ABA Staff Analysis: Rules Regarding Loan Originator Compensation Policies

Transcription

1 ABA Staff Analysis: Rules Regarding Lan Originatr Cmpensatin Plicies September 2010 Final Rule Issued: August 16, 2010 On August 2010, the Federal Reserve Bard issued rules impsing restrictins regarding cmpensatin t mrtgage lan riginatrs. These rules are meant t prtect cnsumers in the mrtgage market frm unfair r abusive lending practices that can arise frm certain lan riginatr cmpensatin practices. This rule is finalizing prtins f a prpsed rule issued in the Federal Register in August 2009, pertaining t refrms t TILA rules cvering clsed-end credit. (See 74 FR 43232, Aug. 26, 2009). The lan riginatr cmpensatin restrictins adpted under this rule are virtually identical t cmpensatin restrictins adpted by Cngress in the Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act ( DFA ). 1 The Bard is adpting these cmpensatin restrictins under authrity set frth in TILA Sectin 129(l)(2), and nt under the DFA. In varius instances, the Bard tailrs the cntent f this rule t be cnsistent with the mandates f the DFA, but makes clear that these final rules d nt implement the lan riginatr cmpensatin prvisins f the DFA. The Bard states that it intends t implement the DFA s mrtgage lan riginatin standards in future rulemaking after ntice and pprtunity fr further public cmment. Overview The final rule cntains three basic prhibitins. First, the rule prhibits a creditr r any ther persn frm paying, directly r indirectly, cmpensatin t a mrtgage brker r any ther lan riginatr that is based n a mrtgage transactin s terms r cnditins, except the amunt f credit extended. Secnd, the rule prhibits any persn frm paying cmpensatin t a lan riginatr fr a particular transactin if the cnsumer pays the lan riginatr s cmpensatin directly. Third, the rule prhibits a lan riginatr frm steering a cnsumer t cnsummate a lan that prvides the lan riginatr with greater cmpensatin, as cmpared t ther transactins the lan riginatr ffered r culd have ffered t the cnsumer, unless the lan is in the cnsumer s interest. With respect t this last ptin, the rule prvides a safe harbr t facilitate cmpliance with the prhibitin n steering. A lan riginatr is deemed t cmply with the anti-steering prhibitin if the cnsumer is presented with lan ptins that prvide (1) the lwest interest rate, (2) n risky features, such as a prepayment penalty r negative amrtizatin r a balln payment in the first seven years; and (3) the lwest ttal dllar amunt fr riginatin pints r fees and discunt pints. Althugh this issuance is described as ending the practice f cmpensating lan riginatrs n the basis f yield spread premiums, it is imprtant t fully understand the nature f the Bard s restrictins expressed in this final rule, as the term yield spread premium has been used t identify varius distinct financing methdlgies. Under the current regulatry amendments, a cnsumer may legally cntinue the practice f financing upfrnt csts, such as third-party settlement csts, by increasing r buying up the interest rate. Thus, this final rule des nt prhibit creditrs r lan riginatrs frm using the interest rate t cver upfrnt clsing csts, as lng as any creditr-paid cmpensatin retained by the riginatr des nt vary based n the transactin s terms r cnditins. The Bard s fcus in this rulemaking is n hw the riginatr is cmpensated, nt n hw cnsumer csts are financed. 1 Amng ther prvisins, Title XIV f the Refrm Act amends TILA t establish certain mrtgage lan riginatin standards. In particular, Sectin 1403 f the Refrm Act creates new TILA Sectin 129B(c), impses restrictins n lan riginatr cmpensatin and n steering by lan riginatrs. ABA staff analysis des nt prvide, nr is it intended t substitute fr, prfessinal legal advice. 1

