Financial Services Update - Special Alert January 30, CFPB Issues Final Loan Originator Compensation and Qualifications Rule

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1 Financial Services Update - Special Alert January 30, 2013 CFPB Issues Final Loan Originator Compensation and Qualifications Rule On January 20, the CFPB posted its final rule (the Rule) regarding loan originator compensation, loan originator qualification standards, and restrictions on mandatory arbitration clauses and financing of single-premium credit insurance. The Rule amends Regulation Z to implement amendments to the Truth in Lending Act (TILA) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and to revise and clarify these existing regulations and commentary on loan originator compensation. The CFPB issued the corresponding proposed rule (the Proposal) to obtain public comments on August 17, 2012 (77 Fed. Reg , Sept. 7, 2012), and the Rule largely follows the Proposal with some important revisions and clarifications. Effective Date The provisions on arbitration clauses and financing of single-premium credit insurance go into effect on June 1, All other aspects of the Rule become effective on January 10, Unlike most regulations, there are provisions in the Rule that some companies may wish to implement earlier than next January because they are easy to implement and/or are beneficial to the company s business. Nonetheless, we understand from informal contacts with CFPB staff that it is their view that companies should continue to comply with the currently existing provisions until the effective date, if complying with the Rule would be considered a violation of the current provisions. For example, currently under Regulation Z, mortgage broker companies that receive compensation from the consumer may not pay a commission to their employee mortgage brokers. While the Rule has revised Regulation Z to permit such payments, because this revision is not yet effective, mortgage broker companies should continue to comply with the current restrictions until January 10, 2014, unless and until further clarification can be obtained from the CFPB. The same reasoning would appear to apply to pricing concessions or profit sharing plans that are non-qualified (explained in more detail below). However, for amendments that would not violate current regulations, it appears early implementation would be permissible. While we believe it would be 1

2 beneficial if companies were permitted an opportunity to begin early implementation of this Rule, particularly in light of its complexity in some areas and the other new rules also going into effect at the same time, based on the CFPB s informal view stated above, we recommend companies proceed with caution with implementation of any changes prior to the effective date. Scope All of the provisions implemented by the Rule apply to closed-end consumer credit transactions secured by a dwelling. Only the restrictions on mandatory arbitration clauses and financing of credit insurance premiums also apply to an open-end home equity line of credit (i.e., credit subject to ) when secured by the consumer s principal dwelling. None of the provisions apply to a loan that is secured by a consumer s interest in a timeshare plan. Loan Originator For purposes of both the compensation provisions and the qualification provisions, the definition of a loan originator has been expanded to include a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application; offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. While the existing regulations apply to producing branch managers because, generally speaking, those managers meet the definition of a loan originator, the Rule includes an express clarification of this fact. Some producing branch managers may be able to receive profit-based compensation under the exceptions for Profit Sharing Plans described below. Notably, the Rule expressly includes in the definition of a loan originator any person referring a consumer to any person who participates in the origination process as a loan originator. Referring includes any oral or written action directed to a consumer that can affirmatively influence the consumer to select a particular loan originator or creditor to obtain an extension of credit when the consumer will pay for such credit. However, see below for the exception for persons who provide loan originator or creditor contact information to a consumer in response to the consumer s request (as opposed to providing customer information to a loan originator or creditor). It is important to remember that this definition is not only for purposes of determining who is subject to the restrictions on compensation, but also for the qualification requirements discussed herein. For example, a branch manager that originates 8 loans 2

