American Bankers Association American Financial Services Association Consumer Mortgage Coalition Independent Community Bankers of America

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1 American Bankers Association American Financial Services Association Consumer Mortgage Coalition Independent Community Bankers of America July 23, 2012 The Honorable Richard Cordray Director Consumer Financial Protection Bureau 1700 G Street, N.W. Washington, D.C Re: Loan Originator Compensation Rulemaking Dear Director Cordray: The undersigned appreciate the opportunity to comment on the Consumer Financial Protection Bureau s ( CFPB ) upcoming rulemaking to implement certain Dodd-Frank Act provisions relating to mortgage loan originator compensation. These are important provisions, yet their rulemakings raise a number of technical drafting issues. We hope that this letter will help the CFPB to avoid unintended consequences in this important rulemaking. I. Dual Compensation The Dodd-Frank Act generally prohibits compensation to mortgage loan originators from anyone other than a consumer. It has an exception that allows compensation from someone other than the consumer under two conditions: (1) the loan originator does not receive any compensation directly from a consumer; and (2) the consumer does not make an upfront payment of discount points, origination points, or fees, other than bona fide third party fees. We agree with CFPB that implementation [of the dual compensation ban] without exemption would significantly change the financing for most current mortgage loan originations. 1 It would remove an important consumer benefit from the marketplace: allowing consumers to compensate mortgage loan officers for their services while paying discount points in order to reduce the interest rate on their mortgage loan. Without an exception, once a consumer agrees to pay compensation to a mortgage loan officer, the consumer would be denied the ability to pay discount points for a lower rate. This would harm consumers because they might be forced to pay interest on costs over the life of the 1 Outline of Proposals Under Consideration, Small Business Regulatory Enforcement Fairness Act of 1996 ( SBREFA Outline ) pp. 7 8.

2 loan when they might have preferred to reduce their monthly payments and pay those costs in cash at the beginning of the transaction. Due to the potential that Dodd-Frank Act language would harm consumers, the legislation gave the CFPB explicit authority to make exemptions. [T]he Bureau may, by rule, waive or provide exemptions to this clause if the Bureau determines that such waiver or exemption is in the interest of consumers and in the public interest. 2 The clause referred to is TILA 129B(c)(2)(B), which permits an origination fee or charge to be paid by someone other than a consumer if the consumer does not compensate a loan originator directly, and the consumer does not pay upfront discount points, origination points, or fees. The CFPB is appropriately considering exemptions. However, it may sunset the exemptions after three to five years. We agree with the CFPB that this sunset would be disruptive. 3 The CFPB can propose amendments to its rules at any time to address any deficiencies, so we recommend that the sunset provision be included in the broader exemption that the CFPB is considering. A. Transaction-Specific Compensation to Employees Should be Excluded from the Dual Compensation Ban The language of the dual compensation ban is unclear in many respects. The CFPB may interpret the Dodd-Frank language as not prohibiting salaries or hourly wages paid to individual loan originator employees. 4 We support this approach because salaries and hourly wages do not present any risk of steering. The CFPB says interpreting origination fee or charge to exclude commissions paid by a creditor or brokerage is one permissible interpretation. 5 We believe this is the only permissible interpretation, as we explain in this letter. Congress expected loan originators to be paid for their services; it only intended to prevent inappropriate steering into loans that increase a loan originator s compensation. The Dodd-Frank Act prohibits loan originator compensation that varies by loan terms other than principal amount, 6 which is a steering prohibition. It is important to consider 2 Dodd-Frank Act 1402, TILA 129B(c)(2)(B)(ii). 3 SBREFA Outline p SBREFA Outline p SBREFA Outline p. 6 footnote Dodd-Frank Act 1403, TILA 129B(c)(1). 2

