On August 17, 2012 the Consumer Financial Protection Bureau (CFPB) released a 369-page proposal to amend Regulation Z. The amendments involve loan originator compensation. These proposals clarify and expand on existing regulations governing loan originator compensation and qualifications.  They also implement new laws, including a restriction on the payment of upfront discount points, origination points, and fees on most mortgage loan transactions.
Restriction on Upfront Points and/or Fees
The proposed rule requires that, before a creditor or mortgage broker may impose upfront points and/or fees on a consumer in a closed-end mortgage transaction, the creditor must make available to the consumer a comparable, alternative loan with no upfront discount points, origination points, or fees that are retained by the creditor, broker, or an affiliate of either (a “zero-zero alternative”).  The requirement would not be triggered by charges that are passed on to independent third parties that are not affiliated with the creditor or mortgage broker.  The requirement would not apply where the consumer is unlikely to qualify for the zero-zero alternative.
In transactions that do not involve a mortgage broker, the proposed rule would provide a safe harbor if, any time prior to application that 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.
Restrictions on Loan Originator Compensation
The proposal adjusts existing rules governing compensation to loan officers and mortgage brokers in connection with closed-end mortgage transactions to account for the Dodd-Frank Act and to provide greater clarity and flexibility.  Specifically, the proposal:

  • Continues the general ban on paying or receiving commissions or other loan originator  compensation based on the terms of the transaction (other than loan amount), with some refinements:
  • The proposal would allow reductions in loan originator compensation to cover  unanticipated increases in closing costs from non-affiliated third parties under certain circumstances.
  • The proposal would clarify when a factor used as a basis for compensation is prohibited as a “proxy” for a transaction term.
  • 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.
  • The proposal would permit employers 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.
  • The proposal 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 last 12 months; or
(2) the company’s mortgage business revenues are limited.  The CFPB is proposing two alternatives, 25 percent or 50 percent of total revenues, as the applicable test.

  • Even though contributions and bonuses could be funded from general mortgage profits, the amounts of such contributions and bonuses could not be based on the terms of the transactions that the individual had originated.
  • Continue the general ban on loan originators being compensated by both consumers and other parties, with some refinements:
    • The proposal would allow mortgage brokerage firms that are paid by the consumer to pay their individual brokers a commission on the transaction, so long as the commission is not based on the terms of the transaction.
    • The proposal would 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.

Loan Originator Qualification Requirements
The proposal would implement a Dodd-Frank Act provision requiring both individual loan originators and their employers to be “qualified” and to include their license or registration numbers on certain specified loan documents.

  • Where a loan originator is not already required to be licensed under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), the proposal would require his or her employer to ensure that the loan originator meets character, fitness, and criminal background check standards that are equivalent to SAFE Act requirements and receives training commensurate with the loan originator’s duties.
  • Employers would be required to ensure that their loan originator employees are licensed or registered under the SAFE Act where applicable.
  • Employers and the individual loan originators that are primarily responsible for a particular transaction would be required to list their license or registration numbers on certain key loan documents.

Other Provisions
The proposal would implement certain other Dodd-Frank Act requirements applicable to both closed-end and open-end mortgage credit:

  • The proposal would ban general agreements requiring consumers to submit any disputes that may arise to mandatory arbitration rather than filing suit in court.
  • The proposal would generally ban the financing of premiums for credit insurance.
  • The proposal would 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 comment period ends October 16, 2012. The CFPB plans to issue final regulations by January 21, 2013.
For a copy of the full proposal click here.