3 a year may be able to receive profit-based compensation, however, that manager is still subject to the loan originator qualification requirements. Exemptions The Rule clarifies the existing exemptions from the definition of loan originator, as well as adding new exceptions. The Rule exempts certain employees of a manufactured home retailer; a servicer or servicer s employees, agents, and contractors who offer or negotiate terms for purposes of renegotiating, modifying, replacing, or subordinating principal of existing mortgages where consumers are behind in their payments, in default, or have a reasonable likelihood of defaulting or falling behind (as long as the transaction does not rise to the level of a refinance or obligates a different consumer on the existing debt); individuals that perform only real estate brokerage activities and are licensed or registered in accordance with applicable State law, unless such person is compensated by a creditor or loan originator or by any agent of such creditor or loan originator for a particular consumer credit transaction subject to this section. The definition of loan originator also does not include bona fide third-party advisors such as accountants, attorneys, registered financial advisors, housing counselors, or others who do not receive compensation for engaging in loan origination activities. The Rule will continue to exempt a person who does not take a consumer credit application or offer or negotiate credit terms available from a creditor, but who performs purely administrative or clerical tasks on behalf of a person who does engage in such activities. However, managers, administrative and clerical staff, and similar individuals who are employed by (or a contractor or an agent of) a creditor or loan originator organization and take an application, offer, arrange, assist a consumer in obtaining or applying to obtain, negotiate, or otherwise obtain or make a particular extension of credit for another person are loan originators. The Rule includes examples of activities that, in the absence of any other activities, will not render a manager, administrative or clerical staff member, or similar employee a loan originator for these purposes, including persons who: At the request of the consumer provides an application form to the consumer; Accept a completed application form from the consumer; Deliver an application to a loan originator or creditor without assisting the consumer in completing the application, processing or analyzing the information, or discussing specific credit terms or products available from a creditor with the consumer; Provide general explanations, information, or descriptions in response to consumer questions; As employees of a creditor or loan originator, provide loan originator or creditor contact information in response to the consumer s request, provided that the 3

4 employee does not discuss particular credit terms available from a creditor and does not refer the consumer, based on the employee s assessment of the consumer s financial characteristics, to a particular loan originator or creditor seeking to originate particular credit transactions to consumers with those financial characteristics; Describe other product-related services; Explain or describe the steps that a consumer would need to take to obtain an offer of credit, including providing general guidance on qualifications or criteria that would need to be met that is not specific to that consumer s circumstances. Pursuant to the Dodd-Frank Act, seller financers are exempt from the definition of loan originator if: The person provides seller financing for the sale of three (3) or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing. The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person. The person provides seller financing that meets the following requirements: The financing is fully amortizing. The financing is one that the person determines in good faith the consumer has a reasonable ability to repay. The financing has a fixed rate or an adjustable rate that is adjustable after five (5) or more years, subject to reasonable annual and lifetime limitations on interest rate increases. A separate seller financing exception is also included for a natural person, estate, or trust that provides seller financing for the sale of only one (1) property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing. Loan Originator Compensation The Rule keeps in place the three basic principles of the current compensation-related provisions under Regulation Z: Fixed Compensation No compensation to loan originators based on transaction terms, except for a payment based on a fixed percentage of the amount of credit extended. No Dual Compensation A loan originator may not receive compensation from both the consumer and another party. 4

5 No Steering A loan originator may not steer a consumer to a transaction that will result in more compensation for the originator unless the transaction is in the consumer s interest. However, the CFPB has revised the existing regulations to reconcile them with the related provisions in the Dodd-Frank Act, as well as to clarify areas in the existing regulations on which the CFPB has received repeated questions. Some of these provisions in the Rule will likely be beneficial to the industry. For instance, the Rule: Allows mortgage brokerage companies receiving compensation from consumers to pay their employees commissions, as long as the commissions are not based on the terms of the loans that they originate; Permits loan originators to reduce their compensation to bear the cost of unforeseen pricing increases in a very narrow set of circumstances; Establishes steps to determine when a factor is a proxy for loan terms; and Permits compensation to loan originators that is based on profits within specified parameters. This summary will address each of these and other key aspects of the Rule in turn. Payments Based on Loan Terms or a Proxy for Loan Terms The Rule revises the wording of the general prohibition on payments based on the transaction s terms and conditions to a prohibition on payments based on the term of a transaction. The change does not reflect a substantive change in meaning. The Rule defines term of a transaction to mean any right or obligation of the parties to a credit transaction. A credit transaction is defined by the Rule to be the operative acts (e.g., the consumer s purchase of certain goods or services essential to the transaction) and written and oral agreements that, together, create the consumer s right to defer payment of debt or to incur debt and defer its payment. This definition includes: (A) The rights and obligations memorialized in a promissory note or other credit contract, as well as the security interest created by a mortgage, deed of trust, or other security instrument, and in any document incorporated by reference in the note, contract, or security instrument; (B) The payment of any loan originator or creditor fees or charges for the credit, or for a product or service provided by the loan originator or creditor related to the extension of that credit, imposed on the consumer, including any fees or charges financed through the interest rate; and 5

