The Consumer Financial Protection Bureau released its final rule on compensation for mortgage originators on Jan. 22. Industry advocates generally have hailed the rule as an even-handed guideline that will curb abusive lending while also allowing banks to hire and retain qualified mortgage staff.
The Bureau’s final loan originator compensation rule removes the connection between loan terms and lender compensation. “Before the financial crisis, many mortgage borrowers were steered toward risky and high-cost loans because it meant more money for the loan originator,” said CFPB Director Richard Cordray said in a press release. “These rules will hold loan originators more accountable by banning the incentives that led so many of them to direct consumers toward disaster.”
But the rule does not totally ban financial institutions from offering incentive-based compensation for its lenders. “The Bureau agrees with the industry that the payment of profit-sharing bonuses and the making of contributions to designated plans in which individual loan originators participate do not create steering potential under all circumstances,” the Bureau says in the final rule.
For this reason, the final rule allows banks to compensate lenders through qualified bonuses (“designated plans” is the term used in the regulation). Under certain circumstances a bank may even compensate a lender through a non-qualified bonus or a profit-sharing plan. (The Bureau refers to these as “non-designated plans.”) The rule allows banks to contribute to 401(k) plans, and other “designated tax-advantaged plans,” such as Simplified Employee Pensions (SEPs) and savings incentive match plans for employees (SIMPLE plans) from mortgage-related profits, provided the lender: originates 10 or fewer mortgage transactions during the preceding 12 months; or receives compensation in a non-deferred profits-based compensation plan which is equal to or less than 10 percent of the lender’s total compensation.
The final rule also waived a provision of section 1403 of the Dodd-Frank Act, which would have prohibited consumers from paying up front discount points and fees to lower their interest rate, the CFPB said in its summary of the final rule. The Bureau believed this type of prohibition would only have confused consumers. And so, the CFPB “has decided instead to issue a complete exemption to the prohibition while it scrutinizes several crucial issues relating to the proposal’s design, operation, and possible effects in a mortgage market undergoing regulatory overhaul,” the Bureau said.
While the rule also adds formal character and fitness requirements for lenders such as screenings for felony convictions, training on rules governing mortgage loans, and registration with the Nationwide Mortgage Licensing System, these add nothing new to banks’ current practice. “Community banks already performed background checks on mortgage loan originators, who receive training that was in many ways superior to what is provided through the NMLS,” the Independent Community Bankers of America said in a press release on the rule.