On May 9, 2012 the Small Business Review panel released an outline of additional CFPB proposals pertaining to LO compensation. These proposals would clarify and amend certain LO comp rules to ensure consistency between the Federal Reserve’s compensation requirements and those of Dodd Frank before the Jan. 21, 2013 date where several Dodd Frank provisions are set to go into effect. What is clear after reading the May 9 information release is that when it comes to the CFPB and the Federal Reserve, the left arm clearly does not know what the right arm is doing. Indeed, the proposals being considered by the CFPB demonstrate the CFPB is either unaware of or is simply ignoring all of the verbal guidance provided by the Federal Reserve in advance of the effective date of its LO comp rules. The proposals also recognize an inherent acknowledgement that portions of the Dodd Frank Financial Reform Act were ill conceived without sufficient consideration of the law’s impacts and unintended consequences. The highlights of the proposals under consideration can be summarized as follows:
• Leveling the playing field between brokers, depositories and non-depositories: Currently the law recognizes distinctions between the foregoing institutions. Specifically, brokers cannot receive compensation from borrowers and lenders, whereas mortgage banks can receive compensation on the front and back end of a deal. With respect to depository and non-depository institutions, loan officer licensing (SAFE Act) rules place significantly more burden on the latter, in order to license a loan officer, in terms of training, approvals, and background checks. Under the CFPB proposals, most of these distinctions would disappear. Indeed, the CFPB is considering changes that would effectively erase any difference between how brokers and mortgage banks can receive compensation and pay originators. At the same time, the CFPB is proposing to place additional licensing requirements on depository institutions that would significantly narrow (but not necessarily eliminate) the licensing differences that currently exist.
• Points and fees: One section of Dodd Frank that has surprisingly received relatively little attention, effectively eliminates of up-front discount points and origination fees. Currently, Dodd Frank prohibits any compensation from being paid to an originator, if the loan includes up-front discount points and/or origination fees. Fortuitously, the CFPB recognizes that enforcement of any such law would have a profound and unpredictable impact on lending. Accordingly, the CFPB appears to be backing away from such requirements by proposing instead that lenders must offer borrowers in every loan scenario, an option with and without up-front discount points. Also, discount points must be bona fide, meaning they have to correspond to a reduction in interest rate. With respect to origination fees, in order for such fees to be paid up-front, they would need to be flat, meaning they could not vary by loan amount.
• Eliminating consumer paid distinctions: Currently the LO comp rules do not apply to compensation paid exclusively by the borrower. The CFPB is proposing to eliminate such distinctions so that the LO comp rules apply regardless of whether a consumer or institution are paying the originator.
• Profit based compensation: Currently the LO comp rule is interpreted as prohibiting any compensation from being paid to an originator if any portion is based upon the profits of lending operations. Recognizing the impacts on retirement profit sharing plans, the CFPB is proposing to allow such compensation if it is paid into an ERISA qualified retirement plan. Additionally, under the current proposal, profit sharing in non-qualified plans would be permissible, but only under very strict rules which would limit their utility and applicability for most lenders.
• Pricing Concessions: The CFPB is considering allowing changes to an LO’s compensation if there is an unanticipated need to make pricing concessions as a result of factors beyond the control of the lender, the originator, or the lender’s affiliates.
• Point Banks: In an illustration of the CFPB clearly being unaware of the Federal Reserve’s commentaries on point banks (stating they were impermissible), the CFPB proposes to prohibit point banks unless the contributions into the point bank are unrelated and unaffected by the originator’s transactions and there is no impact on a originator’s compensation for overdrawing the point bank.
• Proxy definition: To provide clarity and additional flexibility, the CFPB is proposing to define proxies as any factor that correlates to a loan term and which the originator has discretion to use in presenting a loan scenario to the borrower. It appears that the CFPB is intending to use this definition to provide lenders additional flexibility in deviating compensation where there is no possible risk of steering (such as between refinance and purchase loan). However, if this is the intention, it ignores the fact that the Federal Reserve clearly indicated that the type of loan was a term itself. As such, it is unclear how a relaxation of the proxy rule would have the intended impact.
It is important to note that all of the above are only proposals at this time. If these proposals are not implemented on or before Jan. 21, 2013, the Dodd Frank requirements—as scattered and inconsistent as they may currently be—will go into effect unchanged. In the coming weeks I will focus my blog on the developments regarding these proposals, and will dissect and analyze each proposal in terms of its potential impact on lending operations, compliance, and compensation in general. Stay tuned, as the second half of this year promises to be interesting.