6 (C) The payment of any fees or charges imposed on the consumer, including any fees or charges financed through the interest rate, for any product or service required to be obtained or performed as a condition of the extension of credit. The fees and charges described above in paragraphs B and C are only a term of a transaction if the fees or charges are required to be disclosed in the Good Faith Estimate, the HUD-1 (or HUD-1A) or subsequently in any integrated disclosures promulgated by the CFPB. Other costs paid by the consumer as part of the overall transaction that are not required as part of the credit transaction are not considered terms of a transaction. For example, charges for owner s title insurance or fees paid by a consumer to an attorney representing the consumer s interests would not be considered terms of a transaction for purposes of the restriction on compensation based on loan terms. Loan originators may not receive compensation that is based on the terms of a transaction or that is based, in whole or in part, on a factor that is a proxy for a term of a transaction. To make a determination as to whether a particular factor is one prohibited as a basis for compensation, the Rule has effectively established a three-pronged analysis to follow. First, is the factor a term of the transaction (as described above)? If the answer is yes, then a loan originator s compensation may not be based on that factor. If the answer is no, then we must ask if the factor is one that consistently varies with a term over a significant number of transactions. If the answer is no, then the factor is not a proxy and a loan originator s compensation may be based on that factor. If the answer is yes, then we must ask if the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. If the answer is no, then the factor is not a proxy and a loan originator s compensation may be based on that factor. If the answer is yes, then the factor is a proxy and a loan originator s compensation may not be based on that factor. Dual Compensation Under the current regulations, a loan originator may only receive compensation from one party, either the consumer or another party, but not both. The current language encompassing this restriction has resulted in several issues and open questions which the Rule attempts to address. For one, the Rule provides a new exception to the dual compensation restriction that will allow mortgage brokerage companies receiving compensation from consumers to pay their employees or contractors commissions, as long as the commissions are not based on the terms of the loans that they originate (i.e., like lenders pay their retail loan originators). However, the Rule implements the Dodd-Frank Act s prohibition on compensation based on transaction terms to consumer-paid compensation. Therefore, 6

7 mortgage brokerage companies will no longer be able to base compensation paid by consumers on the terms of the transaction, and those consumer-paid compensation amounts must be treated the same way as compensation from lenders. Second, the Rule maintains the existing position that payments derived from an increased interest rate are not considered compensation received directly from the consumer. Therefore, funds from the creditor that will be applied to reduce the consumer s settlement charges, including origination fees paid by a creditor to the loan originator, that are characterized on the disclosures made pursuant to RESPA as a credit are not considered to be received by the loan originator directly from the consumer. However, the Rule amends the existing provisions to clarify that in a transaction where a loan originator receives compensation directly from a consumer, a creditor still may provide funds for the benefit of the consumer in that transaction, provided such funds are applied solely toward costs of the transaction other than loan originator compensation. In addition, payments by a consumer to a loan originator from loan proceeds are considered compensation received directly from the consumer. However, payments by a consumer to the creditor are not considered payments to the loan originator that are received directly from the consumer whether they are paid directly by the consumer (for example, in cash or by check) or out of the loan proceeds. Third, the Rule attempts to clarify how payments from certain third parties (e.g., sellers, home builders, home improvement contractors) are treated for purposes of the restrictions on dual compensation to loan originators. While the provisions may spell out how these payments are treated, the new provisions (along with the revised provisions discussed above) require that the parties closely track and document the payer and payees of each payment in a deal. Payments in the transaction to the creditor on behalf of the consumer by a person other than the creditor or its affiliates are not considered payments to the loan originator that are received directly from the consumer. On the other hand, if a payment is made to a loan originator pursuant to an agreement between the consumer and a third party under which such other person agrees to provide funds toward the consumer s cost of the transaction (including loan originator compensation), then the compensation is considered to be received directly from the consumer. However, if the third party is an affiliate of the creditor in the transaction, the payment to the loan originator is not deemed to be made directly by the consumer. As a result, if a home builder is an affiliate of the creditor, the Rule prohibits the home builder from paying compensation to the loan originator in connection with a transaction if the consumer pays compensation to the loan originator in connection with the transaction. 7

