by Amber Cushman, Compliance Attorney
The Consumer Financial Protection Bureau (CFPB) has proposed amendments to 12 CFR § 1026.36, which governs the compensation loan originators can receive for certain closed-end mortgage transactions. Per the requirements of the Dodd-Frank Act, the CFPB intends to have final proposals ready by January 21, 2013. The comment period closed on October 16, 2012. The proposed amendments should be fully implemented by January 21, 2014. Proposed changes to 12 CFR § 1026.36 include adding definitions for terms previously undefined, clarification of existing compensation rules, and creating additional restrictions on collecting discount points, and origination points or fees via the “zero/zero alternative”.
Part of the amendments modifies the currently defined terms “loan originator” and “mortgage broker”. These amendments to Subpart (a) of 12 CFR § 1026.36 alter the definition of “loan originator” to exclude employees of manufactured home retailers that assist consumers in obtaining or applying to obtain consumer credit. This exclusion applies as long as the employees do not act as loan originators by taking a consumer credit application, negotiating the terms of a consumer credit transaction, or engaging in other similar actions. The definition of “loan originator” is also modified to include specific definitions for “individual loan originator” and “loan originator organization,” since these terms are necessary for the amendments to loan originator compensation rules (discussed below). The most important definition included in the proposed revisions is for “compensation,” which the amendment defines as including “salaries, commissions, and any financial or similar incentive provided to a loan originator for originating loans”.
Clarifying Existing Compensation Rules:
The current rule prohibits loan originators from receiving compensation based, directly or indirectly, on any of the transaction’s terms or conditions. The CFPB plans to eliminate “or conditions” to make the language of the statute consistent with similar RESPA provisions, as well as existing and proposed commentary. The CFPB’s amendments expand the current prohibition against loan originator compensation based on the terms of the transaction. Under the amendment, compensation is based indirectly on the terms of the transaction when the loan originator’s compensation was based in whole or in part on a factor that is a proxy for the transaction’s terms. A factor that is a proxy for the transaction’s terms is not itself a term of the transaction. However, it substantially correlates with the terms of the transaction and the loan originator can, directly or indirectly, add, drop, or change the factor when originating the transaction. The CFPB’s illustrative example includes compensation based on whether a loan is held in portfolio or sold on the secondary market. The example assumes that whether the loan is held in portfolio or sold on the secondary market depends in large part on the loan terms, e.g. a five-year balloon loan is held but a thirty-year loan is sold. With this assumption in place, whether the loan is held or sold becomes a proxy for the terms of the transaction, because this factor is substantially related to the terms of the transaction.
Under the amendments, compensation based on a fixed percentage of the amount of credit extended and subject to a minimum or maximum dollar amount remains permissible. The CFPB amendments further clarify that the percentage of the amount of credit must remain fixed. If the percentage varies from transaction to transaction based on the terms of the transaction, then the compensation is prohibited. The CFPB’s changes also offer guidance on the meaning of “amount of credit extended” for closed-end reverse mortgages, declaring the “initial principal limit” as the “amount of credit extended” for closed-end reverse mortgages.
Current rules for consumer-paid compensation prevent a loan originator from receiving compensation from any other person, directly or indirectly, if the consumer has already paid compensation to the loan originator. If a third party knows or has reason to know of the consumer-paid compensation, that person should not pay, directly or indirectly, any compensation to the loan originator. The existing rules allow for consumer-paid compensation to vary based on loan terms, but the amendment prohibits such compensation. The CFPB’s amendment extends the prohibition against dual compensation by both the consumer and a third party to include payments made to the loan originator by a third party, such as a builder or a contractor, if the payment was made pursuant to an agreement with the consumer. Such payments are considered consumer-paid compensation. If any loan originator receives compensation directly from the consumer, no other loan originator (i.e. from the same loan originator organization) may receive compensation, from another person, in connection with that transaction.
The CFPB’s amendments also clarify multiple types of non-consumer-paid compensation, including profit-sharing plans, bonus or profit pools, and payment to individual loan originators by loan originator organizations. As long as contributions to a qualified contribution or benefit plan, such as a 401(k), were not based directly or indirectly on the terms of the participating individual loan originator’s transactions, compensation from the loan originator’s organization to the individual loan originator out of the benefit plan are permissible.
If compensation to individual loan originators from loan originator organizations is made out of a non-qualified plan, the individual loan originator may receive compensation based on the terms of the transactions of multiple individual loan originators if:
- The compensation out of the plan funds to the individual loan originator is not based on the terms of the transactions originated by that individual, and
- Not more than (a) 50% or (b) 25% of the total revenues of the person paying the individual are derived from that person’s mortgage business during the tax year immediately preceding the year in which payment or contribution is made.
Revenues from servicing mortgages are not considered revenues of the person’s mortgage business. The CFPB has offered 50% and 25% as proposed alternatives and will set a fixed percentage after comments are reviewed.
Individual loan originators may receive a year-end bonus under a profit-sharing plan if individual loan originators are not allowed to deviate from a creditor’s pre-established loan terms. However, if a loan originator organization is exclusively creditor-paid, then the bonus is permitted. The amendment also allows individual loan originators to receive compensation based on the terms of a transaction if the loan originator had originated five or fewer loans in the past twelve months prior to the time the organization decided to compensate the individual.
The Zero/Zero Alternative:
The main amendment to existing compensation rules is what the CFPB is calling “the zero/zero alternative.” This amendment prohibits originators from collecting discount points and origination points or fees unless the loan originator provides the consumer with an alternative, comparable loan without discounts points and origination points or fees. The amendment also requires creditors to notify consumers of the zero/zero alternative loans available to them or provide pricing on all their zero/zero alternative loans to brokers, who would then inform consumers of the specific zero/zero alternatives available to them. There is an exception for when a particular consumer does not qualify for a zero/zero alternative.
Comments closed on October 16, 2012, for the CFPB’s proposed amendments to existing loan originator compensation laws. These proposals seek to offer increased consumer protection by expanding prohibitions on loan originator compensation based on the terms of the transaction and preventing further dual compensation by both a consumer and a third party having an agreement by the consumer. The amendments also add clarification to currently defined terms while also defining previously undefined terms. Clarification as to specific compensation schemes within loan originator organization would also be provided to address previous confusion about profit-sharing plans and bonuses.