|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.
From National Mortgage Professional—
The Consumer Financial Protection Bureau (CFPB) has announced its latest proposal to bring greater transparency to the mortgage marketplace and simplify the understanding of mortgage costs and comparison shopping for consumers. The CFPB is seeking comment on and will finalize these rules by January 2013.
Click here to view the CFPB’s latest round of proposed rules.
Highlighted among the rules set forth by the CFPB:
►Require lenders to make a no-point, no-fee option available: This option would enable prospective homebuyers or those seeking to refinance a simpler method of comparing varying offers, making it simpler to compare offers from a particular creditor, and deciding whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.
►The prohibition of steering incentives towards LOs: The CFPB’s rule would implement the Dodd-Frank Act provision and clarify certain issues in the existing rule that have created industry confusion.
►Require an interest-rate reduction when consumers elect to pay upfront points or fees: The CFPB is seeking comment on proposals to require that any upfront payment, whether it is a point or a fee, must be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point or fee.
In addition to regulating upfront points and fees, the CFPB is proposing changes to existing rules governing mortgage loan originators’ qualifications and compensation.
►Set screening standards: The CFPB is proposing rules to implement Dodd-Frank Act requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable. The proposed rule includes: Character and fitness requirements, criminal background checks; and training requirements.
►Restrictions on arbitration clauses and financing of credit insurance: The proposal implements Dodd-Frank Act provisions that, for both mortgage and home equity loans, prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums.
“Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”
The CFPB has engaged with consumers and industry, including through a Small Business Review Panel, and used this feedback in developing the proposed rules. The CFPB believes that this proposal, if adopted, would promote stability in the mortgage market, which would otherwise face radical restructuring of the current pricing structure in order to comply with Dodd-Frank.
“The CFPB has released a number of rules in the last few weeks that, if finalized properly over time, will go a long way toward proving needed clarity and certainty to lenders and consumers, helping increase access to credit for qualified borrowers, stabilizing and growing the housing market,” said David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA). “We look forward to reviewing the proposed rule more thoroughly over the coming weeks and providing comprehensive comments.”
The public will have 60 days, until Oct. 16, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January of 2013.
|A further update on the rules as reported by Mortgage Daily….(see our previous post on this topic).
Guidance Issued on LO Comp Rule
CFPB proposes rules on fees, originator qualifications and originator compensation
Aug. 17, 2012
By MortgageDaily.com staff
|New rules on loan fees and interest rates have been proposed, while another proposal seeks to eliminate some of the disparity between bank and non-bank loan originators. In addition, changes are being proposed to the existing loan originator compensation rule that should alleviate some industry concerns.
On mortgages where a mortgage broker or creditor pays a loan originator a transaction-specific commission, the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits up-front discount points, origination points or fees that are retained by the creditor, broker or affiliate. While bona fide up-front payments to independent third parties such as appraisers are still being permitted, the change would result in a restructuring of current pricing practices in the vast majority of transactions.
But the Consumer Financial Protection Bureau is proposing to use its exemption authority to allow the origination of loans with up-front fees and/or points as long as certain other options are made available to prospective borrowers.
The proposed rules would require that before up-front fees or points — excluding those from non-affiliated independent third parties — are imposed, lenders provide prospective borrowers with a loan option that has no discount points or origination fees. The option is intended to make it easier to compare offers from competing lenders. It would also make it easier to compare multiple offers from the same lender and determine whether the amount of the payment reduction is adequate when up-front fees are paid.
An exception to the proposed rule would be cases when the consumer won’t qualify for no-fee loans.
In addition, the CFPB is proposing that the interest rate is reduced when borrowers do pay up-front fees or points.
According to the regulator, without the proposed rules — the Dodd-Frank act would prohibit up-front points and fees for most home loans even if the borrower prefers a lower interest rate with some up-front costs. The CFPB’s approach is expected to benefit consumers and the mortgage industry.
A safe harbor would be provided under the rule for lenders that offered a quote for a loan with up-front fees or points before the application, while the rule would also provide a safe harbor when creditors provide brokers with the pricing for all of their zero-zero alternatives.
“The proposed approach would promote stability in the mortgage market, which otherwise would face radical restructuring of its existing pricing structures and practices to comply with the new Dodd-Frank act requirement,” according to the bureau.
The CFPB is seeking feedback on whether it should adopt a bona fide requirement to ensure consumers receive value in return for paying up-front fees and points and how such a requirement should be structured. It also wants comments on whether changes to how affiliate fees are treated would make it easier for consumers to compare offers between multiple lenders.
Feedback is also sought on a potentially different approach when consumers don’t qualify for the zero-zero alternative, whether advertising should include information about the zero-zero alternative and whether such disclosures should be required within three days of the application.
Also being proposed are changes to existing rules governing mortgage loan originators’ qualifications and compensation.
The CFPB is proposing to eliminate the disparity in standards between loan originators who work for financial institutions, mortgage brokerages and nonprofit organizations. If the originator is not subject to the Secure and Fair Enforcement for Mortgage Licensing Act, then equivalent SAFE act requirements would be imposed.
Regardless of their charter type, originators would be subject to the same standards for character, fitness, and financial responsibility. Each would need to have a criminal background check to screen for felony convictions. They would also be required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.
Employers are responsible for ensuring that their originators who are subject to the SAFE act are licensed or registered. The license or registration number of the employer and the originator on a transaction will need to be noted on certain key loan documents.
“In its proposal, the bureau describes rule text that may be included in the final rule to implement a Dodd-Frank act requirement that the bureau require depository institutions to establish and maintain procedures to assure and monitor compliance with many of the requirements described above and the registration procedures established under the SAFE act,” the CFPB stated.
Mortgage Bankers Association President and Chief Executive Officer David H. Stevens issued a statement that said, “Consumers benefit from a vibrant and competitive mortgage market with a diversity of players, and this rule, as it relates to loan originator qualification and screening, should ensure a level playing field for originators regardless of business model.”
A rule issued in 2010 by the Federal Reserve Board intended to end the practice of steering borrowers into higher priced loans with the sole objective of earning more compensation. A similar provision in the Dodd-Frank act prohibited the practice of varying loan originator compensation based on interest rates or other loan terms.
One adjustment being proposed by the consumer regulator is allowing originators to reduce their compensation to cover unanticipated increased closing costs from non-affiliated third parties in some circumstances.
In addition, the CFPB seeks to clarify and revise restrictions on pooled compensation, profit-sharing and bonus plans for originators. The proposal would allow contributions from general mortgage activity profits to 401(k) plans, employee stock plans and other qualified plans under tax and employment law as long as profits aren’t based on the terms of transactions generated by the originator. It would also allow contributions to non-qualified profit-sharing or retirement plans as long as the originator hasn’t originated more than five mortgages during the prior 12 months or the company’s mortgage business revenues are limited to no more than half of total revenues — though a 25 percent limitation is also being considered.
While originators would still be banned from being paid by both the borrower and other parties, mortgage brokerage that are paid by the consumer would be able to pay individual originators a commission as long as the commission isn’t based on the terms of the transaction. However, originator compensation paid by sellers, home builders, home improvement contractors or other similar parties will be considered to be payments made by the consumer directly to the originator.
MBA’s Stevens applauded the efforts to protect borrowers by eliminating steering.
Another proposal would implement Dodd-Frank provisions that prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums on mortgages and home-equity loans.
The CFPB says that the rules will bring greater accountability to the mortgage loan origination market and make it easier for consumers to understand mortgage costs and compare loans.
Comments are being accepted at www.regulations.gov until Oct. 13 on the proposals, which are expected to become final in January 2013.