8 No-Points, No-Fees Loan Option (Zero/Zero Alternative) Not Adopted Yet The Dodd-Frank Act includes a prohibition on a loan originator s ability to charge an origination fee or charge only if the consumer does not make an upfront payment of discount points, origination points, or fees. The Proposal included an alternative to this ban on discount points, origination points and fees that would require creditors and mortgage brokers to make available a no-points, no-fees loan option to consumers (the zero-zero alternative ) before they would be permitted to impose upfront points or fees on a consumer. Based in part on industry comments to the Proposal, the CFPB used its exemption authority to issue a complete exemption to the prohibition on upfront points and fees. As a result, the Rule does not include the no-points, no-fees loan option requirement, but the CFPB will conduct consumer testing and other research to assess how the exemption affects consumers and whether further regulation is appropriate. Pricing Concessions Currently, Regulation Z does not permit a creditor to reduce a loan originator s compensation in connection with a change in terms on a transaction, for example, a pricing concession. However, like the Proposal, the Rule permits loan originators to reduce their compensation to bear the cost of pricing concessions in a very narrow set of circumstances. Loan originators will be permitted to decrease their compensation in unforeseen circumstances to defray the cost, in whole or part, of an increase in an actual settlement cost over an estimated settlement cost disclosed to the consumer or an unforeseen actual settlement cost not disclosed to the consumer pursuant to RESPA. The preamble states that this exception includes, for example, a situation where the loan originator assures the consumer that the interest rate is being locked but fails to do so, but the commentary s example appears more limited in scope, so there are still open questions as to what falls within the confines of the exception. However, these exceptions do not to permit loan originators to reduce their compensation to bear the cost of a pricing concession in connection with matching a competitor s credit terms or to avoid high-cost mortgage provisions. Profit-Sharing and Bonus Plans To prevent incentives to increase rates and charges to consumers on loans, the Rule generally prohibits loan originator compensation based upon the profitability of a transaction or a pool of transactions. However, the Rule adds two exceptions to this general prohibition and provides examples of various types of retirement and profitsharing plans that meet the exception. For example, mortgage-related business profits can be used to make contributions to certain tax-advantaged retirement plans, such as 8

9 a 401(k) plan, and to make bonuses and contributions to other plans that do not exceed ten percent (10%) of the individual loan originator s total compensation. Under the first exception, the Rule permits compensation in the form of (a) a contribution to a defined contribution plan that is a designated tax-advantaged plan or (b) a benefit under a defined benefit plan that is a designated tax-advantaged plan. These forms of compensation are permissible, even if the contribution or benefit is directly or indirectly based on the terms of the transactions of multiple individual loan originators in multiple transactions (i.e., profit from mortgage transactions). However, in the case of a contribution to a defined contribution plan, the contribution must not be directly or indirectly based on the terms of that individual loan originator s transactions. Consequently, the compensation payment may not take into account, for example, the fact that the individual loan originator s transactions during the relevant calendar year had higher interest rate spreads over the creditor s minimum acceptable rate on average than similar transactions for other individual loan originators employed by the creditor. The term designated tax-advantaged plan corresponds to the Proposal s term qualified plan, and the set of plans that qualify as designated plans under the Rule is largely the same as those that were qualified as described in the Proposal. The Rule defines designated tax-advantaged plans to include: Any plan that meets the requirements of IRS Code section 401(a); Employee annuity plans described in IRS Code section 403(a); Simple retirement accounts, as defined in IRS Code section 408(p); Simplified employee pensions described in IRS Code section 408(k); Annuity contracts described in IRS Code section 403(b); and Eligible deferred compensation plans, as defined in IRS Code section 457(b). Under the second exemption, the Rule permits compensation to a loan originator under a non-deferred profits-based compensation plan if certain criteria are met. A nondeferred profits-based compensation plan is any arrangement for the payment of nondeferred compensation that is determined with reference to the profits of the person from mortgage-related business. These plans include, without limitation, bonus pools, profits pools, bonus plans, and profit-sharing plans. For the sake of convenience, we herein refer to any non-deferred profits-based compensation plan as a Profit Sharing Plan. In order to compensate a loan originator permissibly under a Profit Sharing Plan, the compensation paid to an individual loan originator pursuant to the Profit Sharing Plan may not be directly or indirectly based on the terms of that individual loan originator s transactions. Therefore, creditors may not pay a loan originator a larger amount under 9

