Federal Reserve Board Announces Final Rules on Loan Originator Compensation and Steering

November 30, 2010 at 4:25 pm Leave a comment

(Original E-Alert Dated August 7, 2010)

The Federal Reserve Board recently announced final rules intended to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that may arise from loan originator compensation practices. The final rules amend Regulation Z (12 CFR Part 226) which implements the Truth in Lending Act and the Home Ownership and Equity Protection Act.

The final rules will become effective on April 1, 2011, and apply to closed-end transactions secured by a dwelling in which the creditor receives a loan application after April 1, 2011. The final rules will apply to all persons who originate loans, including mortgage brokers and their employers, as well as mortgage loan officers employed by depository institutions and other lenders. The final rules’ effective date of April 1, 2011, is intended to allow lenders and originators time to develop new business models, train personnel, and implement any necessary system changes.

The final rules amend Regulation Z to prohibit certain practices relating to payments made to compensate mortgage brokers and other loan originators. Specifically, under the final rules, compensation to a mortgage broker or other loan originator may not be based upon a mortgage transaction’s terms or conditions (for example, the loan’s interest rate), except the amount of credit extended (i.e., compensation based upon a fixed percentage of the loan amount is permissible). Additionally, the rule also prohibits a creditor or any other person from paying compensation to a mortgage broker or loan officer for a particular transaction if the consumer pays the loan originator’s compensation directly.

Under the final rules, mortgage brokers and loan officers are prohibited from “steering” consumers to a lender offering less favorable terms in order to increase the brokers’ or loan officers’ compensation. The final rules do provide a safe harbor to facilitate compliance with the anti-steering provisions. A loan originator is deemed to have complied with the anti-steering prohibition if the consumer is presented with loan options for each type of transaction in which the consumer expresses an interest (i.e., fixed rate loan, adjustable rate loan, etc.) and the loan options presented to the consumer include the following: (1) the lowest interest rate for which the consumer qualifies; (2) no risky features, such as prepayment penalty, negative amortization, or a balloon payment in the first seven years; and (3) the lowest dollar amount for origination points or fees and discount points.

The Board noted that although the Dodd-Frank Wall Street Reform and Consumer Protection Act (Reform Act) includes provisions similar to the Board’s final rules, the Reform Act provisions also address other practices not covered by the final rules. The Board considered whether it would be appropriate to delay the effective date of the final rules so that the Reform Act rules could be implemented at the same time. Ultimately, the Board determined that the benefits to consumers of an earlier effective date for the final rules outweighed any potential savings to lending institutions in compliance costs. The Board plans to implement the Reform Act provisions in a future rulemaking and allow opportunity for public comment.

For additional information, including a summary and text of the final rules, click here.

Entry filed under: Client Alerts.

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