Discusses the parameters of the new definition of "loan originator," who is and is not a "loan originator" for purposes of the new rule? Also discussed is the prohibition on dual compensation, prohibited compensation based on a term of a transaction, and restrictions on pooled compensation plans.
2. Scope
Reg Z – Amends 1026.36
Rule is broken into 5 parts:
◦ Loan originator compensation
Clarifies MLO provisions of D-F that codify
existing regulations
No compensation based on term of loan
No dual compensation
◦ MLO Qualifications and unique identifier
◦ Financing Single Premium Insurance
◦ Arbitration clauses
◦ Recordkeeping Requirements
3. Coverage
Most of the rule applies to closed-end
consumer loans secured by a dwelling
except:
◦ Timeshares
4. Definition: Loan Originator
A person who, in expectation of direct or
indirect compensation or other monetary
gain, performs any of the following
activities:
◦ takes an application
◦ offers, arranges, assists a consumer in
obtaining or applying to obtain, negotiates, or
otherwise obtains or makes an extension of
consumer credit for another person
◦ through advertising or other means of
communication represents to the public that
such person can or will perform any of these
activities
5. Includes an employee, agent, or contractor of a
creditor
Includes a creditor that engages in loan
origination activities if the creditor does not
finance the transaction at consummation out of
the creditor's own resources
Includes collecting info on behalf of the
consumer to submit to a loan originator or
creditor
Initially contacting and ‘orienting’ the consumer
to a particular MLO or creditor
Assisting a consumer by filling out an application
form, preparing application packages
Definition: Loan Originator (cont’d)
6. Definition: Loan Originator (cont’d)
Does NOT include:
◦ A person who performs purely administrative or clerical
tasks on behalf of an MLO
◦ A person who engages only in certain management,
administrative and clerical tasks, such as loan processors
◦ A servicer or servicer's employees, agents, and
contractors who offer or negotiate terms for purposes of
renegotiating, modifying, replacing, or subordinating
principal of existing mortgages where consumers are
behind in their payments, in default, or have a
reasonable likelihood of defaulting or falling behind.
◦ Certain seller financers
7. Admin & Clerical Staff Exception to
LO Definition
Providing application at consumer’s
request and/or accepting completed
application
◦ Without assisting the consumer in completing
Deliver the app to the LO or creditor if:
◦ Don’t assist in completing the app, process or
analyze, or discuss specific terms or products
Responding to consumer inquiries
and providing general info
8. Admin & Clerical Staff Exception
(cont’d)
Certain loan processing functions
◦ Compiling application packages and documentation
◦ Verifying information
◦ Arranging for consummation, providing that any
discussion of credit terms only confirms agreed to
terms
Underwriting, credit approval, credit pricing
◦ Receive and evaluate consumer info to make
underwriting decisions and communicating
decision to MLO
◦ Approve or set credit terms, establish credit pricing
offered to public
◦ No communication with consumer
9. Compare with SAFE Act Definition
Mortgage loan originator means
(1) An individual who:
(i) Takes a residential mortgage loan
application; and
(ii) Offers or negotiates terms of a
residential mortgage loan for
compensation or gain.
10. Differences b/w SAFE Act & TILA
Definition
Any vs. And
TILA definition separately triggered by assisting
a consumer in obtaining or applying to obtain a
loan
◦ advising on terms, preparing loan packages, or
collecting information on behalf of the consumer
TILA includes “any person who represents to
the public through advertising or other means
of communicating or providing information . . .
that such person can or will provide any of the
services or perform any of the activities”
11. Definition of Loan Originator
Organization
Any loan originator that is not an
individual loan originator
‘Loan Originator’ includes creditors that
make use of table funding by a 3rd party
◦ When the creditor does not provide the funds
at consummation
◦ If close in own name but don’t fund and assign
after consummation, you are still both a
creditor and a LO
12. Definition of Compensation
Includes:
◦ Salaries
◦ Commissions
◦ Annual or periodic bonuses
◦ Merchandise, trips, services
◦ Amounts the MLO retains independent of
the label or the name of the fee
◦ Any incentive regardless of whether labeled
as payment for non-MLO services –
‘processing fee’
13. Definition of Compensation
Does not include:
◦ amounts the LO or LO organization receives
as payment for bona fide and reasonable
charges, such as credit reports, where
those amounts are passed on to a third
party that is not the creditor, its affiliate, or
the affiliate of the loan originator
◦ Payment to the bank or an affiliate for non-
loan originator activities
14. Prohibition Against Dual
Compensation
Reg Z already stated that if a LO
receives comp directly from a
consumer the LO can’t receive comp
from anyone else in connection with
that transaction
Payment by consumer to LO from loan
proceeds is comp directly from
consumer, payment derived from an
increased rate is not
15. Dual Compensation (cont’d)
Payment from consumer to creditor: If the
creditor receives comp from a consumer,
may pay an employee LO, if not based on
the terms of the transaction
All Creditor Provided Funds not Dual
Comp: If the LO receives comp directly
from a consumer, creditor may still
provide funds for the benefit of the
consumer if applies solely to costs of the
transaction other than LO comp
16. Dual Compensation (cont’d)
Creditor provided Funds Cont’d:
◦ Funds from the creditor applied to reduce
settlement charges, including origination
fees paid by creditor to the LO, are not
dual compensation if disclosed as a credit
on the GFE
17. Dual Compensation (cont’d)
Funds from 3rd Party: Comp qualifies as
‘directly from a consumer’ if paid to a LO
on a consumer’s behalf pursuant to
agreement b/w consumer and 3rd party
◦ Includes payments from seller, home builder,
contractor, and RE broker or agent
Funds from 3rd Party example:
◦ Seller agrees to pay consumer $1,000 of closing
costs
◦ Any of that $1,000 paid to the LO is comp directly
from the consumer, even if the agreement does not
specify that any must by used to compensate the LO
18. No Prohibition on Upfront Points
& Fees
Dodd-Frank would have prohibited
upfront points or fees if the LO comp is
paid by a person other than the
consumer
CFPB proposed to waive the ban if the
consumer offered an alternative with no
upfront points and fees
In final rule CFPB issued complete
exemption
◦ Further consumer testing
19. Compensation Based on Term
Determination based on the objective
facts and circumstances indicating that
compensation would have been
different if a transaction term were
different
◦ Matter of policy
Rule applies to comp from single or
multiple transactions
20. Definition: Term of Transaction
Any right or obligation of any of the
parties to a credit transaction
Includes:
◦ Any right or obligation in the credit
contract, mortgage, deed of trust, security
instrument, or other document
incorporated by reference
◦ Payment of any fees to the LO or creditor
for the credit or for a product or service
related to the credit, including fees
financed through the rate
If required to be disclosed on either the GFE
or HUD-1/HUD1A
21. Term of Transaction Examples
Interest rate, APR
Collateral type (condo v. detached home v.