3 the effects of this steering rule when construing the dual compensation language. A creditor or brokerage paying its employees a commission that does not vary by loan terms other than principal does not create an incentive to steer consumers to more costly loans. It merely supports the safety and soundness of lenders and brokerages by tying their costs to their revenue. This is especially important in mortgage lending because the business is cyclical. The language in TILA 129B(c)(2) is confusing, so it is important to consider its purpose. A main purpose was to ban yield spread premiums: However, nothing in the Act should be construed as permitting yield spread premiums or other similar incentive compensation, affecting the mechanism for providing the total amount of direct and indirect compensation permitted to a mortgage originator, restricting a consumer s ability to finance origination fees if they were disclosed to the consumer and do not vary with the consumer s decision to finance such fees, or prohibiting incentive payments to a mortgage originator based on the number of loans originated. 7 That is, nothing in the Act should be construed as... affecting the mechanism for providing the total... compensation permitted to a mortgage originator. The mechanism for compensating mortgage originators was, and is, commissions. Moreover, nothing in the law should be construed as prohibiting incentive payments to a mortgage originator based on the number of loans originated. Incentive payments based on the number of loans originated are expressly permissible. In its originator compensation language, Congress distinguished between an origination fee or charge and compensation. The language in the TILA 129B refers to both 7 The House Report on what is now 1403 explains its purpose: Section 103. Prohibition on steering incentives This section provides that for any mortgage loan, the total amount of direct and indirect compensation from all sources permitted to a mortgage originator may not vary based on the terms of the loan (other than amount of principal). In addition, the Federal banking agencies, in consultation with the Secretary and the Commission, will jointly prescribe regulations to prohibit (1) mortgage originators from steering any consumer to a residential mortgage loan that the consumer lacks a reasonable ability to repay, that does not provide net tangible benefit, or that has predatory characteristics, (2) mortgage originators from steering any consumer from a qualified mortgage (prime loan) to a loan that is not a qualified mortgage, (3) abusive or unfair lending practices that promote disparities among consumers of equal creditworthiness but of different race, ethnicity, gender, or age, and (4) mortgage originators from assessing excessive points and fees to a consumer for the origination of a residential mortgage loan based on such consumer s decision to finance all or part of the payment through the rate for such points and fees. However, nothing in the Act should be construed as permitting yield spread premiums or other similar incentive compensation, affecting the mechanism for providing the total amount of direct and indirect compensation permitted to a mortgage originator, restricting a consumer s ability to finance origination fees if they were disclosed to the consumer and do not vary with the consumer s decision to finance such fees, or prohibiting incentive payments to a mortgage originator based on the number of loans originated. H. Rep , at (2009). 3

4 compensation that cannot vary based on loan terms 8 and origination fees and charges paid to a mortgage originator or a third party. 9 We believe that it is clear that the meaning of compensation includes salary and other personal income. This clearly implies that not all mortgage originator compensation consists of origination fees and charges. It seems very unlikely that this was intended to treat the compensation that creditors and brokerage firms pay to their employees as origination fees or charges. The distinction between salaries on the one hand and commissions and other transactionspecific compensation paid to employees is artificial neither would be origination fees or charges in the ordinary meaning of that phrase. Dodd-Frank does not provide a definition that would change the meaning of origination fees or charges, and it does not make a distinction between salaries and transaction-specific compensation. The reason is that Congress intended for transaction-specific commissions based on the number of loans closed to remain as permissible compensation, given the ban on yield spread premiums. There are several reasons why the TILA 129B(c)(2) language must be read to permit creditors and brokerages to pay commissions to their employees. The prohibition on compensation set by loan terms will prevent the steering and yield spread premiums that Congress intended to prohibit. B. Long-Term Compensation Unknown at Consummation Should be Excluded The loan originator rule in place today treats compensation that is unknown at loan origination as salary. Compensation is not based on the loan terms if it is based on any of the following: The long-term performance of the originator s loans; 10 The percentage of applications submitted by the loan originator to the creditor that result in consummated transactions; 11 or The quality of the loan originator s loan files (e.g., accuracy and completeness of the loan documentation) submitted to the creditor. 12 These compensation factors are not based on loan terms or conditions and do not present steering risks. They incent responsible work performance. So, the compensation should be treated as it is today. 8 TILA 129B(c)(1). 9 TILA 129B(c)(2). 10 Comment 36(d)(1)-3.ii. 11 Comment 36(d)(1)-3.vi. 12 Comment 36(d)(1)-3.vii. 4

