CFPB considers easing rules on mortgage LO compensation
The Consumer Financial Protection Bureau will consider an exemption for a Dodd-Frank Act rule prohibiting mortgage loan officers from being paid by both the borrower and the brokerage firm.
The Federal Reserve rule went into effect in April 2011, forbidding payments to loan officers based on a mortgage's terms or conditions. The rules also keep a loan officer from being paid by both the borrower and any other party in the deal. This was meant to crack down on the practice of steering borrowers into higher cost loans, which would result in a higher payment for the loan officer.
The CFPB held a meeting with industry members in June to discuss possible exemptions. The Fed rule without any leeway goes into effect January 21, 2013.
"Because these types of compensation are present in the vast majority of originations and the payment of upfront points and fees is widespread, implementation without exemption would significantly change the financing for most current mortgage loan originations," the CFPB said in an outline of proposals released in May.
The exemption under consideration would allow borrowers to pay discount points resulting in a minimum deduction of the interest rate for each point paid upfront and a "flat" origination fee that cannot vary with the size of the loan.
But the Mortgage Bankers Association even pushed back against that stipulation in a letter released Monday.
"The CFPB could make this determination by concluding that absent an exemption, all points and fees would have to be included in the rate, resulting in higher rates and less affordable credit for borrowers. This would provide ample basis for either waiver or exemption," according to the MBA letter.
Borrowers of loans with a lower balance could end up being charged higher fees as a percentage of their mortgage than wealthier homeowners taking out larger loans, according to the trade group.
Also, a flat fee could result in smaller mortgages exceeding minimal percentage-based triggers under the pending CFPB rule on the Qualified Mortgage. Originators would be prohibited under the current proposal from extending higher-priced mortgages without determining a borrower's ability to repay.
It defines a higher-priced loan as having an interest rate set by 1.5 percentage points more than a comparable transaction. Flat fees on smaller loans could push the expense beyond this threshold, making less available due to a lenders' heightened liability should the loan later default.
CFPB Director Richard Cordray testified earlier in the year that easing restrictions on the loan officer compensation rule would be "sensible."
The CFPB is considering a slew of other exemptions as well, even allowing a dual-compensation in some particular states but not others, according to the MBA. Or, it might apply the flat fee exemption to particular mortgages, not all of them.
The bureau said it might also allow the exemption to sunset the partial exemption after five years. This would give the CFPB time to evaluate the rule to see how it is working with the exemption.
"At that time, the CFPB will have had time to conduct a more detailed assessment of the payment of points and fees in a more stable regulatory environment to determine the long-term regulatory regime that would maximize consumer protections and credit availability," according to the proposal outlined in May.
But the MBA pushed back even against that, complaining a sunset or partial implementation would result in higher costs and confusion. They want a clear broad exemption from a rule that was once highly contested in court before industry representatives dropped suits last year.
"Nearly 16 months ago, the lending industry implemented the Federal Reserve's loan officer compensation rules, which required a complete overhaul of compensation practices for mortgage loan originators," the MBA wrote. "The implementation process was problematic, guidance that seemed to extend far beyond the rules was provided, and compliance was demanded in too short a period."