CFPB Releases Proposed LO Comp Rule

Today the Consumer Financial Protection Bureau (CFPB) released proposed rules on   MLO Compensation. These rules, which the CFPB is seeking comment on will be finalized by January 2013.  According to the CFPB the proposed changes were made in an effort toward greater accountability to the mortgage market.  They also published a Summary of Proposed Rule of the 369 page rule.

“Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act places certain restrictions on the points and fees offered with most mortgages and the qualification and compensation of loan originators. Most notably, without this rulemaking, the Dodd-Frank Act would prohibit payment of upfront points and fees for most mortgages even where a consumer prefers a loan with a lower interest rate and some upfront costs.

The CFPB is seeking public comment on a proposal that would:

  • Require Lenders to Make a No-Point, No-Fee Loan Option Available: Under the proposed rule, creditors would have to make available to consumers a loan without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan.
  • Require an Interest-Rate Reduction When Consumers Elect to Pay Upfront Points or Fees:  The CFPB is seeking comment on proposals to require that any upfront payment, whether it is a point or a fee, must be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point or fee.

In addition to regulating upfront points and fees, the CFPB is proposing changes to existing rules governing mortgage loan originators’ qualifications and compensation.

The rules the CFPB is proposing would:

  • Set Qualification and Screening Standards: Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is proposing rules to implement Dodd-Frank Act requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable.

The proposed rule includes:

  • Character and Fitness Requirements
  • Criminal Background Checks
  • Training Requirements
  • Prohibit Payment of Steering Incentives to Mortgage Loan Originators
  • Place Restrictions on Arbitration Clauses and Financing of Credit Insurance

The public will have 60 days, until October 16, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January 2013.