MBA Compliance Essentials: Loan Originator Compensation Rule Resource Guide Sample


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MBA Compliance Essentials: Loan Originator Compensation Rule Resource Guide Sample

  1. 1. Loan Originator Compensation Rule Resource Guide Richard J. Andreano, Jr. Practice Leader, Mortgage Banking Group Ballard Spahr, LLP MBA Compliance EssentialsSM 13597 Updated February 13, 2014 m
  2. 2. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 4 TABLE OF CONTENTS Author Biography and Information about the Firm Page 6 Introduction Page 9 Statutory and Regulatory Background Page 10 Requirements and Implications Page 12 Overview and Scope Page 12 Basic Elements Page 12 Covered Transactions Page 13 Loan Originator (Covered Persons) Page 14 Covered Compensation Page 15 Terms or Conditions/Proxy For Terms or Conditions Prohibitions Page 16 Nature of The Terms or Conditions Prohibition Page 16 Nature of The Proxy For Terms or Conditions Prohibition Page 17 Consumer Payment Exception and Implications Page 18 Compensation Source Page 19 Creditor Pricing Page 20 Modification of Loan Terms Page 20 Qualified Compensation Plans—CFPB Bulletin 2012-02 Page 21 Changes to Loan Originator Compensation Plan or Agreement Page 21 Variances Among Loan Originators Page 22 Market-Based Variances Page 23 Affiliates Page 23 Dual Compensation Prohibition Page 23 Nature of Prohibition Page 23 Compensation Source Page 24 Affiliates Page 24 Anti-Steering Prohibition Page 25 Nature of Prohibition Page 25 Consumer’s Interest Page 26 Amount of Compensation Page 27 Safe Harbor Page 27 Record Retention Page 29 Model Regulation Z Loan Originator Compensation Rule Policies & Procedures Page 31 Introduction Page 31 I. Scope and Purpose of Policies and Procedures Page 31 1.1 Scope of Policy and Procedures Page 31 1.2 Purpose of Policies and Procedures Page 32 II. Roles and Responsibilities Page 32 2.1 Board of Directors Page 32 2.2 Compliance Department Page 32 2.3 Employees Page 33 III. Covered Transactions, Persons and Compensation; Definitions Page 33 3.1 Covered Transactions Page 33 3.2 Covered Persons—Loan Originators Page 34 3.3 Covered Compensation Page 35 m
  3. 3. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 5 3.4 Investor Page 36 3.5 Creditor Page 36 3.6 Dwelling Page 36 3.7 Mortgage Broker Page 36 3.8 Timeshare Plan Page 37 IV. Compensation of Loan Originators Page 37 4.1 Employee Compensation Plans Page 37 4.2 Third Party Loan Originator Compensation Agreements Page 38 4.3 Company Compensation as Loan Originator Page 40 4.4 Qualified Plan Participation Page 41 4.5 All Compensation Arrangements Through the Company Page 41 4.6 Variances in Compensation Page 42 4.7 Payment of Expenses Page 42 V. Anti-Steering Page 42 5.1 Third Party Loan Originators Page 42 5.2 Company as Loan Originator Page 44 VI. Monitoring Page 46 6.1 Pre-Closing Monitoring Page 46 6.2 Post-Closing Monitoring Page 48 VII.Training Page 49 7.1 Employees Page 49 7.2 Third Party Loan Originators Page 50 VIII. Record Retention Page 50 Sample Loan Originator Compensation Rule Compliance Checklist Page 52 m
  4. 4. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 6 AUTHOR BIOGRAPHY AND INFORMATION ABOUT THE FIRM Richard J. Andreano, Jr., is a Practice Leader of the Mortgage Banking Group at Ballard Spahr, and a member of the Consumer Financial Services and Privacy and Data Security Groups. He has devoted more than 25 years of practice to financial services, mortgage banking, and consumer finance law. Rich advises the mortgage and settlement service industries on regulatory compliance and related matters, including issues concerning the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Real Estate Settlement Procedures Act (RESPA), Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Fair Housing Act, Fair Credit Reporting Act (including FACTA), Home Mortgage Disclosure Act (HMDA), and Gramm-Leach-Bliley Act. He assists clients with preparing for and handling CFPB examinations and with regulatory issues, including implementation of the CFPB repayment ability to repay, loan originator compensation, appraisal, escrow and servicing rules. Rich is Editor-in-Chief of Mortgage Finance Regulation Answer Book 2011-2012, published by the Practising Law Institute; author of its chapters on Dodd-Frank, HMDA and RESPA and co-author of its ECOA and TILA chapters. As legislation governing the mortgage banking industry evolves and government scrutiny intensifies, Ballard Spahr offers broad experience and strong industry relationships to help clients navigate uncharted territory and develop strategies for success. Our attorneys are at the forefront of rapidly changing regulatory developments, working with a wide range of clients in both the residential and commercial mortgage banking industries. Our Mortgage Banking Group is part of the firm's nationally recognized Consumer Financial Services Group. We combine broad regulatory experience with formidable skill in litigation and depth in enforcement actions and transactions. Our team represents clients worldwide, from start-ups to Fortune 500 corporations. Clients include:  Financial institutions, mortgage lenders, brokers, and servicers  Secondary-market investors  Insurance companies  Investment bankers  Settlement service providers  Auction platforms  Homebuilders We also advise industry service providers such as technology vendors, collection agencies, document preparation companies, telemarketers, loan fulfillment companies, and trade associations. A national firm of more than 500 lawyers in 13 offices across the country, Ballard Spahr offers mortgage banking clients a full range of legal services. m
