Update on CFPB Proposed LO Compensation Rule
by Marissa Aquila Blundell, Esq.
Sr. VP & General Counsel
Industry comments regarding the Consumer Financial Protection Bureau’s proposed rules governing loan originator compensation, implementing key provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) must be submitted by October 16, 2012. Although the CFPB extended the comment period for a limited section of the proposed rule, comments related all other sections which are subject to the original comment period end date. The proposed rules were published in the Federal Register on September 7, 2012.
The proposal contains clarifying amendments to definitions set forth in the current TILA compensation restrictions. For example, the proposal aims to clarify that clerical employees of creditors and loan originators who do not “arrange, negotiate, or otherwise obtain an extension of credit for consumers” are not covered by the rule, while producing managers who meet the definition of a loan originator are subject to the compensation restrictions.
Additional proposed clarifications and changes with respect to the prohibition of loan originator compensation based on a transaction’s terms are highlighted below:
- Guidance for determining whether a factor is a proxy for a transaction’s term is provided along with practical examples. A factor will be considered a proxy for a transaction term “if the factor substantially correlates with a term or terms of the transaction and the loan originator can, directly or indirectly, add, drop, or change the factor when originating the transaction.” If a factor cannot be added, dropped, or changed, directly or indirectly by a loan originator, that factor cannot be a proxy for the transaction’s terms because such a factor could not be the basis for incentives to steer consumers inappropriately.
- A property location is listed as an example of a factor which would not be a proxy for a transaction term. Whether a loan is held in portfolio, as opposed to sold on the secondary market based the product type is listed as an example of a factor which is a proxy. Of note, the CFPB has stated that under that under its proposal a credit score should be subject to the proposed test and not considered a proxy factor automatically.
- “Pooled compensation,” a practice whereby loan originators are compensated differently and each originates loans with different terms and share in such pooled compensation is specifically not permitted.
- The use of “point banks” by creditors and loan originators to allow loan originator compensation to be reduced as a concession for the borrower is likewise impermissible. However, the CFPB has included a limited permissible pricing concession exception permitting a loan originator to reduce compensation in the event an unanticipated increase in a non-affiliated third-party closing cost results a limit set by applicable law, such as RESPA tolerance requirement, being exceeded. This exception would not apply if a creditor or loan originator “knows or should reasonably be expected to know the amount of any third-party closing costs in advance.” Repeated pricing concessions for the same categories of closing costs across multiple transactions would be considered knowledge of the cost in advance.
Moreover, the current loan originator compensation restrictions are expanded and new restrictions with respect to the payment of origination points and fees by the consumer are set forth as follows:
- The prohibition of loan originator compensation based on a transaction’s terms applies regardless of whether or not the consumer pays the loan originator directly. Under the current rule, “borrower-paid transactions” are not subject to this restriction. This expansion of the compensation restriction was one of several additional requirements set forth in Dodd-Frank.
- Where a loan originator will receive compensation from any source other than the consumer, discount points and origination points and fees may not be imposed upon the consumer unless a “comparable alternative loan” which does not include discount points and origination points and fees is made available. However, no “comparable alternative loan” is required to be provided unless the consumer qualifies for such a loan. Further guidance clarifies that no discount points or origination points and fees may be imposed on the consumer, unless there is a bona-fide reduction in the interest rate when compared to the interest rate for the comparable alternative loan that does not include discount points and origination points or fees.
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