ACTION: Compliance with all Provisions
- June 1, 2013: Prohibitions on the waiver of certain federal rights and arbitration provisions in consumer-purpose, open- and closed-end loans secured by a member’s principal dwelling became effective on June 1, 2013.
- January 1, 2014: Requirements defining compensation and the qualifications of a mortgage loan originator for consumer-purpose, closed-end loans secured by a dwelling became effective January 1, 2014.
- January 10, 2014: Finally, you are prohibited from financing credit insurance on loan applications received on or after January 10, 2014.
- A clarified definition of “loan originator”;
- Prohibited compensation practices;
Regulatory Tip: Only the provisions on mandatory arbitration, waivers of federal claims, and financing credit insurance premiums apply to HELOCs secured by a member’s principal dwelling.
- Detailed qualification requirements for loan originators,
including ongoing training;
- Mandatory identifying information on loan documents;
- Written policies and procedures to ensure compliance with the rule;
- Prohibited mandatory arbitration and waivers of federal claims available to consumers; and
- Restricted financing of credit insurance premiums.
- Takes an application;
Regulatory Tip: The rule’s definition of “loan originator” is more expansive than the definition of “mortgage loan originator” under the SAFE Act. Unlike the SAFE Act, there is no exception for employees who acted on fewer than five residential mortgage loans during a 12-month period. Certain employees may be considered loan originators under this rule but not under the SAFE Act.
- Offers, arranges, or assists a consumer in obtaining or applying to obtain credit;
- Negotiates, or otherwise obtains or makes an extension of credit for another person; or
- Advertises, communicates, or represents to the public that they can or will perform any loan origination services.11
- A person who performs purely administrative or clerical tasks on behalf of a loan originator, including loan processing or credit underwriting activities;16
- A licensed real estate broker;17
- A loan servicer, its employees and agents who negotiate loan modification terms or other workout arrangements with delinquent borrowers.18
- Interest rate;
- Annual percentage rate (APR);
- Collateral type;
- Existence of a prepayment penalty;
- Origination points or fees paid to a creditor or loan originator;
- Fees for creditor-required title insurance; or
- Proxy for a transaction term.22 (CFPB provides several examples in its commentary.)23
Compensation to a loan originator based on profits of mortgage-related business activity is generally considered prohibited compensation based on the terms of multiple transactions by multiple individual loan originators. If your credit union is paying a loan originator, you generally may not pay this type of compensation.
Likewise, as loan originators, your employees generally may not receive compensation that is based on the terms of multiple transactions conducted by multiple individual loan originators.
If a loan originator receives compensation directly from a consumer, the loan originator may not receive dual compensation or any compensation from anyone else in connection with that loan.24
Under the anti-steering provisions of the rule, your credit union or your loan originator employees are not permitted to direct or “steer” a member to a loan product that will provide greater compensation to the originator, unless that loan product is in the member’s interest.25
Generally, the payment of a bonus from a bonus pool that takes into consideration profits received from consumer closed-end loans secured by a dwelling is also prohibited.
However, you can make some exceptions in limited circumstances for retirement plans and bonus plans as discussed below.26
What Compensation Methods Are Permitted?
The loan originator compensation rule establishes seven permissible methods of compensation for payment of salary, commissions, and other compensation. These “approved” compensation methods are essentially safe harbors under the rule:
- The loan originator’s overall dollar volume (total dollar amount of credit extended or total number of transactions originated) delivered to the creditor;
- The long-term performance of the originator’s loans;
- An hourly pay rate based on the actual number of hours worked;
- Loans made to new members versus loans to existing members;
- A payment that is fixed in advance for every loan the originator arranges for the creditor (for example, $600 for every credit transaction arranged for the creditor, or $1,000 for the first 1,000 credit transactions arranged and $500 for each additional credit transaction arranged);
- A percentage of the loan originator’s applications that close;
- The quality of the loan originator’s loan files (for example, accuracy and completeness of the loan documentation) submitted to the creditor.
What are the Qualification Requirements for Loan Originators?