2 Cmpliance The Bard has determined that cmpliance with this final rule shall becme mandatry n April 1, The new rules wuld therefre apply t transactins fr which the creditr receives an applicatin n r after April 1, The Final Rule Cverage: The new rules apply t all persns wh riginate lans, including mrtgage brkers and the cmpanies that emply them, as well as mrtgage lan fficers emplyed by depsitry institutins and ther lenders. The final rule bradens the scpe f (cntaining TILA s restrictins fr practices in cnnectin with credit secured by a dwelling) frm transactins secured by the cnsumer s principal dwelling t all transactins secured by real prperty r by a dwelling. The rule s restrictins generally apply t lan riginatrs, defined as a persn wh, fr cmpensatin r ther mnetary gain, r in the expectatin f cmpensatin r ther mnetary gain, arranges, negtiates r therwise btains an extensin f cnsumer credit fr anther persn. The term includes an emplyee f a creditr r mrtgage brker if the emplyee meets the definitin. A mrtgage brker is defined as a lan riginatr that is nt an emplyee f the creditr. A creditr is cnsidered a lan riginatr nly if the creditr des nt prvide the funds fr the transactin at cnsummatin ut f the creditr s wn resurces, including by drawing n a bna fide warehuse line f credit r using depsits held by the creditr. The rule s restrictins apply t all clsed-end cnsumer credit transactins secured by a dwelling, regardless f price r lien psitin. Generally, the rule des nt apply t the fllwing Payments received by a creditr when selling the lan t a secndary market investr. Payments t managers, administrative staff and similar individuals wh are emplyed by a creditr r lan riginatr but d nt arrange, negtiate r therwise btain an extensin f credit fr a cnsumer, and whse cmpensatin is nt based n whether any particular lan is riginated. Payments t lan servicers when the servicer mdifies an existing lan n behalf f the current wner f the lan. This final rule des nt apply if a mdificatin f an existing bligatin s terms des nt cnstitute a refinancing under (a). Payments t riginatrs handling HELOCs that are subject t 226.5b and timeshare plans, as described in the bankruptcy Cde, 11 U.S.C. 101(53D). Payments t riginatrs in instances f lans secured by real prperty that des nt include a dwelling. Meaning f Term Cmpensatin : The term cmpensatin includes salaries, cmmissins and any financial r similar incentive that is tied t the transactin s terms r cnditins, including annual r peridic bnuses, r awards f merchandise r ther prizes. Fr purpses f (d) and (e), the term cmpensatin includes amunts retained by the lan riginatr, but des nt include amunts that the lan riginatr receives as payment fr bna fide and reasnable third-party charges, such as title insurance r appraisals. The Bard recgnizes that ften, lan riginatrs receive payment fr third-party charges that may exceed the actual charge because riginatrs may nt be able t determine with full accuracy what the charge fr the third-party service will be. In such instances, the riginatr may retain the difference, and such amunt retained will nt be deemed cmpensatin if the third-party charge impsed n the cnsumer is bna fide. If, hwever, a lan riginatr marks up a fee and retains the amunt ver the actual fee, the excess is cmpensatin. ABA staff analysis des nt prvide, nr is it intended t substitute fr, prfessinal legal advice. 2

3 Prhibiting Cmpensatin Based n Lan Terms: In (d)(1), the final rule prhibits any persn frm cmpensating a lan riginatr, directly r indirectly, based n the terms r cnditins f a lan transactin secured by real prperty r a dwelling. Cmment 36(d)(1)-2, prvides examples f lan riginatr cmpensatin that are deemed t be based n transactin terms r cnditins, such as cmpensatin that is based n the interest rate, annual percentage rate, r the existence f a prepayment penalty. This general rule wuld als restrict decreases in lan riginatr cmpensatin where the riginatr ffers lan cncessins t the cnsumer. In the preamble, the Bard clarifies that permitting creditrs t decrease lan riginatr cmpensatin because f a change in terms favrable t the cnsumer wuld result in lphles and permit evasin f the final rule. CRA Lans: The Bard, thrugh the rule s preamble, articulates the pinin that allwing cmpensatin t vary with lan type, such as lans eligible fr cnsideratin under the Cmmunity Reinvestment Act, wuld permit unfair cmpensatin practices t persist in lan prgrams ffered t cnsumers wh may be mre vulnerable t such practices. Cmment 36(d)(1)-2 