difficult to close loans — and it appears the bureau is listening.
At a recent congressional hearing, Rep. Gary Miller, R-Calif., urged the young agency to consider changes to the LO rule that would give brokers more flexibility – in particular allowing them to use part of their compensation to cover unexpected costs that crop up at loan closings.
“This is an issue we are looking at,” CFPB director Richard Cordray said.
The bureau inherited the LO compensation rule from the Federal Reserve, and currently is in the process of drafting proposed language that includes certain provisions required by the Dodd-Frank Act. It also aims to clarify issues left unanswered by the Fed.
The proposed rule likely will be issued during the summer.
Changes to LO compensation have stirred a great deal of controversy because it up ended traditional compensation practices with a stated goal of preventing LOs from steering borrowers into higher cost and riskier loans. The rule became a compliance nightmare because the Fed provided so little guidance on how to comply with its complex features.
The rule basically prohibits loan officer compensation based on the terms and conditions of the loan or “proxies” for terms or conditions. Essentially, a LO can only be compensated based on the dollar amount of the mortgage and the volume he produces.
Once a branch manager originates one loan he/she is considered a loan officer for purposes of the rule. Therefore, they cannot receive bonuses because bonuses are considered a “proxy” for the profitability of the loans originated by the branch.
Community Mortgage Banking Project managing director Glen Corso wants the bureau to clarify branch manager compensation. He noted that independent mortgage banks usually compensate their managers based on the profitability of the branch. But that changed when the LO compensation rule went into effect in April 2011.
The American Bankers Association is concerned about the “proxy” concept, which has led bank examiners to take the position that year-end bonuses or contributions to 401-k plans violate the rule because it’s related to bank profits.
CFPB director Cordray signaled during the recent hearing that the bureau would be looking at the “unintended effects on pension arrangements.”
ABA also wants the bureau to rein in the proxy concept. “It expands the rule to unpredictable areas and unpredictable applications,” ABA senior regulatory counsel Rod Alba said. He pointed out that compensation practices that run afoul of the rule subject a lender to severe liability. In some cases, a lender might have to repurchase all the loans they originated that year.
Mortgage Bankers Association president and chief executive David Stevens noted that the CFPB is working on the LO comp and “Qualified Mortgage” rules at the same time. Both address the issue affordability and ability to repay. The LO compensation proposal prohibits lenders from steering borrowers into higher cost products to increase their compensation while the QM rule prohibits originators from steering borrowers into loans they can’t afford.
The MBA CEO is worried the two rules could conflict unless the bureau takes a “holistic” approach and coordinates the two rulemakings, which are on separate tracks. CFPB is expected to issue the final QM rule this summer.
Meanwhile, the National Association of Independent Housing Professionals is urging the CFPB to exempt prime loans and government-backed loans from LO compensation rule. The rule should only be applied to high-cost Home Owners and Equity Protection Act loans, according to NAIHP president Marc Savitt.
Competition to originate plain vanilla prime loans and Federal Housing Administration loans will keep lender fees in check, the West Virginia mortgage broker said.