BY: EDMUND D. HARLLEE
On Friday, February 15, the Consumer Financial Protection Bureau (the “Bureau”) published final rules (with official interpretations) in the Federal Register to amend its Regulation Z (Truth in Lending) to implement requirements and restrictions concerning loan originator compensation and related matters. These rules were issued to implement changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”).
The final rules contain the following main provisions:
1. Prohibition Against Compensation Based on a Term. While Regulation Z currently prohibits basing a loan originator’s compensation on a term of the transaction (such as the amount or the interest rate), the final rules implement the Act’s amplification of that prohibition. The final rules provide an extensive definition of “loan originator” and further define “a term of the transaction” as any right or obligation of the parties. This would include compensation based on steering the consumer to a particular title insurance company, since title insurance would be a required expense of the borrower. The final rules also contain several prohibitions designed to prevent evasion of the general rule. One such prohibition applies to compensation based on a “proxy,” which is a factor that is not strictly a term or condition of the loan, but is so tied to a term or condition that it is deemed to be a term or condition under the rules. Another prohibition designed to prevent evasion is the prohibition on “pricing concessions,” which is where the originator’s compensation is reduced to offset the cost of a change in the transaction’s terms. Originators may reduce their compensation to defray certain unexpected increases in estimated terms. Finally, with certain exceptions, the final rules prohibit compensation based on the profitability of a loan or a pool of loans.
2. Prohibition Against Dual Compensation. Regulation Z currently prohibits compensation to the originator from both the borrower and anyone else in the transaction. The final rules implement the codification of this prohibition in the Act and add an exception for mortgage brokers that pay their employees or contractors commissions, although the commission cannot be based on the loan’s terms.
3. Waiver of Prohibition on Payment of Upfront Points and Fees. The Act contains a prohibition on the payment of upfront points and fees by the borrower in a transaction where the originator is being compensated by someone other than the borrower. However, under the Act, the Board is authorized to issue waivers of, or exemptions under, the Regulation with respect to upfront points and fees under certain circumstances. The Board has issued such a waiver with respect to this provision of the Act, pending further study of the possible effects of such a prohibition.
4. Loan Originator Qualifications and Identifiers. The final rules require individual loan officers, mortgage brokers and creditors to be “qualified” and, under certain circumstances, licensed and registered under applicable state and federal law. Loan originator organizations must ensure that their individual loan originators are licensed and registered under the SAFE Act. For banks and other employers whose employees are not required to be licensed, the final rules require that they (i) ensure that their individual employees meet character, fitness and criminal background standards similar to those in the SAFE Act, and (ii) provide training to loan originator employees consistent with the firm’s origination activities. Further, organizational and individual loan originators are now required to provide their names and NMLSR identification numbers on loan documents.
5. Mandatory Arbitration; Single Premium Credit Insurance. The final rules prohibit the inclusion of mandatory binding arbitration clauses in loan documents for a residential mortgage loan or a home equity line of credit. Provisions barring a consumer from bringing a claim in court in connection with an alleged violation of federal law are also prohibited. Finally, the financing of premiums or fees in connection with credit insurance (such as credit life insurance) is prohibited in loans secured by a dwelling, although credit insurance may be paid on a monthly basis.
6. Recordkeeping. The final rules extend existing recordkeeping requirements regarding loan originator compensation to three years.
The final rules discussed in paragraph five, above, take effect on June 1, 2013. The other final rules discussed above take effect on January 10, 2014.