Hearing: FRB Testimony on LO Compensation

On Wednesday, July 13, 2011, the Insurance, Housing and Community Opportunity Subcommittee (Committee of Financial Services) held a hearing, entitled "Mortgage Origination: the Impact of Recent Changes on Homeowners And Businesses."

The overall purpose of the hearing was to evaluate recent changes to mortgage origination laws, with particular focus on the impact the new laws and regulations have on consumers and credit availability in the mortgage finance markets. 

During the hearing, Sandra Braunstein, the FRB's Director of Division of Consumer and Community Affairs seemed to state that the loan officer employees of loan originators (i.e., brokers) would not be required to be paid only by a salary on consumer-paid transactions, but may also be paid "bonus" commissions.

Her testimony today actually supports my understanding of her statement to this Subcommittee.

[See page 8-9 of Director Braunstein's submitted testimony in our Library.]

Under the new TILA loan compensation rule, if a loan is brokered and the consumer is paying the broker fee, then the branch manager, the loan officer, and all the other employees may only be paid a salary or hourly wage.

Similarly, bonuses and referral fees to tellers, processors, and other staff are not be permitted for a brokered loan when the borrower pays broker fees or other origination fees to the broker.

Perhaps I did not understand fully Director Braunstein's remarks. But if that aspect of the Rule is changed, then this would be a significant relief to mortgage brokers. 

In any event, the details and facts must be considered. So further clarity will be needed to determine if this is actually a change in FRB policy.

 HEARING

The hearing consisted of two panels.

The full text of the testimony of each witness may be found in our Library.

 WITNESSES

Panel I

Sandra F. Braunstein, Director of Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System

Teresa Payne, Associate Deputy Assistant Secretary, Regulatory Affairs, Department of Housing and Urban Development

Kelly Cochran, Deputy Assistant Director for Regulations, Consumer Financial Protection Bureau , Department of Treasury

James R. Park, Executive Director, Appraisal Subcommittee, Federal Financial Institutions Examination Council

William B. Shear, Director of Financial Markets and Community Investment, Government Accountability Office

Anne Norton, Maryland Deputy Commissioner of Financial Regulation, on behalf of the Conference of State Bank Supervisors

Panel II

Steve A. Brown, Executive Vice President, Crye-Leike, on behalf of the National Association of Realtors

Henry V. Cunningham, Jr., CMB President, Cunningham & Company, on behalf of the Mortgage Bankers Association

Tim Wilson, President, Affiliated Businesses for Long & Foster Companies, on behalf of the Real Estate Services Providers Council, Inc.

Anne Anastasi, President, Genesis Abstract and President, American Land Title Association

Mike Anderson, President, Essential Mortgage, on behalf of the National Association of Mortgage Brokers

Marc Savitt, President, The Mortgage Center, on behalf of the National Association of Independent Housing Professionals

Sara Stephens, President Elect, Appraisal Institute

Don Kelly, Executive Director, Real Estate Valuation Advocacy Association (REVAA), on behalf of REVAA and the Coalition to Facilitate Appraisal Integrity Reform

Janis Bowdler, Director, Wealth-Building Policy Project Office of Research, Advocacy, and Legislation, on behalf of the National Council of La Raza

Ira Rheingold, Executive Director, National Association of Consumer Advocates

 Library

Insurance, Housing and Community Opportunity Subcommittee
(Committee of Financial Services)

"Mortgage Origination: the Impact of Recent Changes 
on Homeowners And Businesses"
 
Witness Testimony - Two Panels

July 13, 2011

CFPB: Defining "Larger Participant"

On June 29, 2011, the Consumer Financial Protection Bureau (CFPB) issued a request for comments regarding the requirement to implement a program to supervise certain nondepository covered persons for compliance with Federal consumer financial laws.

The scope of the CFPB's supervision coverage varies for different product markets. Section 1024 of the the Dodd-Frank Act (Dodd-Frank) provides that the CFPB may supervise covered persons in the residential mortgage, private education lending, and payday lending markets. For other markets for consumer financial products or services, the supervision program generally will apply only to a ''larger participant'' of these markets.