The rule outlines certain qualification requirements for your credit union (if it is a loan originator organization) and your employees (if they serve as individual loan originators) to demonstrate financial responsibility, character, and general fitness. Likewise, this rule mandates additional qualification requirements for your employees serving as loan originators who, while employed by an institution subject to a federal regime of examination and supervision, only have to be registered under the SAFE Act.
If your credit union is a loan originator organization, you must ensure your individual loan originators, which could include persons who operate under a brokerage agreement with your credit union, are licensed or registered in compliance with the SAFE Act and other applicable law.27
Employees Not Required to be Licensed under the SAFE Act
Your credit union may also need to comply with aspects of the rule pertaining to additional requirements for your loan originator employees who are only required to be registered with NMLSR – and not licensed – under the SAFE Act.28 The rule outlines expectations to ensure individual loan originators who are not required to be licensed under the SAFE Act are qualified, trustworthy, and properly trained.
- Not been convicted of, or pleaded guilty or no contest to, a felony in a domestic or military court during the past seven years;
- Never been convicted of, or pleaded guilty or no contest to, a felony involving an act of fraud, dishonesty, breach of trust, or money laundering at any point; and
- Demonstrated financial responsibility, character, and general fitness that would lead you to determine the individual loan originator will operate honestly, fairly, and efficiently.
- All compensation you receive from creditors, consumers, and other individuals or entities;
- All compensation you pay to individual loan originators; and
- The compensation agreements that govern those receipts or payments.
Records are sufficient to evidence payment and receipt of compensation if they demonstrate the following facts:
- The nature and amount of the compensation;
- Who paid the compensation;
- Who received the compensation; and
- When the payment and receipt of compensation occurred.33
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1 12 U.S.C. 5101-5116.
2 12 CFR Part 1007.
3 12 CFR Part 1008.
4 74 FR 43232 (August 26, 2009).
5 See, e.g., 15 U.S.C. 1639b.
6 75 FR 58509 (September. 24, 2010).
7 See generally 12 CFR § 226.36(d).
8 76 FR 79768 (December 22, 2011).
9 12 CFR § 1026.36(b).
10 12 CFR § 1026.36(a)(1)(ii).
11 12 CFR § 1026.36(a)(1), Comments 36(a)-1, 36(a)-4 and 36(a)(1)(i)(B)-1.
12 12 CFR Part 1026, Supplement I, comment 36(a)-1.ii.
13 Renegotiating or modifying an existing mortgage does not constitute a loan origination activity. The rules for what determines whether a loan is a modification or a refinance are in 12 CFR § 1026.20(a) and accompanying commentary.
14 See 12 CFR § 1026.36(a)(1)(i)(E).
15 See section 3.II of CFPB’s Small Entity Compliance Guide for a more detailed discussion on exclusions.
16 A credit union employee who provides a credit application for the member to complete is not a loan originator. Additionally, a credit union employee who delivers a member’s credit application to you is not a loan originator, as long as the employee did not assist the consumer in completing the application, process or analyze information, or discuss credit terms that are or may be available based on the member’s financial characteristics. 12 CFR § 1026.36(a)(1)(i)(A), Comment 36(a)-4.
17 12 CFR § 1026.36(a)(1)(C).
18 12 CFR § 1026.36(a)(1)(E).
19 Compensation does not depend on the label given to a particular fee. The activity your credit union or your loan originator employee performs to generate the fee will determine if it is compensation. Any payment made to your loan originator employees, including salary, commissions, and financial or similar incentive is compensation regardless of how it is labeled.
20 Particularly important to your credit union’s role as a loan originator organization, your credit union’s compensation does not include amounts you receive as payments for bona fide and reasonable charges, such as credit reports, you collect and pass on to a third party which is not a creditor, the creditor’s affiliate, or your credit union’s affiliate. For example, if your credit union, as a loan originator organization, provides title insurance to a consumer in a transaction, payment your credit union receives for the title insurance is not compensation, so long as your credit union’s insurance charge was bona fide and reasonable.
