TopMortgage Compliance Update (1)
August 17, 2010
Compensation: TILA and the Dodd-Frank Act

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We now enter the era when the Dodd-Frank Act has become the law of the land. Today's brief review (provided below) is at the advent of this period and introduces some of the many changes resulting from this landmark legislation.

But first a comment.

Consolidation of regulatory authorities will be considerable!

There will be transfer and consolidation of enforcement authorities into the Consumer Financial Protection Bureau (Bureau) over the consumer financial protection functions currently performed by the Federal Reserve's Board of Governors, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA) and the Federal Trade Commission (FTC) - including exclusive authority over all related research, rulemaking, guidance, supervision, examination and enforcement activities.

At least sixteen (16) existing consumer protection laws will be included in the transfer, giving new exclusive rulemaking and examination authority to the Bureau.

I have published articles extensively on this subject; indeed, forthcoming this month, I will publish a 3-part series in the National Mortgage Professional Magazine on the financial reform legislation and its impact on the mortgage industry.

If you want to read more, go PDF 12x12here, PDF 12x12here, here, and here.

For the next few years, we will be seeing numerous announcements implementing the changes required by the Dodd-Frank Act. These issuances will come from various agencies as well as the new Bureau and will affect revisions to existing regulations, enumerated laws, Bureau mandates, and many other implementation requirements.

It is essential that you review and continually monitor for these changes, because there will indeed be many and, in various instances, the statutory requirements are complex, extensive, and interlock or interact with other laws - and violations can be enormously costly.

Because of the many regulatory compliance areas that are affected, we urge you to approach the required compliance proactively, seeking guidance now from a competent residential mortgage compliance professional.
On August 16, 2010, the Federal Reserve Board announced final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders. The Board is publishing these final rules, amending Regulation Z, which implements the Truth in Lending Act (TILA) and Home Ownership and Equity Protection Act (HOEPA).

At this time, lenders may pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a "yield spread premium"). Under the final rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. The ostensible purpose of this regulation is to prevent loan originators from increasing their own compensation by raising the consumers' loan costs (i.e., by increasing the interest rate or points).

However, loan originators can continue to receive compensation that is based on a percentage of the loan amount.

There is also a prohibition that prevents a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. This new rule requires that consumers who agree to pay the originator directly will not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.

The final rule prohibits loan originators from directing or "steering" a consumer to accept a mortgage loan that is not in the consumer's interest in order to increase the originator's compensation.

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.

  • Prohibits payments to the loan originator that are based on the loan's interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted.
  • Prohibits a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.
  • Prohibits a mortgage broker or loan officer from "steering" a consumer to a lender offering less favorable terms in order to increase the broker's or loan officer's compensation.
  • Provides a safe harbor to facilitate compliance with the anti-steering rule.
The safe harbor is met if:
  1. 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
  2. The loan options presented to the consumer include the following:
  • (A) the lowest interest rate for which the consumer qualifies;
  • (B) the lowest points and origination fees, and
  • (C) the lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.
Visit Library for Issuances
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Truth in Lending, 12 CFR Part 226, Final rule and Official Staff Commentary, FRB (8/16/10)

Highlights of Final Rules on Loan Originator Compensation and Steering, FRB (8/16/10)

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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

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