MBA Requests Written Guidance re: FRB's Loan Originator Compensation Final Rule

The national Mortgage Bankers Association recently sent a request for written compliance guidance regarding implementation of the Federal Reserve Board’s final rule on loan originator compensation and steering, set to go into effect on April 1, 2011. (The FRB had previously provided oral guidance, but had not reduced its guidance to writing.)


Among other things, the MBA's letter points to:

(1) conflicts between the FRB's final rule and similar provisions in the Dodd-Frank Act;

(2) conflicts between the language of the rule and informal oral guidance provided by the FRB;

(3) the language of the Official Staff Commentary for the final rule stating that compensation may differ where it can be shown based on a bona fide analysis that average costs and time spent to originate these differing products justify compensation differences;

(4) the absence of any reference in the final rule or other justification for prohibiting different compensation for purchase money loans as opposed to refinance loans;

(5) the final rule's exemption for managers from the restriction on compensation based on rate or terms, and a de minimis proposal as to managers who also originate loans; and

(6) a list of Q&A's for consideration and written comment by the FRB.

A copy of the MBA's request is available at:

http://www.mbaa.org/files/Advocacy/2010/MBALettertoFederalReserveonLoanOfficerCompensation.pdf

As you may recall, the Federal Reserve Board earlier this year issued final rules that: (1) prohibit compensation that is based on the interest rate or other loan terms, subject to limited exception for the amount of credit extended; (2) prohibit a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party; and (3) prohibit loan originators from directing or "steering" a consumer to accept a mortgage loan with terms less favorable to the consumer in order to increase the originator's compensation.

The final rules also provide a safe harbor to facilitate compliance with the new anti-steering rule. The safe harbor is met if: (a) the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and (b) the loan options presented to the consumer include the following: (1) the lowest interest rate for which the consumer qualifies; (2) the lowest points and origination fees, and (3) the lowest rate for which the consumer qualifies for a loan with no so-called "risky features," such as a prepayment penalty, negative amortization, interest-only payments, shared equity or appreciation, or a balloon payment in the first seven years.

Compensation that is based on a fixed percentage of the loan amount is permitted under the new rules. The FRB's new rules apply to closed-end consumer loan secured by a dwelling.

The final rules apply to mortgage brokers and the companies that employ them, mortgage loan officers employed by depository and non-depository lenders, and TILA "creditors" that do not lend their own funds, or warehouse line or deposit funds.

The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011.



The final rules are available at:

http://edocket.access.gpo.gov/2010/2010-22161.htm