21 The amount of credit extended is not a term of a transaction. 12 CFR § 1026.36(d)(1)(ii).
22 12 CFR § 1026.36(d)(1)(i). A factor (that is not itself a term of a transaction) is a proxy for a term of a transaction if (1) the factor consistently varies with a term of a transaction over a significant number of transactions, and (2) the loan originator has the ability, directly or indirectly, to add, drop or change the factor when originating the transaction.
23 12 CFR § 1026.36(d)(1), Comment 36(d)(1)-2(ii)(B).
24 The dual compensation prohibition does not apply to a loan originator organization (such as a credit union or CUSO) that receives compensation from a member and pays its mortgage loan originator employees.
25 12 CFR § 1026.36(e). The following elements are required to satisfy the anti-steering provision:
Your member is presented with loan offers for each type of transaction in which they express an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and
The loan options presented to your member include the following:
o The lowest interest rate for which the member qualifies;
o The loan with the lowest total dollar amount of discount points, origination points or origination fees (or if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees); and
o The lowest rate for which the member qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.
26 12 CFR § 1026.36(d)(1)(iv), Comment 36(d)(1)-3. An employer may compensate an individual originator in the form of a contribution to a defined contribution plan that is a designated tax-advantaged plan under the Internal Revenue Service code. This includes 401(k) plans, employee annuity plans, simple retirement accounts, and simplified employee pensions. In addition to these retirement plan exceptions, a non-deferred, profit-based compensation plan or a bonus which takes into account the profits of the employer may be exempt. Such compensation cannot be directly or indirectly based on the terms of an individual loan originator’s transactions, and:
The compensation cannot exceed 10 percent of an individual loan originator’s total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid; or
An individual cannot have been a loan originator for more than 10 covered transactions consummated during the 12-month period preceding the date of the compensation determination.
28 For purposes of this Regulatory Alert, individual loan originators who are not subject to SAFE Act licensing requirements generally include employees of depository institutions and their federally regulated subsidiaries.
29 You must collect the above information for any individual: 1) hired on or after January 1, 2014; or 2) hired before that date but for whom no applicable statutory or regulatory background screening standards were in effect at the time of hire, or the applicable standards were not used to screen that individual.
30 You are not required to provide training to loan originators who operate under a brokerage agreement with your credit union.
31 Individual loan originators are not required to receive training on requirements and standards that apply to types of mortgage loans they do not originate or on subjects on which they already have knowledge and skill.
32 12 CFR § 1026.25. If your credit union meets the definition of a creditor that is not a loan originator organization for purposes of the compensation provisions (not a table-funded creditor), you must maintain records sufficient to evidence:
- All compensation you pay to loan originators; and
- The compensation agreements that govern those payments.
34 Your credit union does not need to include the information more than once on each of the specified loan documents. For example, you do not have to include the information on each page of a loan document. Additionally, if the individual loan originator with primary responsibility for a transaction changes, your credit union does not have to reissue previously completed documents merely to update a loan originator name and NMLSR ID. Going forward, your credit union would need to include on loan documents the information about the individual who now has primary responsibility, and would not include the information about the individual who formerly had primary responsibility.
35 For certain time-share plans, a contract or other agreement could bar a consumer from bringing a claim in court asserting a violation of any federal law.
36 As with the prohibitions against mandatory arbitration, after a dispute or claim under the transaction arises, a member, creditor, or any assignee may agree to settle or to use arbitration or another non-judicial procedure to resolve the dispute or claim.
37 The rule excludes credit unemployment insurance from the definition of “credit insurance” if:
- The credit unemployment insurance premiums are reasonable;
- Your credit union receives no direct or indirect compensation in connection with the credit unemployment insurance premiums; and
- The credit unemployment insurance premiums are paid pursuant to a separate insurance contract and are not paid to any of your credit union’s affiliates.
38 This prohibition does not apply to credit insurance when the premiums or fees are calculated and paid in full on a monthly basis. Premiums are calculated on a monthly basis if they are determined mathematically by multiplying a rate by the actual monthly outstanding balance.