Loan Originator Compensation: New Rules

On January 24, 2013, as the last of the Final Rules of the Consumer Financial Protection Bureau (CFPB) rolled out, I offered an outline of all of them, entitled "CFPB's Gang of Seven (Final Rules)".*

I listed them in order of issuance, as follows:

1. Ability-to-Repay (ATR)
2. High-Cost Mortgage (HCM)
3. Escrow
4. Servicing
5. Appraisals for High-Risk Mortgages
6. Copies of Appraisals
7. Mortgage Loan Originator Compensation

Having come through the last two months responding to numerous questions about these Final Rules, I have been able to cobble together some of the most salient questions, regulatory features, and concerns that our clients have expressed about them. And when I have spoken to the media types, it seems that they also have a set of questions and interests that are not being fully addressed in the current dialogue. Of abiding interest is the change relating to loan originator compensation.

With that in mind, I want to provide a brief outline of some loan originator compensation issues, offering additional details garnered from two months in the trenches working through these regulatory issues on behalf of our clients. From time to time, I will have more to discuss about many regulatory changes anticipated in 2013 and 2014. I am going to conduct this review topic by topic, rather than just as specific regulations subject to a final rulemaking.

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IN THIS ARTICLE

Terms and Conditions
Retirement Plans
Factors and Proxies
Dual Compensation
Non-loan Originations Services
Points and Fees
Loan Originator Qualifications
Mandatory Arbitration Clause
Single Premium Insurance
Record Retention Requirements

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Terms and Conditions

By now, there is nary a residential mortgage lender or originator that does not know that, under Regulation Z, loan originator compensation is prohibited from being based upon the terms and conditions of a mortgage loan transaction.

The CFPB has provided new nomenclature for the terminology "transaction terms and conditions," without much changing the prohibition and certain exceptions to the standing rule. The new terminology is "term of a transaction," but now with the clarified meaning that term of a transaction means to include "any right or obligation of the parties to a credit transaction."

The usual cast of regulatory prohibitions continue in force. For instance, loan originator compensation is still prohibited from being based on such things as the interest rate of a loan, or upon the inclusion of additional fees or charges for products or services provided by other parties to the transaction.

And the usual cast of regulatory identifiers of a term of a transaction continue in force. Thus, fees or charges are a term of the transaction if they must be disclosed in the Good Faith Estimate (GFE) or HUD-1 or HUD-1A Settlement Statement (HUD-1). That obviously means to include loan originator or creditor fees or charges for the credit transaction or for a product or service provided by the loan originator or creditor that is related to the extension of credit; and it also means those fees or charges of other parties for any product or service required by the lender as a condition of the extension of credit. Keep in mind, however, that just because a fee or charge is stated on the HUD-1 does not in itself make the fee or charge a term of the transaction.

One rather controversial area involves the off-setting of compensation due to increased costs. The standing rule has provided that loan originator compensation is prohibited from being reduced in response to a change in the transaction terms. This has caused lenders all manner of frustration, not to mention loss of revenues and diminished profits. Yet, the new rule would allow compensation to be reduced in order to offset unexpected increases to estimated settlement costs, otherwise known as "unforeseen circumstances." What is a circumstance that is unforeseen? The imagination reels! But since the CFPB has offered no formal guidance to delineate very specifically what may or may not be an unexpected event, the lender must be extremely careful not to enter these dark waters too briskly.

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CFPB's Gang of Seven (Final Rules)

This has been a busy month for the Consumer Financial Protection Bureau (CFPB). Since the advent of the New Year, the CFPB has issued seven Final Rules that impact residential mortgage loan originations.

The finale was on Sunday, January 20, 2013, when the CFPB issued the seventh Final Rule, one day prior to the deadline set forth in the Dodd-Frank Act (Dodd-Frank), in § 1400(c), for automatic implementation of its Title XIV provisions.

By my count, these are the Final Rules, in order of their issuance:

1. Ability-to-Repay (ATR)
2. High-Cost Mortgage (HCM)
3. Escrow
4. Servicing
5. Appraisals for High-Risk Mortgages
6. Copies of Appraisals
7. Mortgage Loan Originator Compensation 

I recently discussed the Final Rule regarding the Ability-to-Repay. I will soon provide an outline of the CFPB's important Final Rule for Mortgage Loan Originator Compensation.

