Last April, lending companies scrambled to implement loan officer compensation changes that went into effect under the Federal Reserve Board, mandated under the Dodd-Frank Act. With a brief delay pending the outcome of a lawsuit filed against the Fed for such changes, lenders began operating under the new rules just a week after the originally scheduled April 1 start date.
Now that the newly launched Consumer Financial Protection Bureau has authority over the rule, however, all that is subject to change—again. Whether the CFPB actually will decide to implement more change in 2012 remains an unknown, but it does have the power to do so, and it has made some indication that the loan originator compensation discussion is not yet over.
“We’re just looking for some clarity,” says Rod Alba, Vice President, Mortgage Finance & Senior Regulatory Counsel for the American Bankers Association. “I think a lot of our members halfway embrace [the changes] while also understanding they bring trouble.”
The ABA recently listed loan officer compensation as No. 6 on its list of top-10 regulatory concerns this year, released in January. As long as the changes are done right, Alba says, they might not be such a bad thing. But in the meantime, uncertainty still plagues many lenders who have tried to adhere to the new rules as best as possible.
“Rather than engaging in an orderly process of clarification, questions have been lingering for a year and a half,” he says.
The rule, which says employers cannot compensate loan originators on the terms or conditions of a loan, can be confusing for types of compensation that do not relate directly to those terms, but for which they could indirectly come into play. One example is the holiday bonus—not directly based on loan terms, but being performance based, could be seen as such, Alba says.
Further, now that the CFPB has gained its full power and has begun to regulate all lenders, bank and nonbank, companies are subject to the CFPB’s determination of anything that falls under “unfair or deceptive” in terms of lending practices.
“If your compensation plan is found to violate some form [of the rule], you’re deemed unfair and deceptive,” Alba says. “That comes with massive levels of liability.”
ABA was present at an industry call with CFPB officials during which the agency indicated it would release guidance on the compensation issue by the end of the first quarter, Alba told RMD. Any guidance at that time could be followed by a comment period and rule making process, which could take several months. And while the CFBP has yet to enforce the rule, some lenders are left wondering.
“We’re in complete limbo until then,” Alba says.
Written by Elizabeth Ecker