10 a Profit Sharing Plan if that loan originator s transactions averaged a higher interest rate or higher average fees than other loan originators transactions. In addition, at least one of the following conditions must also be satisfied: The compensation paid to an individual loan originator does not, in the aggregate, exceed ten percent (10%) of the individual loan originator s total compensation corresponding to the time period for which the compensation under the Profit Sharing Plan is paid; or The individual loan originator was a loan originator for ten (10) or fewer transactions during the 12-month period preceding the date of the compensation determination. Under a Profit Sharing Plan, the individual loan originator may be paid directly in cash, stock, or other form of non-deferred compensation, and the amount to be paid out from the Profit Sharing Plan and the distributions to the individual loan originators may be determined by a fixed formula or may be at the discretion of the person (e.g., the person may elect not to pay compensation under a Profit Sharing Plan in a given year), provided the distributions are not directly or indirectly based on the terms of the individual loan originator s transactions. Also, compensation under a Profit Sharing Plan is not subject to the ten percent (10%) total compensation limit if the Profit Sharing Plan is determined with reference only to profits from business other than mortgage-related business, as determined in accordance with reasonable accounting principles. Under the Dodd-Frank Act, individual loan originators are also liable for violations of these provisions, for example, impermissibly receiving compensation that is based on the terms of a transaction. See the discussion under Liability below. Importantly, the Rule includes a Safe Harbor for individual loan originators who receive payments under this exception and are provided with an accounting statement that meets certain specifications, since individuals generally will not have access to the information necessary to ensure compliance. Pooled Compensation The Rule clarifies that certain pooled compensation structures will violate the existing compensation regulations, and the CFPB does not intend to revise the regulations to permit these structures. Therefore, such compensation structures are now and will continue to be prohibited by Regulation Z. 10

11 Point Banks The preamble to the Rule discusses point banks very briefly and indicates that the CFPB believes that there are no circumstances under which point banks are permissible. The Proposal discusses point banks in more detail, but generally, the CFPB views a point bank as any continuously maintained accounting balance of basis points credited to a loan originator by a creditor for originations. From the point bank, amounts are debited when spent by the loan originator to obtain pricing concessions from the creditor on a consumer s behalf for any transaction. While the Rule does not expressly add a prohibition, it appears that the regulations will be interpreted to continue to prohibit point banks in all cases. Reverse Mortgages In response to industry comments, the Rule clarifies what the amount of credit extended is for closed-end reverse mortgage loans. For closed-end reverse mortgages, a loan originator s compensation may be based on either (a) the maximum proceeds available to the consumer under the loan; or (b) the maximum claim amount (if the mortgage is subject to 24 C.F.R. part 206), or the appraised value of the property, as determined by the appraisal used in underwriting the loan (if the mortgage is not subject to 24 C.F.R. part 206). Additional Steering Provisions in the Future? The Dodd-Frank Act also added a provision which requires the CFPB to prescribe regulations to prohibit certain kinds of steering, abusive or unfair lending practices, mischaracterization of credit histories or appraisals, and discouraging consumers from shopping with other mortgage originators. 15 U.S.C. 1639b(c)(3). The CFPB does not address those provisions in the Rule because the CFPB believes that the substantive prohibitions cannot take effect until the regulations establishing them have been prescribed and taken effect. The CFPB intends to prescribe such regulations in a future rulemaking. As a result, until such regulations are issued, no obligations are imposed on mortgage originators or other persons under TILA section 129B(c)(3). Record Keeping Requirements The Rule will expand the record keeping requirements in connection with originator compensation. Specifically, a creditor will be required to maintain records sufficient to evidence all compensation it pays to a loan originator and the compensation agreement that governs those payments for three (3) years after the date of payment. In addition, a loan originator organization will be required to maintain records sufficient to evidence all compensation it receives from a creditor, a consumer, or another person; all compensation it pays to any individual loan originator; and the compensation agreement 11

