The loan originator compensation rule is 12 CFR s. 1026.36 of Regulation Z (12 CFR Part 1026). Nobody may pay a loan originator on the basis of a term of the transaction or anything standing in for one. Nobody else may pay the originator where the consumer pays directly. Steering for a bigger commission is prohibited, with a safe harbor built on three loan options. The Consumer Financial Protection Bureau (CFPB) set the dates in 2013: s. 1026.36(h) and (i) took effect June 1, 2013, the rest January 10, 2014.
Who counts as a loan originator
Section 1026.36(a)(1)(i) reaches anyone who, for or in expectation of direct or indirect compensation, takes an application, offers, arranges, assists a consumer in obtaining credit, negotiates, or otherwise obtains or makes an extension of consumer credit for another person, or advertises that they can, employees, agents and contractors included. A natural person who qualifies is an “individual loan originator”, anyone else a “loan originator organization”, and a mortgage broker any loan originator who is not the creditor’s employee.
Five carve-outs follow: clerical staff who neither take applications nor offer or negotiate terms; a manufactured home retailer’s employee who does neither and advises on no rates or fees; a licensed real estate brokerage, unless a creditor or originator pays it for the transaction; seller financers meeting the three-property test in (a)(4) or the one-property test in (a)(5); and a servicer working out a distressed borrower’s mortgage, though not a s. 1026.20(a) refinancing.
“Compensation” in (a)(3) is wide: salaries, commissions, and any financial or similar incentive. Paragraph (b) sets the scope. Paragraphs (d) through (i) reach closed-end consumer credit secured by a dwelling; (c)(1) and (c)(2) reach closed-end credit secured by a principal dwelling; (c)(3) reaches consumer credit secured by any dwelling. A home equity line of credit under s. 1026.40 is out, except that (h) and (i) reach it when secured by the principal dwelling and (c)(3) reaches it when secured by any dwelling. A timeshare-secured loan is outside (d) through (i).
Paragraph (c) is a servicing rule: credit a periodic payment as of receipt, hold partial payments as it directs, pyramid no late fees, and send an accurate payoff statement within seven business days of a written request.
Pay may not be based on a term of the transaction
Paragraph (d)(1)(i) bars compensation “in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or the terms of multiple transactions by multiple individual loan originators”. A term here is any right or obligation of the parties, so the interest rate and a prepayment penalty are out as pay factors.
The amount of credit extended is the exception. Under (d)(1)(ii) it is neither a term nor a proxy, provided the compensation is a fixed percentage of that amount, which may carry a minimum or maximum dollar figure.
The proxy test has two conditions, both of which have to hold: the factor consistently varies with a transaction term over a significant number of transactions, and the originator can add, drop or change it when originating. In the CFPB’s examples at pp. 41 and 42 of its small entity compliance guide, paying differently on portfolio loans and sold loans can be a proxy; paying by the state the property sits in usually cannot.
Two routes survive the bar:
- Under (d)(1)(iii), a contribution to a designated tax-advantaged defined contribution plan, or a benefit under a designated tax-advantaged defined benefit plan. A contribution may not rest on that originator’s transaction terms. The paragraph lists the qualifying plans.
- Under (d)(1)(iv), a non-deferred profits-based plan, meaning any payment determined with reference to the profits of the person from mortgage-related business. It may not rest on that originator’s own transaction terms, and one of two conditions has to hold: it does not exceed 10 percent of the individual’s total compensation for the period, or the individual originated ten or fewer covered transactions in the preceding 12 months.
The CFPB works the limit at p. 54, on an originator whose $10,000 year-end bonus sits exactly at 10 percent of $100,000 of total compensation.
Dual compensation
Paragraph (d)(2)(i)(A) is the one-payer rule. Where a loan originator takes compensation directly from the consumer on a dwelling-secured transaction, no loan originator may take compensation from anyone else on it, and nobody who knows or has reason to know of the consumer-paid compensation may pay it. Under (d)(2)(i)(B), money routed through a third party who agreed to cover the consumer’s costs still counts as the consumer’s.
