Key Points to Loan Originator Compensation Requirements
by: Marissa Aquila Blundell, Esq.
Last month the Consumer Financial Protection Bureau (CFPB) released final versions of several rules in accordance with Title XIV of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Most of the new rules take effect in January of 2014, a short implementation period given the breadth and depth of the requirements. The CFPB’s new loan originator compensation and qualification requirements may present a particular challenge in light of the continuing implementation challenges lingering after major changes in this area took effect less than two years ago. However, the rule provides welcome clarification and additional examples in order to address some of the challenges which remain.
Below are initial key points about the compensation-related provisions of the rule, which are effective January 10, 2014.
Loan originator compensation in an amount based on any of the terms of the transaction, except for the loan amount, is prohibited in all consumer credit transactions secured by a dwelling–
Loan originator compensation may not be based on any of the transaction’s term regardless of the source of the compensation, i.e. “lender-paid” or “borrower-paid”.
“Loan originator” is defined as a person who takes an application, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person. Referring parties are included in this definition. Persons performing purely administrative or clerical tasks on behalf of a “loan originator” are excluded from this definition.
Servicers and servicing organizations are excluded from the “loan originator” definition; however, this exclusion is not intended to shield companies that originate loans and intend to serve as servicers for the transactions, or servicers that engage in the refinancing of the debts being serviced. Servicing activity such as loan modification transactions which do not constitute refinance transactions are not considered to be origination activity.
Compensation that is based on a “proxy” for a loan term is also prohibited–
A “multi-stage proxy analysis” is set forth to assist with the determination of whether factor is a proxy for a loan term. First, the factor is analyzed by reference to whether it “consistently varies with a term over a significant number of transactions”. The variance may be a positive or negative. Second, the analysis focuses on whether or not the loan originator “has the ability to” manipulate the factor.
The CFPB commented that whether or not a loan’s type (i.e. FHA, Conventional) is a proxy is not actually a proxy question, but a question involving the scope of the exception permitting compensation based on the loan amount. The CFPB discussed the analysis of whether or not a loan will be held in a creditor’s portfolio or sold on the second market and the application of the proxy analysis resulted in a determination that such a factor is in fact a proxy for a loan term and an impermissible basis for compensation.
Compensation methods designated as “permissible” do not need to be analyzed using the two-pronged proxy analysis set forth above. The list of as “permissible” compensation differs in this rule differs from the current rule’s list in two ways. Specifically, the permissible factor “amount of credit extended” was removed because different provisions of the rule render its inclusion in the list unnecessary, and “legitimate business expense” has also been removed as a permissible factor because this category implicates factors which should undergo the proxy analysis.
Compensation based on the terms of multiple transactions of multiple loan originators is not permitted, in general. However, exceptions are made for designated tax-advantaged plans, and for profits-based compensation plans in certain circumstances. Any contribution to a designated tax-advantaged plan must not be based on the terms of that individual loan originator’s transactions in order for that contribution to be permissible. Additionally, the amount of compensation paid as part of a non-deferred, profits-based compensation plan, may not exceed and amount that is 10% of the individual loan originator’s total compensation corresponding to the same period; or, the originator receiving the compensation must originate only ten or fewer transactions in the prior twelve-month period, in order for the exception to apply.
Manager Compensation and Pricing Concessions–
The compensation restrictions do not apply to “non-producing” managers, but the CFPB clarified that this exclusion applies only if the non-producing manager’s compensation is not otherwise based on whether any particular loan is originated. In other words, a non-producing manger whose compensation is based on the particular transactions of other originators is subject to the compensation restrictions.
“Pricing concessions” by loan originators are generally prohibited; however, the rule provides a limited exception. A loan originator is allowed to decrease compensation in unforeseen circumstances to defray the increased cost of an actual settlement cost over an estimated settlement cost disclosure made under RESPA, or to defray an unforeseen actual settlement cost which was not disclosed. Note, repeated increases in costs or omissions may indicate that the loan originator is not estimating with best information reasonably available. “Loan originator organizations” are not permitted to utilize this exception.
Dual Compensation Prohibited–
For the time being, the dual compensation prohibition is largely unchanged due to the fact that the CFPB created an exemption permitting consumer-paid up-front points in creditor-paid (lender-paid) transactions. The CFPB plans to conduct additional research to understand the impact of such a prohibition, which Dodd-Frank also requires, before finalizing that rule.
An additional exception to the dual compensation restriction allows “loan originator organizations” to pay employees or contractors commissions, provided that the amount of the commission is not based on the terms of the loans originated.
About the Author:
Marissa is Senior VP and General Counsel for Bankers Advisory, Inc. and oversees the firm’s quality control and compliance audit services. She is a graduate of Skidmore College and earned her J.D. at the New England School of Law. She is admitted to the Massachusetts Bar and serves as Co-chair of the Legislative Committee for the Massachusetts Mortgage Bankers Association. She can be reached at marissa@bankersadvisory.com
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