  5. 5. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 7 Industry Relationships Our Mortgage Banking Group has strong industry relationships in both the private and public sectors. Its presence in Washington, D.C., benefits clients who require experienced representation before federal agencies such as the Consumer Financial Protection Bureau, the U.S. Department of Housing and Urban Development, the Federal Trade Commission, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Justice Department. An Educated Perspective Our practice leaders literally wrote the book on mortgage banking. The Mortgage Finance Regulation Answer Book, published by the Practising Law Institute, analyzes current regulatory requirements and has been described as the “bible of mortgage finance” for industry leaders as well as non-experts. The group also publishes Mortgage Banking Update, a biweekly newsletter with analysis of the latest industry developments. Mortgage Servicing Reform We are on the leading edge of changes to the servicing industry—including those connected to the national mortgage settlement and the CFPB’s servicing rules—and advise clients on changes to policies, procedures, and operations. Our attorneys are experienced in reviewing a servicer’s foreclosure practices, and we counsel clients who are likely subjects of future regulatory investigations and compliance orders. Our Collection Documentation Task Force focuses on the rapid spread of document-related scrutiny, including issues related to the mortgage foreclosure process. Fair Lending Our Fair Lending Task Force combines three types of critical resources in an effective, multidisciplinary approach—regulatory attorneys, litigators, and labor attorneys. Together, they counsel providers of consumer credit in preventing, managing, and defending against fair lending violation claims with an understanding of the statistical analyses that underlie such discrimination claims. Litigation/Enforcement Defense Ballard Spahr is home to a preeminent financial services litigation practice. We defend clients nationwide in class actions, single-plaintiff claims, regulatory proceedings, and other complex mortgage litigation. We pioneered the use of pre-dispute arbitration in consumer financial services contracts, and have designed and enforced arbitration programs for many of the world’s largest financial institutions. We defend clients in administrative enforcement proceedings and investigations, including CFPB examinations and enforcement actions and Mortgagee Review Board actions. We help clients respond quickly and efficiently to state attorneys general inquiries to avoid litigation and, when necessary, defend clients against enforcement actions related to consumer finance laws. Compliance and Licensing We advise on issues such as loan originator compensation and steering restrictions, risk retention, repayment requirements, lending and servicing standards and restrictions, and m
  6. 6. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 8 disclosure requirements. We counsel clients on state laws related to licensing, permissible fees, unfair practices, disclosures, and advertising, among others. We also conduct due diligence and compliance audits related to mergers and acquisitions, liquidations of distressed assets, purchases and sales of mortgage loans, servicing rights and other assets, formation of joint ventures and strategic alliances, and the establishment of warehousing and other credit facilities. Privacy and Data Security We advise financial institutions nationwide on compliance, data mining, online marketing, and mobile privacy and help clients respond quickly and confidently to security breaches. We draft and implement compliance policies, represent clients in state attorneys general investigations into privacy practices, and defend clients from claims arising under the Fair Credit Reporting Act and state laws. Employment, Employee Benefits, and Executive Compensation Law Our mortgage banking industry clients are also employers. Ballard Spahr’s nationally recognized employee benefits and executive compensation practice provides innovative legal advice to all types of employers, from multinational corporations with more than 50,000 employees to well-known regional companies. Our lawyers work with senior executives and in- house counsel on high-profile executive compensation issues, and we also pride ourselves on working closely with our clients’ human resources teams on their day-to-day issues. Our attorneys counsel clients on a wide variety of employee benefits issues. In addition, our Labor and Employment Group has experience in counseling and litigating an array of workplace disputes and in representing a large variety of industries. m
  7. 7. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 9 INTRODUCTION This MBA Compliance Essentials Resource Guide addresses the Regulation Z Loan Originator Compensation Rule (Rule) that was issued by the Federal Reserve Board (Board) in August of 2010 and became effective in April 2011. The Rule, along with Regulation Z, was transferred to the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203 (Dodd-Frank) in July 2011, and is set forth in subsections (d) and (e) of 12 CFR 1026.36, and the commentary to the subsections. NOTE: In January 2013, the CFPB adopted revisions to the Rule that will become effective in January 2014. The revisions will be addressed in a Revised Loan Originator Compensation Rule Compliance Essentials Resource Guide (Revised Guide) that will be provided at no additional charge to subscribers. The CFPB has informally advised that none of the revisions may be implemented before the January 10, 2014 effective date. MBA plans to publish the Revised Guide after the CFPB clarifies various aspects of the revised rule. This Guide notes certain aspects of the current Rule that will change under the revised rule. m