5 C. The General Ban on Compensation Paid by a Party Other Than the Consumer Should be Limited to Creditor Payments to Brokerages The general rule is that a loan originator may not receive compensation from any person other than the consumer[.] 13 It is common for a third person, such as a home seller, a relocating borrower s employer, or a public agency that provides closing cost assistance, to pay part of the loan originator s compensation. Clearly, these arrangements benefit consumers and do not present steering risks. It should be permissible for third parties to pay loan originator compensation. The general rule should be limited to instances where the creditor pays the brokerage firm s origination fees. No other situation presents risks of steering, or where there is a potential for consumer harm. D. Payments to Third Parties Should Not be Included in Origination Fees State mortgage revenue bond programs are a method by which states can subsidize home financing options. These programs sometimes charge consumers a fee expressed as a percentage of the loan amount. This practice should not prohibit the creditor from paying otherwise permissible commissions to its employees because a steering risk does not exist. Nor should it require the state bond programs to convert their fees to flat rates because there would not be a consumer benefit, and it would disrupt these housing programs. E. Flat Origination Fees Should Not be Required The CFPB may require flat origination fees when a consumer pays upfront points and fees and a creditor compensates a loan originator. We believe this would do more harm than good. The CFPB explains that points and fees present the possibility of consumer confusion. 14 If the problem is that some consumers would be confused, the solutions are clear disclosures and better consumer education, not removing options that can benefit consumers financially. The CFPB seems uniquely positioned to ensure that both clear disclosures and appropriate consumer education is provided. Flat origination fees will result in consumers being disadvantaged: Flat origination fees are not tax deductible, while discount points may be deducted. Requiring flat origination fees could be a direct cost to consumers. Larger loans subsidize smaller loans, and removing this subsidy would hurt lower-income borrowers. The points and fees threshold for Home Ownership and Equity Protection Act ( HOEPA ) and state high-cost loans, and the points and fees caps for qualified 13 Dodd-Frank Act 1403, TILA 129B(c)(2)(A). 14 SBREFA Outline p. 8. 5

6 mortgage ( QM ) and qualified residential mortgage ( QRM ) loans, are a percentage of the loan amount. If origination fees were a flat amount, smaller loans would withstand disproportionate impact. The proposed QM rule has a slightly higher cap on points and fees for smaller loans, but it is only for loans under $75,000, which is a small mortgage loan. Moreover, the cap only goes up to five percent, and that is only for loans less than $20,000, which is truly tiny for a mortgage loan. Given lenders unwillingness to make non-qm loans because of the unlimited legal liability, flat origination fees might disproportionately exclude lower-income families from the mortgage market. Many state mortgage revenue bond programs and other consumer assistance programs specify the permissible origination charges and limit them to a percentage of the loan amount. A requirement for a flat origination fee would disrupt those programs. Requiring flat origination fees would interfere with the safety and soundness of certain lender practices. Lenders set certain charges as a percentage of the loan amount because the cost to the creditor varies by loan size. These charges include rate-lock fees, extension fees, and adjusters for risk characteristics of a loan. We recommend that the CFPB clarify that these are always permitted to vary by loan size. Construction loans should not be subject to the no-fee or no-point requirements. Construction loans frequently have long-term rate locks which protect the consumer from large rate increases during the construction period. Consumers typically pay for these long-term rate locks with upfront fees or points. Removing the lender s ability to charge upfront fees for long term rate locks would increase costs for consumers. One option creditors would have for managing a flat fee requirement would be for creditors to convert percentage-based fees into an increase in the interest rate on the loan. However, this may not be beneficial to consumers because creditors may only move interest rates on loans in increments of percent. For example, converting a fee that is ¼ of a point to a rate increase would increase the rate by percent over the entire life of the loan. The cost to the consumer would increase. Another option would be for creditors to give consumers the option of a credit towards closing costs in return for a higher rate. If the amount of the credit exceeds the closing costs, the creditor could pay the remainder of the credit to the consumer. However, on rate and term refinances, this would often not be possible because Fannie Mae and Freddie Mac limit the cash out that is permissible in rate-and-term refinances. Cash-out refinances may have higher interest rates than rate-and-term refinances. So, again, consumers could be harmed. Veterans Administration ( VA ) loans limit origination fees, and sometimes other fees, to one percent of the loan amount. A CFPB rule requiring a flat origination fee would conflict with this, and could unintentionally prohibit origination fees on VA loans. 6