Paragraph (d)(2)(i)(C) carries the exception: an organization paid directly by the consumer may still pay its own individual originators, if that pay obeys (d)(1). Affiliates count as one person throughout paragraph (d).
The anti-steering safe harbor
Paragraph (e)(1) prohibits directing a consumer into a transaction because the originator will be paid more on it than on others offered or available, unless the consummated transaction is in the consumer’s interest. Paragraph (e)(2) gives a compliant route: present loan options meeting (e)(3) for each type of transaction the consumer asked about. “Type of transaction” has three values: an annual percentage rate that cannot increase after consummation, one that may increase, and a reverse mortgage.
For each type, the originator obtains options from a significant number of the creditors it regularly deals with and presents three: the lowest interest rate; the lowest interest rate carrying none of negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first seven years, a demand feature, shared equity or shared appreciation; and the lowest total dollar amount of points and origination fees. The originator must believe in good faith that the consumer likely qualifies for each.
Qualification, identification and the closing paragraphs
Paragraph (f) requires a loan originator to be registered and licensed where State or Federal law requires it, naming the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) and 12 CFR Parts 1007 and 1008. Where such an organization employs an individual who need not be licensed, (f)(3) makes it run a criminal background check, pull a credit report, and get findings from the Nationwide Multistate Licensing System (NMLS), which Regulation Z calls the Nationwide Mortgage Licensing System and Registry (NMLSR), for anyone hired on or after January 1, 2014. Paragraph (f)(3)(ii)(A) bars a felony in the preceding seven years, and one involving fraud, dishonesty, breach of trust or money laundering at any time.
Five more paragraphs close the section.
- (g) carries the organization’s and the individual originator’s names and NMLSR IDs onto the credit application, the s. 1026.19(e) and (f) disclosures, the note and the security instrument.
- (h) voids mandatory arbitration clauses in dwelling-secured credit agreements and any reading that would bar a federal claim in court. Parties may still agree to arbitrate after a dispute arises.
- (i) bars financing credit insurance premiums unless calculated and paid in full monthly.
- (j) makes a depository institution keep written policies and procedures covering paragraphs (d) through (g).
- (k) bars extending credit to a first-time borrower on a closed-end dwelling-secured transaction that may negatively amortize, other than a reverse mortgage under s. 1026.33 or a timeshare loan, unless the creditor receives documentation of homeownership counseling from an organization or counselor certified or approved by the Department of Housing and Urban Development. A first-time borrower has had no earlier dwelling-secured closed-end transaction or open-end plan.
Record retention and the underlying statute
Compensation records fall outside the general two year rule in s. 1026.25(a). Under s. 1026.25(c)(2) a creditor keeps all compensation it pays a loan originator, plus the governing agreement, for three years after payment. A loan originator organization keeps the same for what it receives and what it pays its individual originators, three years from each receipt or payment.
The section implements 15 USC s. 1639b, added by the Dodd-Frank Act in 2010 as Truth in Lending Act (TILA) s. 129B. Subsection (b)(1) states the duty of care: be qualified and, when required, registered and licensed, and put the unique identifier on all loan documents. Subsection (c)(1) bars compensation varying with the loan’s terms other than the principal, and (c)(2) carries the dual compensation rule.
The content outline for the SAFE Mortgage Loan Originator Test, National Component with Uniform State Content names mortgage loan originator (MLO) compensation under 12 CFR 1026.36(d) in Federal Mortgage-Related Laws, and names kickbacks, permitted fees, referral fees and fee splitting under Ethics. The Ethics practice set works it from the conduct side.
Sources
- Regulation Z, 12 CFR Part 1026, with Supplement I; 15 USC s. 1639b at United States Code release point 119-102.
- CFPB, Loan originator rule small entity compliance guide, November 2019, pp. 41 to 42 and 54; CFPB, Loan originator compensation final rule, January 2013, p. 2.