The changes could affect in particular branch managers who are not supposed to be originating. Fotolia-© Olivier Le Moal
The changes could affect in particular branch managers who are not supposed to be originating. Fotolia-© Olivier Le Moal

The latest round of proposals initiated by the CFPB greatly expands the definition of "origination.” The term origination was previously considered to largely involve the negotiation and explanation of loan terms, and preparation of loan documents. The CFPB has expanded this definition to now include the borrower’s perception of a manager’s duties. In the latest round of proposals the CFPB advises that origination will include multiple levels of interaction with customers and consider the manner in which an employee is held out to the public. Introductory communications with an employee who is held out as being able to originate loans will be considered originating.

This expanded definition could have a profound impact on nonproducing branch managers. Currently, many nonproducing branch managers are paid on the profits of their branch. While they cannot discuss rates or products, many non-producing branch managers regularly introduce clients to loan officers who then facilitate the transaction, with the manager providing customer relationship assistance as needed.

The CFPB's proposal would prohibit the above scenario unless it was clearly advertised to the consumer that the branch manager was not permitted to facilitate or assist in the transaction. While this may not be material to a specific transaction, there is no doubt that many nonproducing branch managers would be reticent to advertise their lack of involvement in the loan process for fear that would inhibit their ability to solicit loans. One can understand the obvious disadvantages to a nonproducing branch manager attempting to leverage his experience, relationships and reputation in the industry when he must openly announce he is no longer involved in mortgage origination. Moreover, the CFPB's proposal eliminates much of the "gray" area in terms of what could be said before a manager engaged in impermissible origination, thus overly restricting a manager's communication with clients.

As such, managers will not be able to remain paid on actual branch profits (even if they don't engage in what has historically been considered origination activity) unless they accept a role that publicly reflects their inability to originate loans and they largely take on a pure manager role with limited borrower interaction.

From a lenders’ perspective, this will both complicate and simplify matters. Obviously, the danger that a nonproducing branch manager steps over the line is eliminated by these distinctions becoming more apparent. On the other hand, companies can expect droves of unhappy former nonproducing branch managers to push them for aggressive compensation plans. Moreover, lenders must consider new business cards, stationary, email signature blocks and advertising so as to ensure clarity that a nonproducing branch manager is not permitted to be held out as originating loans. In addition, lenders must review manager contracts and policies and procedures to facilitate compliance with the proposal.

Obviously, I am writing this with the assumption that the above proposal will become law. Given the other items that will likely be a focus of heated debate, the definition of "origination" appears to be an issue that could well slip below the radar. Hence, it might be a good idea to start planning now.