With regards to the latter, we will be updating the FAQs Outline - Loan Originator Compensation for the rule changes affecting loan origination compensation. For your consideration, I plan to provide soon a useful and practical understanding of the compensation revisions. In the near future, I will notify you of and provide access to the forthcoming article I am publishing on these regulatory guidelines.

In this article, I want to briefly outline this Gang of Seven (Final Rules). Please keep in mind that I am providing a broad sketch of the Final Rules. As is the case with many applications of legal and regulatory compliance, there are numerous statutory requirements and implementation guidelines that bring about consideration of some recourse to a competent risk management professional.

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IN THIS ARTICLE

Chart: Final Rules Compliance Dates
Gang Member # 1: Ability-to-Repay (ATR)
Gang Member # 2: High-Cost Mortgage (HCM)
Gang Member # 3: Escrow
Gang Member # 4: Servicing
Gang Member # 5: Appraisals for High-Risk Mortgages
Gang Member # 6: Copies of Appraisals
Gang Member # 7: Mortgage Loan Originator Compensation

Library

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Chart: Final Rules - Compliance Dates

Let's start first with a chart of the Final Rules and their respective compliance effective dates. I realize that there is considerable interest in the RESPA/TILA integration of mortgage disclosures; however, on November 16, 2012 the CFPB published a Final Rule exempting persons from complying with twelve specified Title XIV mortgage disclosure requirements. The RESPA/TILA disclosure integration is now scheduled for completion in September 2013. Without the aforementioned exemption, these twelve disclosure requirements would actually have taken effect on January 21, 2013.

Chart deals with only the Gang of Seven (Final Rules).

Disclosure Integration, High Cost, and Counseling

On July 9, 2012, the CFPB issued its proposed integration of RESPA and TILA disclosures into the "integrated" forms, entitled "Loan Estimate" and "Closing Disclosure". These new forms are derived from the Good Faith Estimate (GFE), the Truth-in-Lending (TIL) Disclosure, and the HUD-1/1A Settlement Statement. This assemblage has been duly dubbed with the euphemism "integration".

Excluded from the forthcoming integration are reverse mortgages, home equity lines of credit (HELOCs), chattel dwelling loans, and de minimis originations consisting of loans made by creditors who make five or fewer otherwise covered loans per year.

I have covered the process of constructing these forms in several newsletters and articles, including HERE, and HERE.*

The CFPB is not expecting to finalize the integration before the end of this year. Comments are due November 6, 2012.

However, there is a comment deadline of September 7, 2012 - which will lead to rulemaking before January 2013 - regarding the extent to which the rule applies to loans previously exempted from RESPA or TILA and the further redefining of the term “finance charge” to include most costs associated with residential mortgage loans.

By its own admission, the CFPB has stated that the proposal to "broaden" the definition of a "finance charge" by adopting certain adjustments or accommodations in its HOEPA implementing regulations under Regulation Z, would "cause more loans to exceed the APR and points and fees triggers and be classified as high-cost mortgages under HOEPA."

The CFPB has also set forth proposed rules to implement Dodd-Frank amendments regarding high-cost mortgages and also to provide homeownership counseling provisions that would affect mortgage lending generally (with no exclusion for HELOCs).

The implications of these rules, taken together, are far reaching. I would suggest that you visit our Library for further information.

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IN THIS ARTICLE

“Loan Estimate” and “Closing Disclosure”

Integration

High-Cost Mortgages

Homeownership Counseling

Library

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“Loan Estimate” and “Closing Disclosure”

• The Loan Estimate replaces the GFE and early TIL, while the Closing Disclosure replaces the HUD-1/1A and final TIL.

• HUD's Special Information Booklet will still be required.

• The CFPB's proposal would combine five pages (seven if typical appraisal and servicing disclosures were to be counted) of TILA/RESPA data into a three-page Loan Estimate, not counting the written list of available providers that must be separately provided if the creditor allows a consumer to shop for a settlement service.

• The Closing Disclosure is five pages.

Integration

The integration not only provides an entirely new format but also reconciles certain existing differences between Regulation X, the implementing regulation of RESPA and Regulation Z, the implementing regulation of TILA.

Highlights

• Redefines the term “application” by deleting the 7th component from the definition adopted by HUD, as outlined in its New RESPA Rule FAQs, as “any other information deemed necessary by the loan originator.”

• Alters the coverage of the disclosure requirements so they would apply to home loans, except for the aforementioned exemptions.

• Changes the timing and responsibility rules for providing closing disclosures.