Jan. 21, 2013: LO comp, appraisal, and high-price loan rules released - at least lenders have a year to comply with most of it
Rob Chrisman


Samuel Clemens said, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."  Perhaps Mark Twain would suggest that we are witnessing the transition from mortgage companies that occasionally thought about compliance to compliance companies that occasionally thought about mortgages. And we’ve certainly had the CFPB attempt to clear up a lot of what we know and don’t know, although you can bet that attorneys and compliance folks will have their hands full answering questions.


Yesterday the CFPB announced rules for “Loan Originator Compensation Requirements under the Truth in Lending Act (Regulation Z)”, and on Friday we had “Appraisals for Higher-Priced Mortgage Loans (issued jointly with other agencies),” “Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under the Equal Credit Opportunity Act (Regulation B).” Here you go: http://www.consumerfinance.gov/regulations – look for them all to be enforced by next January (although most lenders have already instituted many).


A few words on LO comp. One headline I saw read, “The Consumer Financial Protection Bureau dropped the idea of requiring lenders to disclose what a loan would cost without any upfront points and fees.” The story out of New Jersey went on. “The Consumer Financial Protection Bureau took further steps to ensure people applying for mortgages aren’t steered toward risky and high-cost loans. Its latest set of rules bans incentives that encouraged mortgage brokers to sell unsafe loans to unexpecting borrowers. ‘Before the financial crisis, many mortgage borrowers were steered toward risky and high-cost loans because it meant more money for the loan originator,’ said CFPB Director Richard Cordray. ‘These rules will hold loan originators more accountable by banning the incentives that led so many of them to direct consumers toward disaster.’”


The rules will prohibit a broker or loan officer from getting paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees. Moreover, the mortgage originator cannot get paid more if, for example, the consumer agrees to buy title insurance from the lender’s affiliate. Previously, loan originators could make more money by getting the consumer to buy these services from the lender, broker, or one of their affiliates. The rules prohibit “dual compensation” in which the loan originator gets paid by both the consumer and another person such as the creditor. In the run-up to the crisis, too often consumers incorrectly assumed that their loan originators were looking out for the consumer’s best interest. And they set qualification and screening standards for loan originators so consumers can be confident that originators are ethical and knowledgeable.


So in recent weeks the CFPB, via its Dodd-Frank authority, defined a “qualified mortgage,” set restrictions on when a lender can foreclose, and put a halt to “dual tracking,” where a mortgage servicer can start foreclosure proceedings while a homeowner is negotiating options. And now it completed its task of announcing rules prior to today, the January 21 deadline. For those with ADD, there are summaries available. For example, the summary of LO compensation rules can be found at http://files.consumerfinance.gov/f/201301_cfpb_loan-originator-compensation-rule_summary.pdf.


The industry has had to deal with the public and press believing that many loan officers engaged in the steering of consumers to high-priced loans. As any loan officer who has been around for several years knows, it was common, or at least well documented, that for many a portion of the compensation paid to loan officers and mortgage originators to be tied to their success in writing specific types of loans. These loans were often those that were most profitable for the lenders and thus more expensive for the borrowers, and thus the loan officers were being compensated for steering consumers toward the loans that were probably the most costly and possibly the least suitable for them.


The rule has undergone several iterations and periods of public comment. One notable change in the final rule from the most recent version released last August is that originators are no longer required to provide a consumer with a no-fee or flat loan quote when they quote a loan with fees. This was intended to give consumers a concrete way to compare the cost advantages or disadvantages of paying upfront fees or costs. Cordray said numerous public comments convinced CFPB that the flat price example would merely be confusing to consumers. The new rule prohibits steering incentives. A loan officer or broker cannot be paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees. Nor can the LO be paid for convincing the consumer to buy additional services from the lender, broker, or an affiliate such as title insurance or mortgage life insurance. The loan officer or broker can be compensated by way of other models such as on the number or size of loans or the aggregate dollar volume of loans written within a stated time period.


