Alert August 21, 2012

CFPB Proposes Rules on Loan Originator Compensation

The CFPB announced the release of a proposal implementing the Dodd-Frank Act’s amendments to Regulation Z, the Truth in Lending Act’s implementing regulation, related to loan originator compensation. The proposal places restrictions on upfront points and/or fees, loan originator compensation, mandatory arbitration, and the financing of credit insurance premiums.

In particular, under the proposal, a creditor may offer a loan with or without upfront fees. If a loan is offered with upfront fees, then it must result in an interest rate reduction, and the creditor must also make available to the consumer “a comparable, alternative loan with no upfront discount points, origination points, or fees that are retained by the creditor [or] broker”—a “zero-zero alternative.” “Comparable alternative loan” is defined to mean “that the two loans for which quotes are provided must have the same terms and conditions, other than the interest rate, any terms that change solely as a result of the change in the interest rate, and the amount of any discount points and origination points and fees.” This requirement does not apply if the creditor or broker makes a good faith determination that the consumer is unlikely to qualify for such a loan. Citing the potential “manipulation of underwriting standards” to prevent consumers from qualifying for such a loan, the CFPB noted that it is considering safeguards to prohibit creditors from changing their qualification standards.  The CFPB further proposed that creditors maintain records “sufficient to evidence that the creditor has made available to the consumer the comparable, alternative loan that does not include discount points and originator points or fees”—the “zero-zero alternative”—or if such a loan is not available “a good faith determination that the consumer is unlikely to qualify for such a loan.”

Moreover, under the proposal, the record retention time period requirements would be extended from two to three years and the coverage of the record retention provisions would apply to all loan originators and not simply creditors. The CFPB is seeking comment on whether the record retention period should be extended to five years rather than three years. Further, under the proposal, “loan originator organizations” are required to obtain a criminal background check and credit report for those individual loan originators who are not required to be licensed under the SAFE Act and who are not licensed. This has a regulatory impact on depository institutions, including credit unions, whose loan originators generally are not subject to state licensing.

Despite the CFPB’s stress on the continuity of previous rulemakings and definitions, the proposed rule significantly changes the definition of important terms such as “loan originator” and “compensation,” presents newly defined terms such as “loan originator organization” and “individual loan originator,” and limits the exemptions for servicers.  For example, while noting the definition of “loan originator” under current law is consistent with the definition of “mortgage loan originator” as defined in the Dodd-Frank Act, the CFPB plans to interpret several terms within the definition of “loan originator” broadly, and add “takes an application” and “offers” to the definition of “loan originator.”

The CFPB also released an overview of the proposed rule. Comments are due October 16, 2012. The CFPB plans to finalize rules no later than January 2013.