LO Comp Rule Drops Zero-Zero Option

CFPB head Richard Cordray said once new mortgage rules take effect, officials will study how they are affecting consumer understanding of upfront origination charges. Photo: Bloomberg News

The Consumer Financial Protection Bureau definitely listened to the mortgage industry in finalizing the loan officer compensation rule and dropped the idea of requiring lenders to disclose what a loan would cost without any upfront points and fees.

As proposed by the CFPB, this “zero-zero” option would give consumers a benchmark to evaluate a similar loan that has upfront points and fees.

The bureau thought it would help consumers understand the trade-offs between discount points and the corresponding reduction of the interest rate or other costs.

But on further study, CFPB officials decided it could confuse borrowers. And some might think the zero-zero option is a better deal, when it’s not.

So CFPB director Richard Cordray decided to shelve the zero-zero disclosure and allow consumers to continue to pay upfront points and fees under the new LO compensation rule that goes into effect next January.

“Once new mortgage rules take effect, we will study how they are affecting consumer understanding of upfront origination charges,” Cordray told reporters Friday afternoon.

And then the CFPB will consider if consumers need further protections in that area, he said.

Under the final rule, banks, mortgage banking and brokerage companies can continue paying their LOs commissions based on the loan amount. But they cannot increase the amount of the commission if it’s based on other terms or conditions of the loan. This restriction is designed to prevent steering—where the LO is incentivized to steer borrowers into higher-cost mortgages.

The bureau also relaxed the restrictions on bonuses and profit-sharing plans.

Under the final rule, employers can make contributions to tax-advantaged retirement plans, such as 401(k) accounts, provided the amount does not exceed 10% of the LO’s total compensation.

The anti-steering rule was mandated by the Dodd-Frank Act, which also banned mandatory arbitration clauses in mortgages and the financing of credit insurance into the loan amount. Those two prohibitions will take effect in June 2013, CFPB said.