7 Different loan products and programs have different origination costs. If the CFPB does require flat origination fees, it should permit creditors to charge different flat origination fees for different products or programs. Furthermore, creditors should be permitted to waive origination fees. Overall, the many disadvantages of flat origination fees far outweigh any possible advantage. We suggest the CFPB address potential confusion about discount points through consumer education programs and through its Know Before You Owe initiative. F. No Discount Point, No Fee, or No Point, No Fee Options The CFPB may require creditors, when a loan will have discount points, to offer the option of a no discount point loan. 15 Requiring creditors to offer a no discount point option is not troublesome because, by definition, a discount point is a point that the consumer chooses to pay to reduce the rate. However, the regulation must clearly state what the creditor or brokerage firm must do to show that they presented this choice to the consumer. Having an exact zero point option would be operationally challenging. Loan pricing models consider a variety of factors, so even if a zero point option were available, when certain factors are present, the number of points may be slightly above or below zero. This would greatly complicate offering the option, with little or no consumer benefit. We recommend that it should be sufficient to give the consumer a choice between a higher rate that provided a percentage-based credit that the borrower could use towards closing costs, or a lower rate with discount points. Economically, the consumer would have the same options, and it would avoid unnecessary operational complexity. The CFPB may require creditors to offer the option of a no-fee loan and a no-point, no-fee loan. 16 We are not sure what the difference is between the two, as a point is merely a fee expressed as a percentage rather than an absolute number. In any event, fees should not include third party charges because the lender cannot set them. Fees for services the borrower elects likewise should be excluded because consumers can benefit from optional services. Fees in connection with a property purchase should be excluded because they do not relate to the loan. We recommend against requiring creditors to offer a no point, no fee loan. Interest rates are near historic lows right now, but will eventually rise. When they do, rolling costs into the rate would become disproportionately harmful. Financing the loan costs is more expensive when rates are high than when they are low. The CFPB may require that the difference between the higher interest rate on the no-fee loan and interest rate on the loan with upfront fees must be reasonably related to the amount 15 SBREFA Outline p SBREFA Outline p

8 of upfront fees. 17 Relating flat fees to the interest rate will disproportionately hurt consumers with small loan sizes. An example will illustrate how. Assume that there are flat fees of $4,000 on two loans, where one loan has a principal of $80,000 and the other of $200,000. The $4,000 equals 5% of the smaller loan (five points) and 2% of the larger loan (two points). If a rate difference of 0.25% for each point were the definition of reasonable, then the rate on the smaller loan, in the absence of upfront fees, would increase by 1.25% (five points times 0.25%) while the rate of the larger loan would increase by 0.50% (two points times 0.25%). This means that the smaller loan is more likely to reach the HOEPA or a state high-cost loan rate threshold and not be made at all. Another problem with requiring creditors to offer a no fee loan is that Regulation X and many state laws limit creditors ability to choose the settlement service providers and negotiate with them for the costs of their services. As a result, if the creditor is required to cover third party fees but cannot control the amounts of those fees, the creditor would need to increase the rate to cover the range of possible third party charges. This would disadvantage consumers. The SBREFA Outline mentions the possibility of carving out fees such as rate-lock fees and expedited handling fees. 18 This is welcome because it would provide much-needed flexibility. Additionally, consumers may elect such options late in the origination process, when renegotiating the loan would be quite disruptive. However, it is not at all clear what types of fees would qualify for the exclusion. There are many types of potential fees on mortgage settlements, and they vary geographically. To the extent the list is unclear, creditors would need to assume the fee is not permitted on a no-fee loan, and increase the interest rate. G. The Difficulty of Defining Bona Fide Discount Points The CFPB may permit bona fide discount points on a loan when the creditor compensates a loan originator, defining bona fide points as points that result in a minimum rate reduction for each point. 19 Creditors will need to be certain whether points meet this definition before they offer that choice to a consumer. The amount of rate reduction that discount points buy depends on a number of factors, including, but not limited to, the expected duration of the loan and how long the reduced rate will remain in effect. On most ARM loans, for example, the discount points buy down the initial rate but not the margin, so the buy-down remains in effect only until the first adjustment. Supply and demand also affect loan pricing, and they fluctuate continuously. It would be quite difficult to put pricing factors into a regulation. In trying to do so, the CFPB would have two possible approaches: 17 SBREFA Outline p SBREFA Outline footnote 26, p SBREFA Outline p. 9. 8