and (d)(1)-3 explicitly detail varius cmpensatin calculatins r frmulas that wuld nt be cnsidered t be based n transactin terms r cnditins. The fllwing cnstitutes a nn-exhaustive list f acceptable cnsideratins in the cmpensatin f lan riginatrs The rule permits riginatrs t be cmpensated based n lan amunt. The amunt f credit extended is explicitly defined as nt being a transactin term r cnditin fr purpses f (d)(1). Thus, cmpensatin payments t lan riginatrs that are based n a fixed percentage f the amunt f credit are permissible. The final rule explicitly permits creditrs t establish minimum r maximum dllar amunts fr lan riginatr cmpensatin (s lng as such minimum r maximum amunt d nt vary with each credit transactin). The lan riginatr s verall lan vlume (i.e., ttal dllar amunt f credit extended r ttal number f lans riginated), delivered t the creditr. The lng-term perfrmance f the riginatr s lans. An hurly rate f pay t cmpensate the riginatr fr the actual number f hurs wrked. Whether the cnsumer is an existing custmer f the creditr r a new custmer. A payment that is fixed in advance fr every lan the riginatr arranges fr the creditr (e.g., $600 fr every lan arranged fr the creditr, r $1,000 fr the first 1000 lans arranged and $500 fr each additinal lan arranged). The percentage f applicatins submitted by the lan riginatr t the creditr that result in cnsummated transactins. The quality f the lan riginatr s lan files (e.g., accuracy and cmpleteness f the lan dcumentatin) submitted t the creditr. A legitimate business expense, such as fixed verhead csts. The Bard clarifies, in Cmment 36(d)(1)-2, that risk-based pricing is still allwed, s lng as the riginatr s cmpensatin des nt vary n the basis f such factrs. The rule preamble clarifies that creditrs may cmpensate their wn lan fficers differently than mrtgage brkers. Fr instance, t accunt fr the fact that mrtgage brkers relieve creditrs f certain fixed verhead csts assciated with lan riginatins, a creditr may pay mrtgage brkers mre than its wn retail lan fficers. The rule preamble clarifies that a creditr may pay ne lan fficer mre than it pays anther lan fficer, s lng as each lan riginatr receives cmpensatin that is nt based n the terms r cnditins f the transactins delivered t the creditr. Fr example, a creditr may pay lan fficer A an amunt equal t 1 percent f the amunt f credit extended fr each lan, and lan fficer B an amunt equal t 1.25 percent f the amunt f credit extended fr each lan. ABA staff analysis des nt prvide, nr is it intended t substitute fr, prfessinal legal advice. 3

4 Prhibiting Certain Dual Cmpensatins: In (d)(1), the final rule, the rule prhibits a mrtgage brker r lan fficer frm receiving payments directly frm a cnsumer while als receiving cmpensatin frm the creditr r anther persn. Under this rule, if the lan riginatr receives cmpensatin directly r indirectly frm a cnsumer in the transactin, then (1) the riginatr may nt receive cmpensatin, directly r indirectly, frm any persn ther than the cnsumer in cnnectin with the transactin, and (2) n persn (ther than the cnsumer) wh knws r has reasn t knw f the cnsumer-paid cmpensatin t the lan riginatr may pay any cmpensatin t a lan riginatr, directly r indirectly, in cnnectin with the transactin. Cmment 36(d)(2)-1 explains that payment f a salary r hurly wage t a lan riginatr des nt vilate the prhibitin in (d)(2) even if the lan riginatr als receives direct cmpensatin frm a cnsumer in cnnectin with that cnsumer s transactin. Additinal clarificatins: Payments t an riginatr that are derived by subtracting the amunts frm the lan prceeds are cnsidered cmpensatin received directly frm the cnsumer. Payments derived frm an increased interest rate, hwever, wuld nt be cnsidered cmpensatin received directly frm the cnsumer. If the cnsumer pays any pints n a lan, these are nt cnsidered payments received directly frm the cnsumer. The Bard clarifies that if the cnsumer pays any riginatin pints t the creditr and the creditr then cmpensates the lan riginatr, the lan riginatr may nt receive cmpensatin directly frm the cnsumer. The rule, under Sectin (d)(3), clarifies that affiliates must