CFPB PROPOSED RULE

Truth in Lending Act

12 CFR Part 1026

Wendy Bernard, Esq. The Bernard Law Group

www.bernardlawgrp.com

Sep 2010 Federal Reserve adopts Loan Originator Compensation Rules

April 6, 2011 Fed Rule Compliance Date

July 21, 2011 Dodd Frank transfers Rulemaking Authority to CFPB

Dec. 22, 2011 CFPB Interim Rules

Sept 7, 2012 CFPB Proposed Rules

A “loan originator organization” is a loan originator that is an organization such as a trust, sole proprietorship, partnership, limited liability partnership, limited partnership, limited liability company, corporation, bank, thrift, finance company, or a credit union.

An “individual loan originator” is limited to a natural person.

Purpose

◦ Implement statutory changes made by the Dodd-Frank Act to Regulation Z’s current Loan Originator Compensation Provisions

1. Restriction on Upfront Points and Fees

2. Restrictions on Mortgage Loan Originator Compensation

3. Loan Originator Qualification Requirements

4. NMLS Numbers/Expanded Use

5. Anti-Steering Rules

6. Ban Arbitration Agreements

7. Ban Credit Insurance Financing

Specifically

◦Dodd-Frank Act would ban the imposition on consumers of discount points, origination points, or other upfront origination fees that are retained by the creditor, broker, or an affiliate of either.

Creditor or Mortgage Broker may impose upfront

points and/or fees on a consumer in a closed-end mortgage transaction

the creditor must make available to the consumer a comparable, alternative loan with NO

discount points origination points or origination fees

…that are retained by the creditor, broker, or an affiliate of either

ANY TIME BEFORE APPLICATION NON-BROKER TRANSACTION:

◦ Creditor provides a consumer an individualized quote for a loan that includes upfront points and/or fees

◦ Creditor also provides a quote for a zero-zero alternative

ANY TIME BEFORE APPLICATION BROKER TRANSACTION: ◦ Creditors provide mortgage brokers with the pricing for all of their zero-zero alternatives. ◦Mortgage brokers then would provide quotes to consumers for the zero-zero alternatives when presenting different loan options to consumers

May charge fees attributable to Independent/Non-Affiliated Third Party Service Providers.

No Zero Cost Loan Offer required if the Consumer is Unlikely to Qualify

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:

◦ No ban on origination points ◦ Origination fees may vary based on the size

of the loan ◦ Recognition that the costs of origination can

vary for loans with different characteristics, such as geography and loan type, and GSE-imposed loan level pricing adjustments vary by loan size.

◦ Avoid disproportionate harm to small lenders ◦ Avoid regressive outcome for borrowers with

smaller loan amounts - would be charged more than they are typically charged currently.

Funds contributed towards closing costs by sellers, home builders, home-improvement contractors, or similar parties,

when used to compensate a loan originator, are considered payments made directly to the loan originator by the consumer.

if they are made pursuant to an agreement between the consumer and the person other than the creditor or its affiliates.

Allow reductions in loan originator compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances.

Clarify when a factor used as a basis for compensation is prohibited as a “proxy” for a transaction term.

A factor (that is not itself a term of a transaction originated by the loan originator) is a proxy for the transaction’s terms if: (i) the factor substantially correlates with a term or terms of the transaction, and (ii) the loan originator can, directly or indirectly, add, drop, or change the factor when originating the transaction.

No loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on any of the transaction’s terms[or conditions].

If a loan originator’s compensation is based in whole or in part on a factor that is a proxy for a transaction’s terms, the loan originator’s compensation is based on the transaction’s terms

No proxy exists if compensation is not substantially correlated with a difference in a transaction’s terms.

Current credit score proxy example is

confusing

Created uncertainty for creditors and loan originators depending on facts and circumstances.

A credit score may or may not be a proxy for a transaction’s terms, depending on the facts and circumstances;

Not automatically a proxy

pooled compensation

profit-sharing

bonus plans

Potential to steer consumers to different transaction terms.

◦ Mortgage creditors and others have raised questions about whether loan originators that are compensated differently and originate loans with different terms are prohibited from pooling their compensation and sharing in that compensation pool.