9 If the CFPB were to determine the required amount of rate reduction, it would need to consider all of the myriad pricing factors, and it would be directly setting prices in the marketplace. If it sets the reduction too low, consumers would not, or should not, accept the loan offer. If it sets the reduction too high, creditors would need to make up the actual market price. They would likely do so by increasing the base rate on the zero point loan so the rate reduction will meet the requirement, or, if that option is unavailable, would remove the loan product from the market. If the CFPB does not directly set the amount of the reduction but leaves creditors to determine whether the points are bona fide under vague guidelines, creditors will not have the certainty needed to offer the choice of discount points to the consumer. Neither option would be beneficial to consumers. Whether discount points are bona fide is an all or nothing question. Either the CFPB may set a minimum reduction requirement at odds with what market forces will dictate, or a creditor may make a good faith determination of what it considers to be a reasonable reduction and then be found, after the fact, in violation. It would be preferable to eliminate the bona fide requirement from these compensation requirements. Section 1403 does not require that discount points may only be paid if they are bona fide. In contrast, the points and fees cap for QM loans and the HOEPA points and fees threshold have bona fide discount point requirements. However, a loan may remain under the QM and HOEPA points and fees cap and threshold even if the discount points are not considered bona fide, providing creditors some measure of certainty. II. Loan Originator Compensation That Varies Based on Loan Terms Other Than Principal The Dodd-Frank Act prohibits loan originator compensation based on loan terms other than the principal amount. The CFPB is considering how to deal with a number of complications resulting from this rule. The CFPB s experience with a loan originator compensation regulation 20 has shown the need for clarification. A. Mortgage Revenue as Share of Total Revenue The CFPB may permit employers to pay bonuses or to contribute to non-qualifying profit-sharing plans if the company s mortgage-related revenue does not exceed, perhaps, 20 to 50 percent of total company revenue. If the company exceeds this limit, the CFPB may permit bonuses or contributions to a non-qualifying profit-sharing plan only out of non-mortgage profits C.F.R (d)(1). 9

10 It is unclear why the CFPB would set differing compensation rules based on the share of company revenue derived from mortgages, or how the difference would affect consumers. To the extent there is any impact on consumers, we suggest that it would be so attenuated as to be an unsound basis for a rule that many loan originators would view as unfair to them. B. Senior Officers Should be Exempt Tying executive compensation to the financial performance of the companies they operate is a common, successful, and safe and sound practice. Senior officers and managers are, and should be involved in individual loan originations from time to time. Every mortgage origination is different, and issues do arise, especially when the rules are in a state of flux. If an issue escalates to a manager or a senior officer, that person should be able to resolve the issue quickly. The officer or manager needs access to application and underwriting information, and needs to be able to offer specific loan terms to a consumer. This is an important consumer protection. Foreclosure preventions sometimes involve loan originations, so this protection is important when default rates are high. There should be no need to check with HR and Legal first due to a loosely-drafted compensation rule. Comment 36(a)-4 needs to be clarified. It provides: For purposes of , managers, administrative staff, and similar individuals who are employed by a creditor or loan originator but do not arrange, negotiate, or otherwise obtain an extension of credit for a consumer, or whose compensation is not based on whether any particular loan is originated, are not loan originators. Officers and managers compensation is not directly based on their intervention in an individual loan origination, but arguably it is indirectly based on that intervention in some cases, however remotely. This comment needs to be clarified to exempt officers and managers who occasionally participate in individual loan originations, and offer or negotiate loan terms, but whose compensation is not directly affected by the loan. Senior officers and managers who do not spend a majority of their time working on individual loan originations should always be exempt from the compensation rules. C. Pricing Concessions The CFPB may allow loan originators to make certain types of pricing concessions. To the extent that any loan originator can make a pricing concession to a consumer, it is critical that a creditor be permitted to place restrictions on the loan originator s discretion. The creditor needs to reduce the likelihood of pricing differentials and potentially illegal disparate impact. The CFPB may permit pricing concessions to cover unanticipated increases in third-party settlement charges, where those settlement charges are not controlled by the loan 10