The rule also prohibits the loan officer or broker from being paid by both the consumer and another person such as the creditor, i.e. dual compensation. CFPB said that in the run-up to the mortgage crisis consumers often incorrectly assumed that because they were paying their loan originators they were looking out for the consumer's interest. However, the Final Rule includes an exception "to allow mortgage brokers to pay their employees or contractors commissions, although the commissions cannot be based on the terms of loans they originate." While the Dodd-Frank act prohibits consumers from paying upfront points or fees on the same loan where the originator is compensated by someone other than the consumer, it also authorizes the CFPB to waive or make exceptions to the prohibition. Such a waiver was proposed in order to facilitate consumer shopping and preserve consumer choice. Although the proposal wasn't finalized today, the CFPB decided to issue a complete exemption to the ban on upfront fees.


The rule also sets uniform standards for qualifying and screening loan originators. Under current rules LO’s have different sets of qualifying standards depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The new rule provides a more level playing field so consumers can be confident that originators are ethical and knowledgeable. The final rules generally require that the loan originators meet character, fitness, and financial responsibility reviews, be screened for felony convictions, and are required to undertake training to ensure they have the knowledge about the rules governing the types of loans they originate.


Mandatory arbitration of disputes involving mortgage and home equity loans are generally prohibited by the new rule as is the practice of increasing loan amounts to cover credit insurance premiums. These two sections of the law will take effect in June 2013 while the balance of the rule will go into effect in January 2014.


But LO compensation information was accompanied over the last three days by information/rules on appraisals and high-priced loans. In fact, the federal financial institution agencies (the FDIC, Fed, OCC, and NCUA), the CFPB, and the Federal Housing Finance Agency all adopted a joint final rule to implement Dodd-Frank appraisal requirements for higher-priced mortgage loans under the Truth in Lending Act. The final rule is effective on January 18, 2014. The rule may have little practical effect, however, because it contains exemptions for various categories of loans, including ones that are deemed qualified mortgages under the ability-to-repay requirements. Once the ability-to-repay rule is implemented on January 10, 2014, it is anticipated that at least initially mortgage lenders will confine the loans that they make to qualified mortgages.


The final rule establishes requirements for obtaining an appraisal on the security property before a lender may make a higher-priced mortgage loan. The final rule uses a modified version of the current definition of “higher-priced mortgage loan” under Regulation Z. A loan meets this definition if it is secured by the consumer's principal dwelling and the annual percentage rate exceeds the applicable average prime offer rate by 1.5 percentage points for a first-lien non-jumbo loan, 2.5 percentage points for a first-lien jumbo loan, or 3.5 percentage points for a junior-lien loan. (This modified definition currently is used for determining a loan that is subject to the existing escrow account requirements for higher-priced mortgage loans.)


The final rule includes a safe harbor under which a lender that takes certain steps in obtaining an appraisal will be deemed to have complied with the final rule’s requirements. The final rule will require that an additional appraisal be obtained when the seller acquires the property at a lower price within 180 days of the date that the borrower contracts to purchase the property. This requirement is subject to exceptions, including those based on a limited increase in the acquisition price. The final rule also includes requirements to provide a copy of the appraisal to the borrower whether or not the loan closes, and to provide the borrower with a related disclosure. In addition to qualified mortgages, other examples of loans that are exempted from the rule include transactions to finance the initial construction of a dwelling, bridge loans with a term of 12 months or less, and reverse mortgage loans.


Of course, as the industry has learned, the devil is in the details. Attorneys and consultants specializing in LO comp, appraisal, and high-cost loan questions will be working overtime initially dealing with the onslaught of questions. And for the industry, the Mortgage Bankers Association is on top of it – information on the changes, and upcoming conferences and webinars on the changes, can be found at http://www.mbaa.org/default.htm.


Once again, the details can be found at http://www.consumerfinance.gov/regulations


Hey – a quick reminder that the fixed-income markets are closed today (which include mortgage-backed securities). Watch that pricing – with no base price to go on, any investor setting prices may rely on what the overseas markets have done, plus a nice margin for cushioning rates and prices. Of the few that are open, some investors are only accept best-efforts locks.



Two Cajuns were waiting at the bus stop when a truck loaded with rolls of turf went past.

Boudreaux said, “I’m gonna do dat when I win da lottery.”

“What's dat?” asks Thibodeaux.

“Send da lawn off to be mowed!"


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