On January 18, 2013 the Consumer Financial Protection Bureau (CFPB) announced publication of  a final rule amending Regulation Z. The new rules revise and clarify existing regulations and commentary on loan originator compensation. The rules also implement Dodd-Frank Act provisions that prohibit certain arbitration agreements and the financing of certain credit insurance in connection with a mortgage loan.
The rules take effect in January 2014, except that the prohibition on mandatory arbitration and on the financing of credit insurance will take effect in June 2013.
Specifically the rule:

  • Prohibits steering incentives: The rules prohibit compensation that varies with the loan terms. A broker or loan officer cannot get paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees. Moreover, the mortgage originator cannot get paid more if, for example, the consumer agrees to buy title insurance from the lender’s affiliate. Previously, loan originators could make more money by getting the consumer to buy these services from the lender, broker, or one of their affiliates.
  • Prohibits “dual compensation”: Under the CFPB’s rules, the loan originator cannot get paid by both the consumer and another person such as the creditor. In the run-up to the crisis, too often consumers incorrectly assumed that their loan originators were looking out for the consumer’s best interest.
  • Set Qualification and Screening Standards: Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, loan originators currently have to meet different sets of qualification standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. These rules implement Dodd-Frank Act requirements that require a more level playing field so consumers can be confident that originators are ethical and knowledgeable. The final rules generally include character and fitness requirements, criminal background checks, and training requirements.

The final rule also implements Dodd-Frank provisions that, for mortgage and home equity loans, generally prohibit mandatory arbitration of disputes related to mortgage loans and the practice of increasing loan amounts to cover credit insurance premiums.
The proposed rule that preceded the final rule contained a provision that allowed creditors to charge upfront points and fees in connection with a mortgage loan, so long as they made available to consumers an alternative loan that did not include upfront points and fees (zero-zero option). The zero-zero option is not included in the final rule.
A follow-up to this article is planned for Sunday January 20 when the actual final rule is scheduled to be made available.