Loan Officer Compensation Rules Finalized

The fourth and last of the final regulationsrncoming from the Consumer Financial Protection Bureau under the Dodd-Frank WallrnStreet Reform and Financial Protection Act was released Friday afternoon.  This rule addresses the causes of what CFPBrnDirector Richard Cordray said was one of the reasons for the collapse of thernmortgage industry, the steering of consumers to high-priced loans.</p

It was common for at least a portion ofrnthe compensation paid to loan officers and mortgage originators to be tied torntheir success in writing specific types of loans.  These loans were usually those that were mostrnprofitable for the lenders and thus more expensive for the borrowers.  Thus the loan officers were being compensatedrnfor steering consumers toward the loans that were probably the most costly andrnpossibly the least suitable for them.</p

After the collapse the Federal Reserverntook steps to change the model under which loan officers, originators, andrnbrokers were compensated.  RichardrnCordray, Director of CFPB, said that the rules released today, mandated by thernDodd Frank Wall Street Reform and Consumer Protection Act build on thoserndeveloped by the Fed.</p

“Before the financial crisis,”rnCordray said, “many mortgage borrowers were steered towards risky and high-costrnloans because it meant more money for the loan originator.  These rules will hold loan originators morernaccountable by banning the incentives that led so many of them to directrnconsumers toward disaster.”</p

The rule has undergone severalrniterations and periods of public comment. rnOne notable change in the final rule from the most recent versionrnreleased last August is that originators are no longer required to provide arnconsumer with a no-fee or flat loan quote when they quote a loan withrnfees.  This was intended to givernconsumers a concrete way to compare the cost advantages or disadvantages ofrnpaying upfront fees or costs.  Cordrayrnsaid numerous public comments convinced CFPB that the flat price example wouldrnmerely be confusing to consumers.</p

The new rule prohibits steeringrnincentives.  A loan officer or brokerrncannot be paid more if the consumer takes a loan with a higher interest rate, arnprepayment penalty, or higher fees.  Norrncan the LO be paid for convincing the consumer to buy additional services fromrnthe lender, broker, or an affiliate such as title insurance or mortgage liferninsurance.  The loan officer or broker can be compensated by way of otherrnmodels such as on the number or size of loans or the aggregate dollar volume ofrnloans written within a stated time period. rn</p

The rule also prohibits the loanrnofficer or broker from being paid by both the consumer and another person suchrnas the creditor, i.e. dual compensation. rnCFPB said that in the run-up to the mortgage crisis consumers oftenrnincorrectly assumed that because they were paying their loan originators they werernlooking out for the consumer’s interest.  However, the Final Rule issued today includes an exception “to allow mortgage brokers to pay their employees or contractors commissions, although the commissions cannot be based on the terms of loans they originate”</p

While the Dodd-Frank act prohibits consumers from paying upfront points or fees on the same loan where the originator is compensated by someone other than the consumer,  it also authorizes the CFPB to waive or make exceptions to the prohibition.  Such a waiver was proposed in order to facilitate consumer shopping and preserve consumer choice.  Although the proposal wasn’t finalized today, the CFPB decided to issue a COMPLETE EXEMPTION to the ban on upfront fees.  </p

In the meantime, the bureau says it will be scrutinizing “several crucial issues relating to the proposal’s design, operation, and possible effects in a mortgage market undergoing regulatory overhaul. The Bureau is planning consumer testing and other research to understand how new Dodd-Frank Act requirements affect consumers’ understanding of and choices with respect to points and fees, so that the Bureau can determine whether further regulation is appropriate to facilitate consumer shopping and enhanced decision-making while protecting access to credit.”</p

The rule also sets uniform standardsrnfor qualifying and screening loan originators. rnUnder current rules loan originators have different sets of qualifying standardsrndepending on whether they work for a bank, thrift, mortgage brokerage, orrnnonprofit organization. The new rule provides a more level playing field sornconsumers can be confident that originators are ethical and knowledgeable. Thernfinal rules generally require: </p<ul class="unIndentedList"<liThat loanrnoriginators meet character, fitness, andrnfinancial responsibility reviews; </li<liThat they be screened for felonyrnconvictions; and,</li<liThat they are required to undertake trainingrnto ensure they have the knowledge about the rules governing the types of loansrnthey originate.</li</ul

Mandatory arbitration of disputesrninvolving mortgage and home equity loans are generally prohibited by the newrnrule as is the practice of increasing loan amounts to cover credit insurance premiums.rn These two sections of the law will takerneffect in June 2013 while the balance of the rule will go into effect inrnJanuary 2014.</p

In a press conference accompanyingrnthe release of the new rule senior CFPB staff said they will be doing baselinernreviews of the effects of the new rules over the next year and will be workingrnwith the affected parties to implement them, watching closely as they arernimplemented, and following up with stakeholders.  They will also be watching the interaction ofrnrules issued by CFPB and those issued by other regulatory agencies.</p

The final rules will be available onrnSunday, January 20 at: http://www.consumerfinance.gov/regulations

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