Therefore, the CFPB is required to issue an initial ''larger participant'' rule not later than July 21, 2012, one year after the designated transfer date.

Essentially, under Dodd-Frank, the CFPB's non-bank supervision program will be able to look at companies of all sizes in the mortgage, payday lending, and private student lending markets. For all other markets - such as consumer installment loans, money transmitting, and debt collection - the CFPB generally can supervise non-banks only if they are larger participants in these markets.

Hence, in order to supervise them, the CFPB must write a rule within the next year to define who is a "larger participant."

The following outline is a brief synopsis of the questions requiring comments.

COMMENTS DUE DATE: AUGUST 15, 2011.

THREE ESSENTIAL QUESTIONS

• Should a larger participant be defined based on the relative size of the participants within a market (i.e., whether the number of annual transactions of the market participants is above the mean or median) or, alternatively, should a larger participant be defined based on an absolute threshold, such as doing business in a specified number of states?
• Should more than one criterion be used to determine the size of a market participant, such as the number of annual transactions and/or the number of states in which the participant conducts business?
• Should the same criteria and thresholds be used to define a larger participant for every market, or should different criteria and thresholds be tailored for each market based on the market's characteristics?

SIZE = AGGREGATE = LARGER PARTICIPANT

In considering how to define which nondepository covered persons are larger participants in a particular market, a number of approaches are be suggested.

Determining the appropriate criteria and thresholds are being approached in light of the applicable statutory language, which refers to a ''larger participant'' of a market. (This statutory language is not limited only to the ''largest'' participants in each market, but at the same time does not encompass smaller market participants.)

Dodd-Frank provides that, for purposes of computing the activity levels of a market participant, the activities of the participant ''shall be aggregated'' with the activities of nondepositor ''affiliated companies.''

Examples of potential criteria that could be used to define larger participants of a market include one or a combination of the following: annual number of transactions in the market; annual value of transactions (i.e., total loan volume); annual receipts or revenue; geographic coverage (i.e., number of states where engaged in business); asset size; and outstanding loan balances.

CRITERIA

• The number of states in which a market participant conducts business. Public data, including from sources such as the Securities and Exchange Commission's online EDGAR database, and state and federal licensing and registration records.
• Nonpublic state or federal supervisory or other data.
• Commercial data, such as proprietary industry market analyses.
• Data obtained directly from  market participants.

REGISTRATION?

The CFPB is considering the establishment of a registration program for certain covered persons through a future rulemaking that will serve to supplement existing data used to measure market participants.

Questions:

• For each market, what reliable data sources are available and would be suitable for the CFPB to use in its larger participant determinations?
• What data should the CFPB collect through a registration process to use in its larger participant determinations?

MEASUREMENT DATES AND SUPERVISION TIMEFRAMES

Questions:

• What factors should the CFPB consider in connection with the treatment of events such as the merger market participants during an assessment time period?
• Are there alternative approaches for establishing an assessment time period the CFPB should consider?
• For what length of time should a market participant be subject to supervision once it meets the applicable threshold?
• How should subsequent changes in the participant's size be treated?

MARKETS

The CFPB seeks comments regarding the following markets: Debt Collection; Consumer Reporting; Consumer Credit and Related Activities; Money Transmitting, Check Cashing, and Related Activities; Prepaid Cards; and, Debt Relief Services.

Questions:

• What consumer financial product or service markets should be included in the initial rule?
• How should the financial product or service markets included in the initial rule be defined?
• In addition to considerations relating to how to define the relevant product markets, should all markets be national in scope, or should the CFPB consider regional or other geographic markets in certain instances?
• If regional or other geographic markets should be considered, describe with specificity how they could be defined?
• What specific criteria should be measured, and threshold levels set, to define a larger participant in the markets identified above, and in any other markets that should be included in an initial rule?
• What data should be used to assess whether the thresholds have been met?

LIBRARY

CFPB: Defining Larger Participants in Certain
Consumer Financial Products and Services Markets
Notice and Request for Comment. (12 CFR Chapter X)
Federal Register, Vol. 76, No. 125
June 29, 2011