12 that governs each such receipt or payment, for three (3) years after the date of each such receipt or payment. Records are sufficient to evidence payment and receipt of compensation if they demonstrate the following facts: the nature and amount of the compensation; that the compensation was paid, and by whom; that the compensation was received, and by whom; and when the payment and receipt of compensation occurred. Compensation agreements must always be retained, but the other forms of records will vary on a caseby-case basis to demonstrate the various forms of compensation (e.g., W-2s or paystubs for salary and bonus payments, filings under IRS requirements or for ERISA purposes, settlement agent flow of funds worksheet or other written record or a creditor closing instructions letter directing disbursement of fees at consummation, records documenting the decrease in compensation for unforeseen RESPA settlement costs and the reasoning for it). Loan Originator Qualifications In addition the restrictions on loan originator compensation, the Rule also implements qualification requirements for individual loan originators and their employers, and requires their license or registration numbers to be included on certain mortgage loan documents as imposed by the Dodd-Frank Act. All creditors and loan originator organizations (other than government agencies or State housing finance agencies) must comply with all applicable State law requirements for legal existence and foreign qualification and ensure that each individual loan originator who works for the organization is licensed or registered to the extent the individual is required to be licensed or registered under the SAFE Act, its implementing regulations, and State SAFE Act implementing law, before the individual acts as a loan originator in a consumer credit transaction secured by a dwelling. The individual loan originators who work for a loan originator organization include individual loan originators who are its employees or who operate under a brokerage agreement with the loan originator organization. A loan originator organization can meet this duty by confirming the registration or license status of an individual at For employers, such as depository institutions, that employ loan originators (as defined by the Rule) that are not required to be licensed under the SAFE Act, the employer must obtain: (A) A criminal background check through the Nationwide Mortgage Licensing System and Registry (NMLSR) or, in the case of an individual loan originator who is not a registered loan originator under the NMLSR, a criminal background check from a law enforcement agency or commercial service; 12

13 (B) A credit report from a consumer reporting agency; andinformation from the NMLSR about any administrative, civil or criminal findings by any government jurisdiction or, in the case of an individual loan originator who is not a registered loan originator under the NMLSR, such information from the individual loan originator. Based on information obtained, the employer must determine that the individual loan originator: (A) Has not been convicted of, or pleaded guilty or nolo contendere to, a felony in a domestic or military court during the preceding seven-year period or, in the case of a felony involving an act of fraud, dishonesty, a breach of trust, or money laundering, at any time; and (B) Has demonstrated financial responsibility, character, and general fitness such as to warrant a determination that the individual loan originator will operate honestly, fairly, and efficiently. In addition, the employer must provide periodic training covering Federal and State law requirements that apply to the individual loan originator s loan origination activities. The periodic training must be sufficient in frequency, timing, duration, and content to ensure that the individual loan originator has the knowledge of State and Federal legal requirements that apply to the individual loan originator s loan origination activities. The training must take into consideration the particular responsibilities of the individual loan originator and the nature and complexity of the mortgage loans with which the individual loan originator works. The Commentary to the Rule provides that the determination of financial responsibility, character, and general fitness requires an assessment of all information obtained pursuant to this requirement (discussed above) and any other reasonably available information, including information that is known to the loan originator organization or would become known to the loan originator organization as part of a reasonably prudent hiring process. The absence of any significant adverse information is sufficient to support an affirmative determination that the individual meets the standards. No single factor necessarily requires a determination that the individual does not meet the standards for financial responsibility, character, or general fitness, provided that the loan originator organization considers all relevant factors and reasonably determines that, on balance, the individual meets the standards. The requirement generally applies to individual loan originator employees who were hired on or after January 10, If the employer hired the loan originator on or before January 10, 2014, and screened that originator under applicable statutory or regulatory background standards in effect at the time of hire, the Rule does not require the employer to obtain the covered information for that individual. However, if the employer 13