be treated as a single persn fr purpses f (d), in rder t prevent circumventin f the final rule. A parent cmpany may nt, therefre, avid these rules by allwing a lan riginatr t chse ne affiliate ver anther in rder t cllect mre cmpensatin fr lans with different lan terms. Prhibiting Steering t Prducts Nt In Cnsumer s Best Interest: In (e), the final rule sets frth the prhibitin that a lan riginatr may nt steer a cnsumer t cnsummate a dwelling-secured lan based n the fact that the riginatr will be prvided with greater cmpensatin, as cmpared t ther transactins the lan riginatr ffered r culd have ffered t the cnsumer, unless the lan is in the cnsumer s interest. This prvisin appears t be inapplicable t traditinal arrangements where the lan fficer is a bank emplyee and is riginating lans fr the emplyer. In instances where the lan riginatr is an emplyee f the creditr bank, the emplyee is prhibited under the prhibitins n termbased cmpensatin set frth under (d)(1) frm receiving fees that are based n the terms r cnditins f the lan. Thus, when a lan fficer riginates lans fr the emplyercreditr, the riginatr may nt steer the cnsumer t a particular lan ffered by the emplyer t increase cmpensatin. Accrdingly, the Bard clarifies that in these cases, cmpliance with (d)(1) is deemed t satisfy the requirements f (e)(1). At the same time, the Bard recgnizes that a creditr s emplyee may ccasinally act as a brker by frwarding a cnsumer s applicatin t a creditr ther than the lan riginatr s emplyer, such as when the emplyer des nt ffer any lan prducts fr which the cnsumer wuld qualify. Accrding t the rule, if the lan riginatr is cmpensated fr arranging the lan with the ther creditr, the riginatr is nt an emplyee f the creditr in that transactin and is subject t (e)(1). See cmment 36(e)(1)-2.ii. The Bard states that there is n unifrm methd t determine which lans may be in the cnsumer s interest. Safe Harbr: The rule prvides a safe harbr t facilitate cmpliance with the prhibitin n steering. See (e)(2)-(e)(3). A lan riginatr is deemed t cmply with the anti-steering prhibitin if the cnsumer is satisfies three requirements First, fr each type f transactin in which the cnsumer expressed an interest (i.e., a fixed-rate, adjustable-rate, r a reverse mrtgage), the cnsumer is presented with, and able t chse frm, lan ptins that include a lan with the lwest interest rate, a lan with the lwest ttal dllar amunt fr riginatin pints r fees and discunt pints, and ABA staff analysis des nt prvide, nr is it intended t substitute fr, prfessinal legal advice. 4

5 a lan with the lwest rate with n risky features, such as a prepayment penalty r negative amrtizatin. The lan riginatr need nly evaluate lan ffers that are available frm creditrs with whm the lan riginatr regularly des business. Lan riginatrs can present fewer than three lans and satisfy (e)(2) and (e)(3)(i) if the lans presented meet the criteria f the ptins set frth in (e)(3). Under (e)(3)(iii), if a lan riginatr presents mre than three lans t the cnsumer fr each type f transactin in which the cnsumer expresses an interest, the lan riginatr must highlight the three lans that satisfy the criteria f the safe harbr, as discussed abve. Secnd, the lan ptins presented t the cnsumer are btained by the lan riginatr frm a significant number f the creditrs with whm the lan riginatr regularly des business. Third, the lan riginatr believes in gd faith that the cnsumer likely qualifies fr the lan ptins presented t the cnsumer. Recrd Retentin: Cmmentaries t Sectin (a) clarify that a creditr must retain, fr tw years, at least tw types f recrds t demnstrate cmpliance with (d)(1): a recrd f the cmpensatin agreement with the lan riginatr that was in effect n the date the transactin s rate was set, and a recrd f the actual amunt f cmpensatin it paid t a lan riginatr in cnnectin with each cvered transactin. The cmmentaries explain that fr lans invlving mrtgage brkers, the creditr may retain a disclsure r agreement required by applicable state law. Questins? Cntact Rd Alba fr mre infrmatin. ABA staff analysis des nt prvide, nr is it intended t substitute fr, prfessinal legal advice. 5