11 originator, the creditor, or their affiliates, and the charges exceed charges disclosed in the Good Faith Estimate ( GFE ). Charges that exceed the GFE are due to a borrowerrequested change or to a change in circumstances. The CFPB gives the example of an appraiser discovering structural damage or an environmental issue that necessitates a special inspection. In this example, the CFPB s approach would permit a pricing concession, but had the borrower told the creditor about the issue at the outset, the CFPB would not permit a pricing concession. This would treat a borrower who tells the creditor that there may be structural or environmental issues worse than a consumer who withholds that information. This would introduce unnecessary friction, and could interfere with safe and sound underwriting. Concessions in the case of a borrowerrequested change or changed circumstances should not be a circumstance for a pricing concession. We do not object to permitting pricing concessions when charges increase within RESPA tolerances, in the absence of a borrower-requested change or a change in circumstances. D. Point Banks The CFPB states that a point bank may provide a loan originator with the ability to close some transactions that may not otherwise have closed, and that a point bank could be viewed as compensation because it provides a financial or similar incentive to the loan originator. The CFPB may therefore clarify that point banks are compensation. The CFPB may permit creditors to fund point banks if (1) the creditor does not base the amount of the contribution to a point bank for a given transaction on the terms of the transaction; (2) the creditor does not change its contributions to the point bank over time based on terms of the loan originator s transactions, or on whether the loan originator overdraws a point bank; and (3) the creditor does not reduce the loan originator s commission on a transaction due to an overdrawn point bank. The idea that if a loan originator is allowed to take any action that affects whether the loan closes provides a financial or similar incentive that is compensation is extremely broad. The loan originator s job is to close loans for qualified borrowers. We assume the CFPB means that a loan originator who has some discretion to ask the creditor to make a pricing concession, but whose compensation for the loan is not directly affected by whether, or to what extent, the creditor grants the concession, has not received impermissible compensation. Point banks create the potential for pricing differentials and disparate impact, and therefore the creditor should be able to restrict the use of point banks to limit this potential. 11

12 E. Reduced Compensation Should Be Permitted For Errors Under current law, if a loan originator makes a serious mistake, such as grossly underestimating fees and charges on the GFE, the creditor is prohibited from using the most effective tool to enforce compliance reducing the loan originator s compensation. Comment 36(d)(1)-6 provides that creditors may periodically review loan performance, transaction volume, or market conditions and prospectively revise loan originator compensation. Retroactive compensation reductions should be permitted when they are based on loan originator error or noncompliance with any rule or creditor requirement. Any other approach serves to undermine important laws and rules, relating both to consumer protection and safety and soundness. F. Proxies for Loan Terms Under current law, if a loan originator s compensation varies in whole or in part with a factor that serves as a proxy for loan terms or conditions, then the originator s compensation is based on a transaction s terms or conditions. 21 The CFPB may provide examples of compensation that is or is not based on loan terms or conditions to clarify which factors serve as proxies for loan terms. We support additional clarity because the existing rule is unnecessarily rigid. The CFPB may define a factor as a proxy for a loan term if: (1) it substantially correlates with a loan term; and (2) the loan originator has discretion to use the factor to present a loan to the consumer with more costly or less advantageous terms than terms of another available loan, through the same loan originator, for which the consumer likely qualifies. We agree that a factor should not be a proxy if the loan originator does not have discretion to use the factor to steer a consumer. It would be helpful to confirm which common factors do not involve discretion. The loan purpose should not be a proxy. Whether a loan is a purchase or refinance, and whether a refinance is a cash-out or a rate-and-term refinance, is not at the loan originator s discretion. The consumer, not the loan originator, determines the loan purpose. The secondary mortgage market price of a loan varies with the loan purpose, so creditors need to reflect this fact when pricing loans. Whether a loan is in a creditor s Community Reinvestment Act ( CRA ) assessment area, and whether the census tract or household is low- or moderateincome, should not be deemed a proxy. Deeming these as proxies interferes with the purposes of the CRA, which include promoting lending in low- and moderate- 21 Comment 36(d)(1)-2. 12

13 income areas. Loan originators do not determine the creditor s CRA assessment area or where the consumer lives. The borrower s credit score should not be a proxy for a loan term. Again, the loan originator has no discretion or influence over the credit score. The credit score certainly influences the secondary market value of a loan, and the creditor needs to reflect this when pricing the loan. A flat no proxy rule does not recognize the fundamental reality that some types of mortgage loan products or programs require more loan originator time and effort than others. Under the current rules, creditors could require loan originators to keep timesheets to document how much time they spent on each file and compensate loan originators on an hourly basis. However, this is at odds with the need to compensate loan originators on a commission basis. Tracking time would also be costly and cumbersome. The CFPB needs to clarify that if a creditor or broker makes a good faith determination of the time and effort to process a loan based upon the loan product or process, then it may use that information to vary loan originator compensation by product or process. This would decrease the likelihood of inappropriate steering to whatever product or process is the least work for the loan originator, as under a flat no-proxy rule. It would also avoid steering to whichever loan product requires the most work, as under hourly pay. III. SAFE Act The Dodd-Frank Act imposes a duty on loan originators to be qualified and, where applicable, registered or licensed as a mortgage originator under state law and the federal SAFE Act. 22 The CFPB may require that to be qualified under TILA, loan originator entities must ensure that individuals who work for them are licensed or registered as required by the SAFE Act. It may also require under TILA that entities whose loan originator employees are subject to SAFE Act registration but not licensure (because the entity is a depository institution): (1) to ensure that their loan originator employees meet character and fitness and criminal background standards equivalent those the SAFE Act applies to licensees; and (2) to provide appropriate training to their loan originator employees commensurate with the size and mortgage lending activities of the entity, analogous to the continuing education requirement that applies to individuals who are subject to SAFE Act licensing, without a minimum number of training hours. 23 The CFPB explains its reasoning: The proposed character and fitness, criminal background check, and training requirements would improve parity among the minimum standards that apply to individual [loan originators] working for different types of entities.... To the 22 Dodd-Frank Act 1402(a)(2), TILA 128B(b)(1)(A). The SAFE Act is the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, Pub. L. No , codified at 12 U.S.C SBREFA Outline pp