  8. 8. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 10 STATUTORY AND REGULATORY BACKGROUND The Rule was adopted by the Board under Truth in Lending Act (TILA) section 129(l), which was added to TILA by the Home Ownership and Equity Protection Act (HOEPA). 75 Federal Register 58509, 58513 (2010). HOEPA was enacted in 1994 as Subtitle B to Title I of the Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L No. 103-325. Although HOEPA generally addressed high-cost mortgage loans, it also added in TILA section 129(l)(2) (15 USC 1639(l)) the following provision that is not limited to such mortgage loans: "The Board, by regulation or order, shall prohibit acts or practices in connection with— (A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and (B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.’’ In the summer of 2009, the Board proposed loan originator compensation requirements as part of a major proposal to revise the closed-end mortgage loan provisions of Regulation Z. 74 Federal Register 43232, 43331-43333 (2009). In July 2010 Congress enacted Dodd-Frank, which includes loan originator compensation provisions, some of which are similar to provisions that the Board had proposed. Dodd-Frank § 1403. Shortly after Dodd-Frank was enacted, the Board adopted loan originator compensation provisions as a stand-alone rule and, except for a minor change, the adopted provisions are the existing Rule. Thus, the Rule is based on the Board's section 129(l)(2) TILA authority, which pre-existed Dodd-Frank. (Based on amendments to TILA made by Dodd-Frank section 1433(a), TILA section 129(l) (15 USC 1639(l)) is now section 129(p) (15 USC 1639(p)), and the CFPB now has the authority under the section.) Because the Rule was adopted under TILA section 129(l)(2), violations of the Rule are subject to the special damages provision that also applies to high-cost loans. In addition to the standard damages applicable to mortgage loans under TILA, the special damages provision provides for damages of an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material. TILA § 130(a)(4), 15 USC § 1640(a)(4). The significant potential liability for violations of the Rule suggests that companies take a prudent approach to compliance. Although the Rule was scheduled to become effective for applications received by creditors on or after April 1, 2011, in connection with a lawsuit challenging the Rule the United States Court of Appeals for the District of Columbia Circuit stayed the implementation of the Rule, and the stay was dissolved on April 5, 2011. The Board revised the commentary to the Rule to reflect the delay, and advised that compliance with the Rule was not mandatory until April 6, 2011. 76 Federal Register 43111 (2011). Under Dodd-Frank, the Rule, along with TILA, Regulation Z and other federal consumer protection statutes and regulations, was transferred to the CFPB on July 21, 2011. In December 2011, the CFPB issued an interim final rule adopting a new Regulation Z as part of the CFPB rules that is codified at 12 CFR Part 1026. 76 Federal Register 79768 (2011). Although the CFPB noted that the interim final rule "substantially duplicates the Board's Regulation Z as the [CFPB's] new Regulation Z, 12 CFR part 1026, making only certain non- substantive, technical, formatting, and stylistic changes", the CFPB also corrected what it termed a "typographical error" in the commentary to the Rule that addressed whether managers m
  9. 9. MBA Compliance Essentials℠: Loan Originator Compensation Rule Resource Guide 11 and administrative staff are loan originators. 76 Federal Register 79768, 79768-69, 80012 (2011). (The commentary to the Rule contains official interpretations of Regulation Z and is set forth in Supplement I to 12 CFR Part 1026. For ease of reference, in this Guide the commentary to the Rule is referred to as the "Commentary".) In April 2012, the CFPB issued Bulletin 2012-02 to address questions regarding how the Rule applies to qualified profit sharing, 401(k), and employee stock ownership plans, and the CFPB deferred addressing non-qualified plans until the planned rulemaking to implement the Dodd- Frank loan originator compensation provisions. In connection with adopting revisions to the Rule (addressed below), the CFPB advised that Bulletin 2012-02 applies until the revisions to the Rule become effective in January 2014. 78 Federal Register 11280, 11336, n. 100. In August 2012 the CFPB posted on its website a proposal to revise the Rule to implement the Dodd-Frank loan originator compensation provisions, and the proposal appeared in the September 7, 2012 Federal Register. 77 Federal Register 55272 (2012). On January 20, 2013 the CFPB posted a final revised Regulation Z loan originator compensation rule on its website, and the final revised rule appeared in the February 15, 2013 Federal Register. 78 Federal Register 11280 (2013). The loan originator compensation provisions in the final rule are effective on January 10, 2014. It appears the intent of the CFPB is that the revised loan originator compensation provisions are effective for applications received by a creditor on or after January 10, 2014, and it would be helpful if the CFPB clarified the effective date. The revised rule will be addressed in the Revised Guide that will be made available after various aspects of the revised rule are clarified. The CFPB has informally advised that none of the revisions may be implemented before the January 10, 2014 effective date. m