Consumer Compliance Outlook
Consumer Financial Protection Bureau Issues Guidance on Compensation to Loan Originators
In September 2010, the Board of Governors of the Federal Reserve System (Board) issued a final rule under Regulation Z (Truth in Lending Act [TILA]) to prohibit certain practices related to compensation of mortgage loan originators. See 12 C.F.R. §226.36. The rule became effective April 6, 2011. Subject to certain narrow exceptions, the rule provides that no loan originator may receive, directly or indirectly, compensation that is based on the terms or conditions of a mortgage transaction except for the amount of credit extended. The Board also stated that the rule prohibits compensation based on a factor that serves as a proxy for a transaction's terms or conditions (such as a credit score). The Board clarified that for purposes of the rule, compensation includes salaries, commissions, and annual or periodic bonuses.
In July 2011, general rulemaking authority for most provisions of TILA transferred to the Consumer Financial Protection Bureau (CFPB). The CFPB has received inquiries about whether and how the loan originator compensation rules under Regulation Z apply to qualified profit sharing, 401(k), or employee stock ownership plans (qualified plans). Specifically, financial institutions asked if contributions can be made to qualified plans for their employees who are loan originators if the employers' contributions to such plans are derived from profits generated by mortgage loan originations. In response to these inquiries, on April 2, 2012, the CFPB published Bulletin 2012-02 as guidance (“Payments to Loan Originators Based on Mortgage Transaction Terms or Conditions under Regulation Z, 12 C.F.R. §1026.36”), which is available online.
The CFPB's bulletin recognized that there has been some confusion on how the loan originator compensation rules apply to qualified plans. The CFPB anticipates issuing proposed rules for public comment in the near future to implement provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) concerning loan originator compensation. However, until final rules are issued under the Dodd-Frank Act, the CFPB believes that it is important to clarify how the compensation rules apply to qualified plans. To provide clarity at this juncture, the CFPB stated that employers could contribute to qualified plans out of a pool of profits derived from loan originations.
The CFPB also received questions about how the compensation rules apply to nonqualified profit-sharing plans. The CFPB expects to provide greater clarity on these arrangements in connection with its proposed rule to implement the loan originator compensation provisions of the Dodd-Frank Act.*