mfg house)
Existence of a pre-payment penalty or any
other fee or charge
22. Compensation Based on a Proxy of
a Term Prohibited
A factor that is not itself a term of a
transaction is 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
23. Proxy Examples
Creditor pays LO higher commission
for loans held in portfolio than those
sold
◦ Creditor only holds fixed rate loans with a
5 year term and a balloon payment
◦ Sells all 30 year mortgages
◦ This is a proxy – terms consistently vary
with factor and LO can advise consumer to
choose 5 year term
24. Proxy Examples (cont’d)
Creditor pays LOs higher commissions
for transactions secured by Iowa
property than those secured by
Nebraska property
◦ Creditor charges lower rate for Nebraska
loans
◦ NOT a proxy –LO cannot influence where
the property is located
25. What is NOT a Term of Proxy of
the Transaction?
LO’s overall volume (dollar volume or
number of transactions)
Long-term performance of LO’s loans
Hourly Rate
Whether consumer is an existing member or
not
Payment fixed in advance for every loan
% of application submitted that result in
loans
Quality of the LO’s file
(accuracy/completeness)
26. What is NOT a Term of the
Transaction? (cont’d)
The amount of credit extended, if:
◦ compensation received by or paid to a loan
originator, directly or indirectly, is based on a
fixed percentage of the amount of credit
extended
Such compensation may be subject to a
minimum or maximum dollar amount
LO comp that pays $100 for loans under
$100k and $150 for over $150k is not
compliant – not based on a fixed
percentage
27. Retirement & Pooled
Compensation Plans
Creditors may pay LO’s comp in the form of
a defined contribution/benefit plan if it is a
designated tax-advantaged plan
◦ Individual contribution can’t be based on terms or
proxy
What’s a designated tax-advantaged plan?
◦ IRC section 401(a)
◦ employee annuity plan under 403(a),
◦ simple retirement account under 408(p),
◦ simplified employee pension under 408(k)
◦ annuity contract under 403(b)
◦ or eligible deferred compensation plan, as defined in
Internal Revenue Code section 457(b), 26 U.S.C.
457(b)
Ask tax advisor
28. Retirement & Pooled
Compensation Plans
May pay LO comp under a non-deferred
profits-based compensation plan, if:
◦ Individual contribution is not based on the terms,
and
◦ At least one of the following are met:
The pooled compensation does not exceed 10% of the
LO’s total compensation corresponding to the time period
for which the compensation under the non-deferred
profits-based compensation plan is paid, or
The LO was a loan originator for ten or fewer transactions
consummated during the 12-month period preceding the
date of the compensation determination.
Total Compensation: wages & tips;
contributions to defined contribution plans
29. Modification of Transaction Terms
No pricing concessions - may not agree to
set the loan originator's compensation at a
certain level and then subsequently lower it
in selective cases (such as where the
consumer is able to obtain a lower rate from
another creditor)
Bank may change terms to match a
competitor or to avoid the high cost
mortgage rules, but change cannot be
accompanied by a change in the LO
compensation
30. Modification of Transaction Terms
(cont’d)
If transaction terms are modified:
◦ A LO may not agree to reduce its compensation or provide a
credit to the consumer to pay a portion of the consumer's
closing costs
◦ The bank may not reduce its own compensation in a
transaction where the bank receives compensation directly
from the consumer, with or without a corresponding
reduction in compensation paid to an individual loan
originator
Permitted decrease in LO comp: unforeseen increase
in an actual settlement cost over an estimated
settlement cost disclosed on GFE or an unforeseen
actual settlement cost not disclosed to the consumer
pursuant to section 5(c) of RESPA
31. Modification of Transaction Terms
(cont’d)
Bank can make periodic changes to LO
comp and the terms of transactions, as
long as revised comp not based on the
terms of a transaction
Example: could review an LO’s volume
and file quality and increase comp
from a flat $3,000 to a flat $3,500.
◦ Could then charge a higher rate to reflect
the higher compensation
32. Flexibility in Setting Loan Terms
Bank may recover the costs of the LO’s
comp and other costs of the transaction by
charging points, fees, or higher rate
Example: may charge 6% if consumer pays
½ of transaction costs at closing but 6.5% if
not
Example: May add .25 point to the rate on
transactions where LO is compensated
based on a % of the amount of credit
extended
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