Compliance Blog

Here's a little overview of the Fed's recently-issued final rule on Loan Originator Compensation and Steering.

Where you can find it? Here.

When does it take effect?  It applies to compensation transactions based on applications taken on or after April 1, 2011.  

Who does it apply to? Anyone who originates loans, including loan officers employed by depository institutions such as credit unions.  There's an exception for servicers.   The rule does not apply to a servicer when the servicer modifies an existing loan on behalf of the current owner of the loan.  

What does it apply to? Closed-end loans secured by the consumer's dwelling, regardless of lien position.  It does not cover HELOCs. It also does not appear to cover transactions that do not involve "table funding." It does not apply to payment received by a creditor when selling a loan on the secondary market.

What does it do?  The Fed is worried that certain compensation practices can lead to "unfair, abusive or deceptive" lending practices.  The thought was this: If loan originators are compensated more for loans with higher interest rates, for example, their incentives clash with the consumer's.  With that in mind, the rule prohibits three types of compensation practices tied to the origination of closed-end loans secured by a consumer's dwelling.  The following are no-nos for mortgage brokers or loan officers.

1. Payments to the loan originator that are based on the loan's interest rate or other terms. (Compensation based on a fixed percentage of the loan amount is OK.)
2. Receiving payments directly from a consumer, while also receiving compensation from the creditor
3. Steering a consumer to a lender offering less favorable terms in order to increase one's compensation. 

Is there a safe harbor?  Yep.  You hit the safe harbor if you present loan offers for each type of transaction that the member is interested in and the loan option includes the following:

1. The lowest interest rate for which the member qualifies;
2. The lowest points and origination fees; and
3. The lowest rate for which the member qualifies for a loan with no "risky" features, such as a prepayment penalty or a balloon payment in the first seven years. 

Recordkeeping. There's also a recordkeeping component to the rule, but it only appears in the Official Staff Interpretation section for section 226.25.  In short, for any transaction subject to the rule, a creditor should maintain records of the compensation it provided to the loan originator for that transaction, as well as the compensation agreement in effect on the date the interest rate was set.  

Here are my thoughts:

• First, you may want to simply map out how you pay your loan originators who work on dwelling-secured loans.
• Once you have that, look to see if any of your compensation practices look like any of the "no-nos."  
• If they do, dig in to see if there are exceptions.  The rule is complicated, and it applies in some scenarios and not in others.  The devil is in the details. 
• After that, build your compliance plan.