14 hired a loan originator before this date that was not subject to any applicable statutory or regulatory background standards at the time of hire, the employer will be required to follow the standards with respect to that loan originator. Subsequent reviews and assessments are required only if the employer knows of reliable information indicating that the individual loan originator likely no longer meets the required standards. Under the Rule, every loan originator organization (including creditors) must include on the loan documents (described below), whenever each such loan document is provided to a consumer or presented to a consumer for signature, as applicable: (a) its name and NMLSR ID, if the NMLSR has provided it an NMLSR ID; and (b) the name of the individual loan originator (as the name appears in the NMLSR) with primary responsibility for the origination and, if the NMLSR has provided such person an NMLSR ID, that NMLSR ID. If the loan originator does not have an NMLSR ID, the loan originator must still include his or her name on the covered loan documents. The loan documents that must include the names and NMLSR IDs are: (i) the credit application; (ii) the note or loan contract; and (iii) the security instrument. In addition, the CFPB expects to adopt the requirement to include loan originator names and NMLSR IDs on the integrated disclosures at the same time that the rules implementing the 2012 TILA-RESPA Integration Proposal are adopted. That separate rulemaking also addresses inclusion of the name and NMLSR IDs on the proposed integrated disclosures. In transactions in which more than one individual meets the definition of a loan originator, the individual loan originator whose NMLSR ID must be included is the individual with primary responsibility for the transaction at the time the loan document is issued. To determine which individual loan originator has primary responsibility, a loan originator organization that establishes and follows a reasonable, written policy for determining which individual loan originator has primary responsibility for the transaction at the time the document is issued complies with the requirement. Policies and Procedures A depository institution (including credit unions) must establish and maintain written policies and procedures reasonably designed to ensure and monitor the compliance of the depository institution, its employees, its subsidiaries, and its subsidiaries employees with the loan originator compensation, anti-steering, qualification, and loan document identification requirements. These policies and procedures must be written and must be appropriate to the nature, size, complexity, and scope of the mortgage lending activities of the depository institution and its subsidiaries. 14

15 Ban on Mandatory Arbitration Clauses A contract or other agreement for a covered transaction (a) may not include terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction and (b) may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law. This prohibition applies to the terms of the whole transaction, regardless of which particular document contains those terms, but does not limit a consumer and creditor or any assignee from agreeing, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim. The prohibition applies to all closed-end consumer credit transactions secured by a dwelling and open end home equity lines of credit secured by the consumer s principal dwelling (i.e., HELOCs). Financing of Credit Insurance Premiums Under the Rule, a creditor will not be permitted to finance, directly or indirectly, any premiums or fees for credit insurance in connection with a covered transaction. Credit insurance generally insures a consumer in the event of a specified event, and the benefit provided is to make the consumer s periodic payments while the consumer is unable to make them. Credit insurance under the Rule means credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, lossof-income, life, or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract. This prohibition will not be a big adjustment for most lenders because Freddie Mac and Fannie Mae have prohibited this same practice for several years. The prohibition applies to all closed-end consumer credit transactions secured by a dwelling and open end home equity lines of credit secured by the consumer s principal dwelling (i.e., HELOCs). This restriction does not apply to credit insurance for which premiums or fees are calculated and paid in full on a monthly basis, or to credit unemployment insurance for which the unemployment insurance premiums are reasonable, the creditor receives no direct or indirect compensation in connection with the unemployment insurance premiums, and the unemployment insurance premiums are paid pursuant to a separate insurance contract and are not paid to an affiliate of the creditor. For clarity purposes, we want to emphasize that the restriction does not apply to mortgage insurance. Liability and Penalties 15

16 In addition to administrative penalties and liability, TILA provides civil liability for any mortgage originator for failure to comply with the requirements of TILA and any of its implementing regulations regarding the loan originator compensation and qualification provisions. The Dodd-Frank Act added liability for individual loan originators for violations of certain aspects of TILA, including those related to originator compensation and steering and qualification, in the same amounts and manner as those applicable to creditors under TILA. Violations of these provisions will subject the violator to TILA civil damages: (a) the consumer s actual damages; (b) statutory damages up to $4,000; (c) an amount equal to the sum of all finance charges and fees paid by the consumer; and (d) the costs of the action, together with a reasonable attorney s fee as determined by the court. The liability of a mortgage originator to a consumer for a violation is limited to the greater of (a) actual damages or (b) an amount equal to three (3) times the total amount of direct and indirect compensation or gain received by a mortgage originator in connection with the residential mortgage loan involved in the violation, plus the costs to the consumer of the action, including reasonable attorney s fees. The Dodd-Frank Act also extended the period for statute of limitations from 1 to 3 years, beginning on the date of the occurrence of the violation. A copy of the Rule and other information may be found at the CFPB s website at: 16

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