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.
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