TRUTH IN LENDING, REGULATION Z
Effective Date: January 10, 2014
The Loan Originator Compensation Rule and the corresponding amendments to Regulation Z implement changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This new rule addresses how loan originators of mortgage loans are compensated, the qualifications of and registration or licensing of loan originators, and compliance procedures for depository institutions. The rule also revises and clarifies existing regulations and CFPB staff commentary relating to loan originator compensation.
Regulation Z already prohibits basing a loan originator’s compensation on any of the terms or conditions of the transaction. The Dodd-Frank Act expanded on this by changing some of the defined terms, by requiring loan originators to meet qualification standards and depository institutions to establish and maintain procedures that are reasonably designed to assure compliance with these standards and the SAFE Act registration procedures. The new rule expands the requirement for loan originators to provide their license or registration number to all loan documents and prohibits loan originator compensation that varies based on the terms of the loan, other than certain terms, such as the principal amount. In addition, the new rule generally prohibits loan originators from being compensated simultaneously by both the consumer and a party other than the consumer.
Record Retention, Section 1026.25
The new rule has increased from two years to three years the period of time to document compliance with the loan originator compensation requirements. Specifically, a creditor must maintain records sufficient to show all compensation it has paid to its loan originators and any compensation agreements it may have with them for three years from the date of the payment. A loan originator organization must retain records that document all compensation it receives from a creditor, consumer, or other party, as well as the compensation agreements that govern the receipt of this compensation for a period of three years from the date of the receipt of the payment.
Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling, Section 1026.36
Definitions, Section 1026.36(a)
In order to understand the requirements and prohibitions of this rule, it’s first necessary to understand how specific terms used in the rule are defined. This rule adds new definitions related to loan originator compensation and revises other existing definitions in the current rule. The key terms to understand are:
“Loan Originator” is a person who performs any one of the following activities with the expectation of or actual receipt of direct or indirect compensation or other monetary gain:
- Takes an application, offers, arranges, assists a consumer in obtaining or applying for, negotiates, or otherwise obtains or extends credit for another person; or
- Through advertising or other communication means represents to the public that such person can or will perform these activities.
The term loan originator can include an employee, agent, or contractor of the creditor or loan origination organization, and a creditor that engages in loan origination activities where the creditor does not finance the transaction at consummation out of the creditor’s own resources.
On the other hand, the term “loan originator” does not include:
- A person who does not take a consumer credit application or offer or negotiate available credit terms, but instead only performs purely administrative or clerical tasks for a loan originator;
- An employee of a manufactured home retailer who doesn’t take a consumer credit application, offer or negotiate available credit terms, or advise a consumer about credit terms;
- A person who only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless this person is compensated by a creditor or loan originator or their agent for a particular consumer credit transaction subject to this rule;
- Certain seller financers; or
- A servicer or servicer’s employees, agents and contractors except if those persons offer or negotiate a transaction that constitutes a refinancing under 1026.20(a) or a situation where an additional obligor is added to the loan.
It’s important to note that the term “loan originator” is different from and more expansive than the term “mortgage originator” as used in the regulations that implement the SAFE Act.
For the purposes of this section “compensation” includes salaries, commissions and any other financial incentives.
Payments Based on a Term of a Transaction, Section 1026.36(d)(1)
No loan originator can receive, in connection with a consumer mortgage loan and no person can pay to a loan originator, either directly or indirectly, compensation in an amount that is based on a term of a transaction other than the loan amount. This prohibition includes a payment based on the terms of multiple transactions by an individual loan originator or based on the terms of multiple transactions by multiple loan originators. In addition, prohibited compensation may include a payment based on a factor that is a proxy for a loan term. The staff commentary provides further information about what constitutes a transaction term and a proxy for a transaction term.
The prohibition, however, does not include a payment based on a fixed percentage of the amount of credit extended, even if that amount is subject to a minimum or maximum dollar amount. Unlike the existing rule, the new rule does not include an exception for compensation received directly from the consumer.
There is an extensive discussion in the rule and the staff commentary related to loan originator compensation that is paid to various forms of retirement or deferred compensation plans. In general, loan originators may receive payments in the form of contributions to a tax-advantaged, defined contribution plan, such as a 401-K plan. An individual loan originator may also receive, and a person may pay to an individual loan originator, compensation under a non-deferred profits-based compensation plan provided that the compensation is not directly or indirectly based on the terms of that individual loan originator’s transactions and at least one of the following conditions is met: (1) the compensation does not, in the aggregate, exceed 10% of the individual loan originator’s total compensation during the same time frame; or (2) the loan originator handled ten or less consumer mortgage transactions during the 12 months prior to the compensation determination.
Payments by Persons Other Than a Consumer, Section 1026.36(d)(2)
The current rule prohibits a loan originator from receiving compensation in connection with a transaction from both a consumer and another person. Compensation for this purpose does not include salaries, hourly wages or other forms of compensation that are not tied to a specific transaction. Compensation also does not include payments a loan originator may receive from a consumer or other person for bona fide and reasonable third party charges, such as credit bureau or appraisal fees that are not retained by the loan originator.
Compensation received directly from a consumer by a loan originator would include payments made under an agreement between the consumer and another person (other than the creditor or an affiliate of the creditor) for the purpose of paying the consumer’s transaction costs (including loan originator compensation).
In addition, no person who knows or has reason to know that the loan originator has been paid compensation by the consumer can pay compensation, directly or indirectly, to the loan originator in connection with the same transaction.
Lastly, a loan originator organization that receives compensation directly from a consumer in connection with a transaction may pay compensation to an individual loan originator as long as it meets the other provisions in this section.
None of the provisions of this section are affected by whether the consumer makes any upfront payment of discount points, origination points, or other similar fees, as long as the loan originator does not receive any compensation directly from the consumer.
Loan Originator Qualification Requirements, Section 1026.36(f)
In order to minimize mortgage loan fraud, loan originators for consumer credit transactions secured by a dwelling must, when required by applicable State or Federal law, be registered and licensed in accordance with the SAFE Act and other applicable laws.
Loan originator organizations that are not government or State housing agencies must: (1) comply with all applicable State law requirements; and (2) ensure that each individual loan originator who works for them is licensed and registered appropriately before acting as a loan originator for a consumer mortgage transaction.
If the individual loan originator employee is not required to be licensed, the loan originator organization must, depending on the date of hire, obtain a criminal background check, a credit report from consumer reporting agency, and obtain information from the Nationwide Mortgage Licensing System and Registry (NMLSR) about any administrative, civil or criminal findings by any government jurisdiction. If the individual loan originator employee is not registered with the NMLSR, the loan originator organization must make a determination based on the criminal background check, the credit report, and any other reliable information known to it, in order to determine that the individual loan originator has not been convicted of or pleaded guilty or nolo contendere to a felony in a domestic or military court during the past seven years or, or any time in the past if the case involved a crime of fraud, dishonesty, breach of trust, or money laundering. The new rule provides for further clarifications and exceptions to this requirement.
Name and NMLSR ID on Loan Documents, Section 106.36(g)
The new rule expands the requirement to provide a consumer with the name and NMLSR ID of the loan originator. When this rule becomes effective the loan originator’s name and NMLSR ID will need to be provided on certain loan documents. The specific loan documents that must reflect this information are the credit application, the note or loan contract and the security agreement.
Policies and Procedures to Ensure and Monitor Compliance, Section 1026.36(j)
Depository institutions must adopt written policies and procedures that are reasonably designed to ensure and monitor compliance with these provisions. The policies and procedures should be appropriate to the nature, size, complexity and scope of mortgage lending activities of the institution and its subsidiaries.