14 extent that some small [loan originators] face competitors with lower costs or other advantages resulting from their lesser requirements for registration, the proposed requirement will increase parity between these firms and reduce potential unfairness. 24 This assumes that small lenders are nondepositories and large lenders are depositories. Of course, many credit unions, small banks and thrifts make mortgage loans, as well. The CFPB may also require under TILA that all loan originator entities, regardless of charter type, comply with applicable state law requirements for legal existence and foreign qualification. 25 The CFPB does not provide a reason for this, and it does not identify a problem this would resolve. In effect, this approach would apply TILA litigation risk and liability to SAFE Act requirements. A. The CFPB Should Reduce Compliance Costs to Accomplish its Goal The CFPB is correct that the cost of SAFE Act compliance is different for depository institutions than for nondepository institutions. It is also the case that the costs of TILA and SAFE Act compliance increase the cost of housing credit. If the goal is to reduce regulatory disparity, we question why the approach is to increase the costs for depositories rather than reduce it for nondepositories. The SAFE Act does not require licensees to be licensed in each state in which they originate loans. It requires loan originators to have either a license or a registration, in the singular: [A]n individual may not engage in the business of a loan originator without first (1) obtaining, and maintaining annually (A) a registration as a registered loan originator; or (B) a license and registration as a State-licensed loan originator[.] 26 Unfortunately, Regulation H as written today goes much farther that the SAFE Act, and thereby created a regulatory burden for registrants that licensees do not bear. It requires a licensee to be licensed in every state where they originate loans: (a) Except as provided in paragraph (e) of this section, in order to operate a S.A.F.E.-compliant program, a state must prohibit an individual from engaging in the business of a loan originator with respect to any dwelling or residential real 24 SBREFA Outline p SBREFA Outline p SAFE Act 1504(a), 12 U.S.C. 5103(a). 14

15 estate in the state, unless the individual first: (1) Registers as a loan originator through and obtains a unique identifier from the NMLSR, and (2) Obtains and maintains a valid loan originator license from the state. 27 There is no reciprocity for licensees where two states have very similar licensure requirements. Nor is there reciprocity where a loan originator is licensed in a state that requires more for licensure than another state where the individual wants to originate loans. This is an unnecessary regulatory burden for licensees that registrants do not bear. Registrants must register only once, and can then originate loans in any state. Rather than impose great costs on depository institutions, the more sound approach would be to permit reciprocity where a loan originator is licensed and meets sufficient standards. Moreover, increasing the regulatory costs on registrants is unnecessary. As the CFPB acknowledges, the CFPB believes that many of these entities already have adopted screening and training requirements, either to satisfy safety-and-soundness requirements or as a matter of good business practice. 28 This is correct. Depository institutions are subject to extensive safety and soundness standards too numerous to cite they permeate all of federal and state banking law. There simply is no need for the CFPB to duplicate safety and soundness standards. If it does duplicate the existing safety and soundness standards, the CFPB should at least grandfather loan originators from going through additional background checks. Bank loan originators have a background check when they are hired, and had another when the SAFE Act required their registration. Criminals cannot work at depository institutions, 29 so there is no reason for a third background check C.F.R SBREFA Outline p The Federal Deposit Insurance Act provides that, absent approval of the Federal Deposit Insurance Corporation: (A) any person who has been convicted of any criminal offense involving dishonesty or a breach of trust or money laundering, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense, may not (i) become, or continue as, an institution-affiliated party [employee, officer, director, and certain outsiders] with respect to any insured depository institution [national or state bank, and federal or state thrift]; (ii) own or control, directly or indirectly, any insured depository institution; or (iii) otherwise participate, directly or indirectly, in the conduct of the affairs of any insured depository institution; and (B) any insured depository institution may not permit any person referred to in subparagraph (A) to engage in any conduct or continue any relationship prohibited under such subparagraph. 12 U.S.C. 1829(a). The same prohibition applies to credit unions. 12 U.S.C. 1785(d)(1). Violations are punishable by a million dollar fine and imprisonment for five years. 12 U.S.C. 1829(b) and 1785(d)(3). Moreover, the federal banking agencies and the NCUA can suspend a person from a position at a depository institution if the person is indicted not convicted, just indicted for a crime involving 15

