The Consumer Financial Protection Bureau released its final rules regarding Loan Originator Compensation Requirements under the Truth in Lending Act (Regulation Z), on January 20, 2013. The final rule implements requirements and restrictions imposed by the Dodd-Frank Act concerning loan originator compensation; qualifications of, and registration or licensing of loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single-premium credit insurance. I am going to focus on how the new amendments will affect mortgage brokers and correspondent lenders.
There are only a few real changes, but you can tell our policy makers valued the input of our industry this time. The most dramatic change is the ability for mortgage brokers to do borrower paid loans AND be able to compensate their loan officers. The ban on dual compensation is still in effect for brokers, making them less competitive against their correspondent peers. It was an uninformed decision by our policy makers to let this happen to begin with, and they have corrected it. Only problem, it doesn't go into effect until January of 2013.
Clarification on retirement plans has been included. It was unclear whether the contribution to employee retirement plans was allowed or not. It is clear now. Yes, mortgage loan originators can now have a retirement program without the worry of violating federal law. Employers are now able to contribute to a designated tax-advantaged plan for their employees, as defined by the IRS.
Also included with a few stipulations, is a profit based non-deferred compensation allowance. It basically allows a bonus up to 10% of a loan officer's total compensation.
Here is a breakdown of all the changes:
Note: Originator is defined as a loan officer ( a person who takes applications and negotiates terms) and a mortgage broker ( an entity that does not fund loans from its own funds or warehouse line), not a depository bank employee or a correspondent lender.
Correspondent: Requires the retention of records regarding all compensation paid to your loan officers, the loan officer compensation agreements, for a period of three years from the date of the transaction.
Broker: Requires the retention of records regarding all compensation paid to your loan officers, the loan officer compensation agreements, compensation received from your Investors, your agreements with them, compensation received from a consumer or other person (borrower paid transactions), for a period of three years from the date of the transaction.
Payments based on terms of a transaction.(Broker/Correspondent)
You cannot compensate your loan officers based on any term (rate, profit, YSP, etc.) on a single transaction, multiple transactions, or a "pool" of transactions. You cannot pay them based on a "proxy" for a term either. A factor, although not an obvious loan term, is considered a "proxy" for a term of the transaction if the factor consistently varies with that term over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. It is allowable to pay your loan officers a "fixed percentage of the loan amount", and if needed, setting a minimum and maximum commission amount.
You are allowed to make contributions to a "designated tax-advantaged plan" as compensation. A designated tax-advantaged plan means any plan that meets the requirements of Internal Revenue Code section 401(a), 26 U.S.C. 401(a); employee annuity plan described in Internal Revenue Code section 403(a), 26 U.S.C. 403(a); simple retirement account, as defined in Internal Revenue Code section 408(p), 26 U.S.C. 408(p); simplified employee pension described in Internal Revenue Code section 408(k), 26 U.S.C. 408(k); annuity contract described in Internal Revenue Code section 403(b), 26 U.S.C. 403(b); or eligible deferred compensation plan, as defined in Internal Revenue Code section 457(b), 26 U.S.C. 457(b). The contribution cannot be directly or indirectly based on the terms of that individual loan originator's transactions.
A bonus can be paid under a non-deferred profits-based compensation plan based on the profits earned by the loan officer if the non-deferred compensation is not based on a loan term or condition and at least one of the following conditions is satisfied:
The compensation paid to an individual loan originator does not, exceed 10 percent of the individual loan originator's total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid; or
The individual loan originator was a loan originator for ten or fewer transactions during the 12-month period preceding the date of the compensation determination.
Dual Compensation (Brokers)
Dual Compensation (receiving funds from the borrower and creditor) is still not allowed for mortgage brokers.Originators who are employed by a Mortgage Broker have been unable to receive compensation when the borrower paid origination fees and discount points (Borrower Paid). Beginning January 20th, 2014, a mortgage broker will be able to compensate their loan officers on these transactions, as long as the compensation is not based on terms or conditions of the loan.
Safe Harbor (Brokers)
When meeting the Safe Harbor requirement, some verbiage has changed as far as the options you must present to the customer:
The option that stated "The loan with the lowest total dollar amount for origination points or fees and discount points." Has been changed to:
"The loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees)."
Loan officer requirements and hiring standards.(Correspondent/Broker)
All of the new requirements are already covered by the SAFE Act and applied when a loan officer registers for NMLS and State licensing.
Name and NMLSR ID on loan documents.(Correspondent/Broker)
This requires the originators name and NMLS number on the credit application, the note or loan contract, and the security instrument.
Effective June 1, 2013
Eliminates the use of mandatory arbitration clauses, waivers of Federal statutory causes of action, and waivers of consumer rights. Arbitration can be used, but not required in a contract.
Prohibition on financing single-premium credit insurance.(Broker/ Correspondent)
Credit insurance can be paid monthly, but cannot be financed as a "single premium".
Read the final rule here: http://www.consumerfinance.gov/regulations/loan-originator-compensation-requirements-under-the-truth-in-lending-act-regulation-z/
In my humble opinion, the amendments released on January 20, 2013 are well thought out and take a step forward this time in accomplishing regulation that will curtail the bad actors in our industry. Although, I think 99% of them left 4 years ago! Regulation can be costly and a burden, but it does go a long way in preventing the problems we have experienced in past years. I encourage everyone in our industry to be involved in the law making procedures through public comment, contact with The Consumer Financial Protection Bureau, and your local politicians. It does make a difference as these new regulations suggest.