JAN 2, 2014

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Compliance Matters

More on Loan Officer Compensation from CFPB



(As an aside the CFPB has issued multiple regulations and amendments to the loan originator compensation rule from January 2013 through October 2013. So CFPB has been amending the compensation rule from inception in January for 10 months! (smallenttiycompgdenov2013)


Compensation based on whether a consumer is of low-to-moderate income likely would not be a proxy for loan terms even if the loans to such consumers have terms that consistently differ from the loans of other consumers (for example, they have a higher interest rate). This is because loan originators typically cannot change whether a consumer is of low-to-moderate income. (cfpbsmallentitycomplianceguide2013lorule)

Payments by a consumer to a loan originator from loan proceeds are considered compensation received directly from the consumer. (36(d)(2)(i)-2comment) Additionally, compensation to the loan originator paid on the consumer’s behalf buy a person other than  the creditor or its affiliates, such as a non-creditor seller, home builder, real estate broker or agent is considered compensation from the consumer if made pursuant to an agreement between the consumer and the person other than the creditor or its affiliates. (36(d)(2)(i)-2(iii) comments,15usc1639b).

CAVEAT:  Once the creditor has agreed to the rate with the consumer it may lower the rate, but it cannot lower the loan originator compensation. The creditor may change credit terms or pricing to match a competitor, to avoid high-cost mortgage provisions or for other reasons, but it may unto change the loan originator compensation on the loan. (36(d)(1)-5, -7)

The one exception to lowering loan originator compensation is when there are unforeseen increases in settlement costs, within certain limitations.  (36(d)(1)-7)

Creditors shall not include mandatory arbitration clauses and provisions where consumers waive federal statutory causes of action.

If you work for a servicer and assist the consumer by refinancing or assisting in adding a different consumer on an existing debt you are a loan originator.  (36(a)(1)(i)(E)).

Sellers financing their own properties can be considered creditors if they extend credit secured by a dwelling six or more times in the preceding calendar year exclusive of high cost loans. The seller is also a creditor under Reg Z if (s)he does more than one high-cost loan in any 12-month period. (1026.32)

Reverse mortgages are subject to loan originator compensation limits. (36(d)(1)-10).

Home builders, real estate brokers, or agents or others may agree to pay some or all of the consumer’s closing costs subject to limitations of state law. Under Reg Z however, if it is agreed that the above will pay it is considered compensation from the consumer and not the creditor/lender.   There are conditions: (1) the entity paying the fee is not the creditor or any of its affiliates; (2) there is an agreement between the consumer and thee person for the person to provide funds toward the consumer’s transaction costs. e.g., home seller agrees to contribute to closing costs $1000 but does not specify what it is to be used for. Any of it used to pay the mortgage loan originator broker is considered paid by the consumer. (1026.36(d)(2)(i)(B))

Although felony convictions within the last seven years will make a person unqualified as a loan originator, if the conviction is subsequently expunged or pardoned the person may qualify as a loan originator subject to state  licensing laws and regulations for licensing such as the California Bureau of Real Estate. (cfpbloruleguidep65iii)

Loan documents that require names of the originating organization and NMLS&R as well as the loan originator information must be included on the credit application, promissory note or loan contract, security instrument (deed of trust, mortgage, etc.).  (1026.36(g)(1)-2commnetary)


These are not all the rules. These are not all the interpretations of the rules. It is to let you know of what is happening. If you would like us to audit you for compliance with CFPB compliance it will of necessity include state compliance which is imbedded in the CFPB rules. These rules are still new and definitely complex even after having read them numerous times. So be careful, be in compliance because with 1,500 employees under CFPB director Richard Cordray, there is no way to guarantee when you will be audited because of the lack of a lengthy track record. So far the “major violators” have been taken on by CFPB.  But they are actively responding to individual consumer complaints as well.



Michael Fuller sued the broker and the lender (First Franklin Financial Corp.) for deceit and scheme of predatory lending as an “unfair business practice” after the normal statute of limitations had passed. The court dismissed the case because of not suing them timely. Fuller appealed.

The 3rd District Courts of Appeal said reversed. The amended complaint sufficiently alleged delayed discovery for filing after the normal time to sue had run out alleging that the reputation of First Franklin as the largest provider of loans to unqualified borrowersand marketer of these subprime loans to investors. Additionally, that First Franklin ignored standard underwriting protocols creating the high risk that plaintiffs and many others would face foreclosure under the loans and inflated home appraisals in order to maximize its market share of loans deflecting any risk to itself by selling off these so-called subprime mortgages to investors.  (Fuller v. First Franklin Financial Corp. (3rd dist. 5-1-13) 163 cr 3rd 44)


All this means is that Fuller has the right to go forward with the lawsuit. Proof is another thing. What is notable here however is the broker was sued as well.



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