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It’s 2014, and if you’re still in the mortgage business, you’ve survived the initial Consumer Financial Pro
Bureau (CFPB) Title XIV rulemaking implementation phase. You feverishly worked through the end of
implement compliance systems that addressed all of the new rules, and now it’s time to put those s
to the test.
There are certainly new business opportunities created by this regulatory environment, but make no m
There are also new pressures, and a host of new compliance traps for the unprepared. One area that w
special attention is loan-originator compensation. As a variety of new regulations come into effect th
it’s important to ask: Is your compensation compliant? >>
Conforming to the intricate terms of the loan-originator compensa
rule requires careful consideration
By R. Colgate Selden
Counsel, Alston & Bird LLP
Illustration by: Dennis Wunsch
With so many new rules and regulations coming into effect this year, mortgage brokers and originators have a range of compliance issues to focus on. The topic of loan-originator compensation certainly isn’t a recent addition to mortgage professionals’
regulatory radar, but that doesn’t mean its guidelines are fully understood by the
originators working in the industry today.
boiled down, the CfPb’s current loan-originator compensation rule is actually a
revision of the federal reserve’s version of the rule, but it also contains new features that have not been vetted in the marketplace. Certain loan-originator compensation also relates to the 3 percent cap on points and fees in the safe harbor of the
ability-to-repay (a Tr) qualified mortgage (QM) rule.
To complicate matters, the Dodd-frank Wall Street reform and Consumer Protection act amended the Truth in Lending act to add new liability for individual loan originators and provided consumers with a new defense to foreclosure when it comes to
loan-originator compensation violations. This defense is similar to the a Tr provisions,
which borrowers can raise as many as 20 years down the road.
Of course, if a borrower raises the defense 20 years after the fact, the lender has
a strong argument that the borrower had the ability to repay when the loan was
consummated, assuming that the lender conducted the a Tr analysis at or before
consummation. for a loan-originator-compensation violation, however, the passage
of time likely doesn’t improve facts in the originator’s favor.
Given this new reality, mortgage professionals should take a closer look at a few
select issues in the CfPb’s loan-originator compensation rule. Which key facts and
figures should your company bear in mind going forward?
Terms and proxies
first and foremost, mortgage professionals should know that the compensation
provisions in the CfPb’s rule prohibit compensation based on the “terms of the
transaction” or a “proxy” for terms of the transaction. The fed’s rule prohibited compensation based on “terms or conditions of the transaction” and “proxies” for terms
The CfPb’s rule also defines the meaning of “terms.” In many respects this is helpful, but “terms” is defined somewhat broadly and includes the payment of any fee or
charge imposed on the consumer for products or services required as a condition for
the extension of credit. If a lender, for example, pays an originator extra compensation for referring a borrower to the lender’s title-insurance affiliate and purchasing a
lender’s title policy, the originator is receiving, and the lender is paying, compensation based on the terms of the transaction. In short, this is a violation of the rule.
The rule also defines what constitutes a “proxy,” which basically includes factors
that consistently vary with transaction terms over a significant number of transactions and that can be manipulated by a loan originator. In general, under the CfPb’s
definitions of “terms” and “proxy,” compensation based on borrower characteristics such as a borrower’s income level or geography may be permissible assuming a
loan originator can’t change the borrower’s income or the borrower’s decision where
to live. There may be rare occasions when a loan originator could manipulate these
R. Colgate Selden is a counsel in alston & bird LLP’s Washington, D.C., office.
He joined the firm from the Consumer financial Protection bureau (CfPb),
where he was a senior counsel in the Office of regulations. Selden also
served as a member of the CfPb Implementation Team at the U.S. Department
of the Treasury. before this, his private practice assisted mortgage bankers,
brokers, affiliates and other service providers with regulatory compliance.
reach Selden at firstname.lastname@example.org.
factors, however, so mortgage professionals should take care. They also should be
aware of potential fair-lending implications when compensation is based on the characteristics of a borrower or the location of the underlying security property.
Take note of this past December’s joint fair-lending action by the CfPb and the Department of Justice against a major auto lender. at a certain level, the CfPb views
auto dealers and mortgage brokers the same to the extent loan pricing is determined
based on each group’s respective compensation structures.
Policies and procedures
another part of the compensation rule clarifies that a determination under the rule
with respect to whether compensation is based on transaction terms is made according to the objective facts and circumstances of the situation. In other words, if a loan
originator is compensated on some basis other than transaction terms, but the compensation appears to track closely with certain transaction terms, the compensation
could be viewed the same as compensation based on transaction terms. This same
provision also explains that if compensation is paid according to a company’s written
policies and procedures (and those policies and procedures were being followed),
then the determination would be based on whether the compensation as spelled out
in the policies and procedures violates the rule. This is an important component that
ties the rule together — a kind of mini safe harbor.
although this part of the rule highlights the importance of policies and procedures, still another part of the rule expressly clarifies that different loan originators may be paid differently for the same loan. This provides leeway for lenders to
reward higher-performing loan originators — used on higher volumes, quality of
loan files, long-term performance of loans originated, etc. — with higher commissions, but this can create fair-lending issues, as well. again, note the auto lender
action referenced previously.
Commission bands establishing minimum and maximum limits for loan-originator-compensation plans should be considered to reduce this risk. for example, some
lenders require that all loan-originator commissions be within a defined range of 100
basis points (e.g., minimum commission of 1 percent and a maximum of 2 percent).
Under certain circumstances, the CfPb permits companies to reward individual loan
originators with compensation based on profits without violating the prohibition on
paying compensation based on transaction terms. Mortgage-business-related profits
turn on a number of factors but are typically derived from revenues generated by interest
rates, prepayment penalties, origination fees, etc.
The CfPb’s rule clarifies how payments based on mortgage-business profits are
generally prohibited. It does provide safe harbors, however, for two different types
1. Compensation paid into defined contribution plans that are designated tax-advan-taged plans (e.g., certain annuity and pension plans); and
“If a loan originator is
compensated on some basis other than
transaction terms, but the compensation appears
to track closely with certain transaction terms,
the compensation could be viewed the
same as compensation based
on transaction terms.”