The Mortgage Bankers Association has sent a letter and supporting materials to the Consumer Financial Protection Bureau providing its opinion on the CPFB's proposed rule on mortgage loan originator (LO) compensation and qualifications.  CFPB's proposal would augment the existing rules issued by the Federal Reserve Board (Board Rules) with similar provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

The principal difference between the Board Rules and Dodd-Frank is that the later would establish an exemption to the provision that bans commission-based compensation to an originator and the payment of up-front points and fees.  The proposal would require that lenders offer a "zero-zero" option or a no points and no fees loan.

The Proposal would also make several revisions and clarifications to the Federal Reserve Rules to address concerns that have arisen following implementation of those rules and would implement Dodd-Frank requirements that loan originators be "qualified," establishing new requirements for background checks and training applicable to loan officers employed by depository institutions.  

In its letter, sent over the signature of its President and CEO David H. Stevens, MBA points out that 18 months ago the Federal Reserve Rules mandated a complete overhaul of compensation practices for LOs.  During the same period new licensing and registration procedures for LOs were established under the Secure and Fair Enforcement in Mortgage Licensing (SAFE) Act.  MBA said the implementation of the Fed's rules was problematic; the guidance provided seemed to extend far beyond the rules, and too short a period was provided for compliance.  Consequently MBA looks at the new rulemaking as a significant opportunity to revisit the Federal Reserve Rules and other requirements to LOs and their compensation.

MBA said that issues around LO compensation and qualifications are important to consumers, the mortgage industry, and the economy at large and the Federal Reserve rules were directed in large measure at prohibiting compensation that could result in LOs steering borrowers to loans that were more beneficial to the originator than the consumer.  Because of these changes and actions by lenders themselves, compensation structures that in some cases resulted in a misalignment of originators and borrowers' interests were eliminated.  Further, thousands of loan officers who did not have the background, character or skill to serve their customers are no longer working for mortgage lenders. 

What follows is a brief summary of key points raised by MBA, principally regarding rules surrounding LO compensation.  MBA provided a significant discussion of each of these points and its letter and supporting information can be read in its entirety here:  MBA's Full Letter

Restrictions on Points and Fees and Commission Based Payments:

• An exemption from the Dodd-Frank provision that might prohibit the payment of transaction-specific commission for originated by a creditor or a mortgage brokerage if the creditor or brokerage also receives points and fees from the borrower is necessary and should be put in place before the January implementation of the Dodd-Frank rules. However, MBA opposes the exemption currently proposed which would require that creditors and brokerages make available a zero-zero loan with no upfront discount points, origination points, or fees if commission-based compensation is paid to an originator.

Many lenders report difficulties in offering this option and the exception goes considerably beyond the stated purpose of the requirement by facilitating comparison shopping and ensuring consumers receive value for the payment of points and fees.  These are issues more appropriately dealt with elsewhere such as in RESPA-TILA rulemaking.

If the Zero-Zero exemption is established, MBA urges that all fees for "third-party services," be excluded from the calculation of a zero-zero loan and, for that matter, the points and fees calculations for QM and HOEPA loans, so that borrowers do not face an apples-to-oranges comparison when comparing loans from lenders with and without affiliates.  

• While MBA supports rules requiring bona fide discount points that result in real rate reductions, regulators must recognize that such a reduction cannot be quantified in terms of a specific and pre-determined fraction of a reduction in all cases. If the requirement is unworkable, discount points may become unavailable despite their value to consumers.

• The final rule regarding Proxies should permit differences in compensation based on cost differences among products; incentivize offering of good sustainable products such as state agency or Community Reinvestment Act loans; and contain an inclusive list of proxies and exceptions.

• MBA is concerned that options for bonuses, profit-sharing, and pooled compensation provided under the provision are not feasible for smaller monoline mortgage lenders and consequently will place these firms at a disadvantage in competing for loan originators.

• The exception to the rule permitting a LO's compensation be reduced to pay origination charges where there is an unanticipated increase in the closing costs attributable to non-affiliated third parties is too limited and should be expanded.

 The CFPB proposes to expand and clarify the definition of "loan originator." However, the Proposal creates confusion as to whether loan processors are loan originators, and would appear to treat as loan originators employees who simply refer business.

MBA urges that the CFPB exercise its exemption authority to permit transaction specific commissions to originators and payment of upfront points and fees to creditors and brokerages before the dual compensation provision of Dodd-Frank takes effect and that after the rule is issued questions be answered in writing and publicized widely. Compliance should not be required until a reasonable time after the provision of necessary guidance as a premature deadline could have negative consequences, and with all the other rules coming on line, twelve months may prove insufficient to comply once the final rule is issued and guidance provided.

 Summary of Key Points in Loan Originator Qualifications

• MBA supports the proposal that originator entities must: (1) ensure that their individual loan originators meet character and fitness and criminal background standards equivalent to the standards the SAFE Act applies to employees of non-bank loan originators; and (2) provide appropriate training to their individual loan originators commensurate with the mortgage origination activities of the individual. But MBA said it also believes that these standards should be established and applied to bank and non-bank originators in a manner that avoids duplication, undue burden and unnecessary costs. These standards will give rise to liability under TILA and therefore should be established as clear, bright-line requirements.

• MBA is examining other opportunities to provide common standards to ensure a common consumer experience and expectations about a loan originator's qualifications. MBA is considering proposals whereby all loan originators would be qualified by taking a uniform test administered by regulators responsible for chartering them as a further step toward uniform standards.