◦ Where loan originators are compensated differently and they each originate loans with different terms, LO Comp Rule does not permit the pooling of compensation so that the loan originators share in that pooled compensation

◦ Bona fide returns or dividends are those returns and dividends that are paid pursuant to documented ownership or equity interests allocated according to capital contributions, and

◦ where the payments are not mere subterfuges for the payment of compensation based on loan terms, and

◦ bona fide ownership or equity interests are not allocated based on the terms of a loan originator’s transactions.

◦ Creditor is not limited in its ability to offer certain loan terms.

◦ a creditor is not limited in its ability to offer a higher interest rate as a means for the consumer to finance the payment of the loan originator’s compensation or other costs that the consumer would otherwise pay (for example, in cash or by increasing the loan amount to finance such costs).

◦ Thus, a creditor is not prohibited by § 1026.36(d)(1) from charging a higher interest rate to a consumer who will pay some or none of the costs of the transaction directly, or offering the consumer a lower rate if the consumer pays more of the costs directly.

◦ Loan originator closes a transaction

◦ Creditor contributes some agreed upon, small percentage of that transaction’s principal amount (for example, 0.15 percent, or 15 “basis points”) into the loan originator’s point bank account.

◦ This account is not actually a deposit account

◦ The loan originator may spend any amount up to the current balance in the point bank to obtain pricing concessions from the creditor on the

◦ consumer’s behalf for any transaction.

Employers permitted to make contributions from general profits derived from mortgage activity to 401(k) plans, employee stock plans, and other “qualified plans” under tax and employment law.

permit employers to pay bonuses or make contributions to non-qualified profit-sharing or retirement plans from general profits derived from mortgage activity if either: ◦ the loan originator affected has originated five or

fewer mortgage transactions during the last 12 months; or

◦ the company’s mortgage business revenues are limited.

25 percent or 50 percent of total revenues as the applicable test.

Even though contributions and bonuses could be funded from general mortgage profits, the amounts of such contributions and bonuses could not be based on the terms of the transactions that the individual had originated.

Even though contributions and bonuses could be funded from general mortgage profits, the amounts of such contributions and bonuses could not be based on the terms of the transactions that the individual originated.

MLOs and their employers to be “qualified”.

◦ Where a loan originator is not already required to be licensed under SAFE ACT

◦ Require employer to ensure that the loan

originator meets character, fitness, and criminal background check standards (SAFE)

◦ Training commensurate with the loan originator’s duties.

◦ Employers/LOs license registration numbers on certain key

◦ loan documents.

MLOs and their employers to be “qualified”.

◦ Where a loan originator is not already required to be licensed under SAFE ACT

◦ Require employer to ensure that the loan

originator meets character, fitness, and criminal background check standards (SAFE)

◦ Training commensurate with the loan originator’s duties.

◦ Employers/LOs license registration numbers on certain key

◦ loan documents.

Depository institutions to establish and maintain procedures to assure and monitor compliance with many of the requirements described above and the registration procedures established under the SAFE Act.

Ban general agreements requiring consumers to submit any disputes that may arise to mandatory arbitration rather than filing suit in court

Ban the financing of premiums for credit insurance

Creditor - compensation paid to a loan originator organization or the creditor’s individual loan originators, and the governing compensation agreement, for 3 years after the date of payment; and

Loan originator organization - records of the compensation it receives from a creditor, a consumer, or another person, it pays to its individual loan originators; compensation agreement that governs those receipts or payments, for 3 years after the date of the receipts or payments.

Creditors - make and maintain,3 years, records to show that they made available to a consumer a comparable, alternative loan when required by the proposed rule, and complied with the requirement that where discount points and origination points or fees are charged, there be a bona fide reduction in the interest rate compared to the interest rate for the comparable, alternative loan.

During the Small Business Review Panel process, the Bureau identified

six categories of small entities that may be subject to the proposed rule for purposes of the RFA:

• commercial banks (NAICS 522110); • savings institutions (NAICS 522120);117 • credit unions (NAICS 522130); • firms providing real estate credit (NAICS 522292); • mortgage brokers (NAICS 522310); and • small non-profit organizations.

Commercial banks, savings institutions, and credit unions are small

businesses if they have $175 million or less in assets. Firms providing real estate credit and mortgage brokers are small businesses if their average annual receipts do not exceed $7 million.

October 16, 2012 Deadline for public commentary

January 21, 2013 CFPB plans to issue final rules

January 21, 2013 Rules take effect UNLESS CFBP delays

15 U.S.C. § 1601 note. The Bureau may provide up to a year for a transition period to implement new rules.