16 B. The CFPB Lacks Authority to Rewrite the SAFE Act In enacting the Dodd-Frank Act, Congress certainly could have removed the fundamental distinction between banks and nonbanks from the SAFE Act, but elected not to do so. Given that Congress intended that distinction to remain, it does not appear that the CFPB has authority to remove it. We do not see any reasonable basis or authority for applying SAFE Act licensure requirements when the SAFE Act expressly and clearly permits registration without licensure. C. Character and Fitness Standard is Undefined If the CFPB will create a character and fitness standard, it will need to be clear. State authorities usually review loan originators credit reports. If the CFPB were to adopt a similar requirement, it will need to be precise about what factors disqualify a loan originator. Credit reports come in endless permutations, so clarity would be especially important. D. Training Costs are Underestimated and Unnecessary Any new training requirement should be clear as well. An initial concern is that the CFPB has not established any lack of training today, and underestimates the cost. The CFPB partially calculates the cost of this training: The typical cost of a stand-alone 8 hour continuing education course is approximately $ This does not recognize the largest cost of training. An eight-hour training course requires eight hours of the employee s time. Eight hours of time of each loan originator employee of every depository institution in the country that makes consumer mortgage loans is a significant cost. At the end of March 2012, there were 379,605 depository institution loan originators in the NMLSR Registry. If each registered loan originator were to spend eight hours in training, it would require over 3 million hours. If each training course cost $129, for the course itself rather than the time, the cost would be dishonesty or breach of trust that is punishable by imprisonment for more than a year, under either federal or state law, or for money laundering. The alleged crime does not need to relate to the depository institution. 12 U.S.C. 1818(g)(1)(A) and 1786(i)(1)(A). A conviction for such a crime can, or sometimes must, result in a permanent prohibition, 12 U.S.C. 1818(g)(1)(C) and 1786(i)(1)(C), from the entire industry, 12 U.S.C. 1818(e)(7) and 1786(g)(7), and acquittal does not bar the person s removal and prohibition. 12 U.S.C. 1818(g)(1)(D)(ii) and 1786(i)(1)(D)(ii). Violations of such a removal or prohibition order are punishable by a million dollar fine and imprisonment for five years. 12 U.S.C. 1818(j) and 1786(l). 30 SBREFA Outline p

17 $48.97 million. This is a very substantial cost for a duplicative requirement that does not add any value. Another major concern is that the number of hours required before an employee may perform loan originator activities needs to be reasonable because a new training requirement can be highly disruptive, as each loan originator would not be able to perform their normal job functions. Training that has already taken place should be credited towards compliance, and training that is informal, such as in-house training, should be credited. The training needs to allow the employee to act as a loan originator in all states, without state-specific training requirements. This would significantly reduce the unnecessary costs of a duplicative training requirement. It is also consistent with the SAFE Act. IV. Conclusion We appreciate the CFPB s continuing work on the many Dodd-Frank Act Title XIV rules. In doing so, we Encourage the CFPB to permit loan originator commissions as Congress intended, consistent with the Dodd-Frank Act prohibition on compensation that varies by loan terms other than principal; Believe flat origination fees would create unnecessary consumer harm; and Encourage the CFPB to avoid creating rules that create compliance dilemmas. We also recommend that the CFPB go through multiple rounds of public iterations of its Title XIV rulemakings to avoid unnecessary disruptions in the nation s housing markets. Sincerely, American Bankers Association American Financial Services Association Consumer Mortgage Coalition Independent Community Bankers of America 17

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