The Dodd-Frank Wall Street Reform and Consumer Protection Act expanded on previous efforts by lawmakers and regulators to strengthen loan originator qualification requirements and regulate industry compensation practices.  The Consumer Financial Protection Bureau (CFPB) has published a proposed rule amending Regulation Z (Truth-in-Lending) amendments made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  The proposal would implement changes to current loan originator compensation provisions, which would otherwise become effective in January 2013 under the Dodd-Frank Act.

Earlier in the year, the CFPB considered a flat origination fee that could not vary with the size of the loan.  However, after meeting with industry groups, the bureau decided that flat fees would have a disproportionate impact on lower income borrowers and disrupt stability in the mortgage market as it would require radical restructuring of existing pricing structures and practices in the secondary market.

The rule, as proposed, would generally require that, before a creditor or mortgage broker may impose upfront points and/or fees on a consumer, the creditor must make available to the consumer a comparable, alternative loan with no upfront discount points, origination points, or fees that are retained by the creditor, broker, or an affiliate of either (a no points-no fees option).

The proposal would adjust existing rules governing compensation to loan officers and mortgage brokers to provide greater clarity and flexibility.  Specifically, the proposal would:

• Continue the general ban on paying or receiving commissions or other loan originator compensation based on the terms of the transaction (other than loan amount), with some refinements:

• • The proposal will allow reductions in loan originator compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances.

• Clarify and revise restrictions on pooled compensation, profit-sharing and bonus plans for loan originators, depending on the potential incentives to steer consumers to different transaction terms.
• Continue the general ban on loan originators being compensated by both consumers and other parties, with some refinements:

• • The proposal would allow mortgage brokers that are paid by the consumer to pay their loan originators a commission on the transaction, so long as the commission is not based on the terms of the transaction.

• Implements a provision requiring both individual loan originators and their employers to be “qualified” and to include their license or registration numbers on certain specified loan documents.

The CFPB is taking comments on the proposed rules governing mortgage loan originations until October 16, 2012.  The CFPB plans to issue final rules by January 2013 to meet Dodd-Frank Act requirements.  The CFPB is requesting comment on how long to provide for implementation.  Plaza encourages you to provide your comments.