Did you know that human resources officers need to be educated on 2013 amendments to Regulation Z that were necessitated by changes in the Dodd-Frank Act to the Truth in lending Act (“TILA”)? In January, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule regarding mortgage loan originator compensation, and then, at the end of May, issued an updated final rule that made additional adjustments to amended Regulation Z. Compliance officers and human resources professionals need to educate themselves and ensure that job descriptions and actual practices take into account the new provisions in amended Regulation Z.
Amended Regulation Z is part of a significant set of mortgage origination and servicing reforms that were enacted through the Dodd-Frank Act and the CFPB’s rulemaking process. In the fallout from the most recent economic crisis, mortgage reform was high on Congress’s to-do list The CFPB, which has protecting consumers as one of its stated goals, has also prioritized mortgage reforms. One of the targets of these changes is actual and perceived issues with how some mortgage loan originators are compensated.
Do We Need to Change Everything?
Hopefully not. Some financial institutions, particularly those focused on community lending, already compensate their mortgage loan originators in a way that complies with amended Regulation Z. Certain factors for compensating mortgage loan originators are outlined in the commentary to the final rule as being acceptable. These factors do not relate to features of the mortgage loans or interest rates associated with the loans. They include the employee’s overall loan volume, whether customers are new versus existing, how loans perform over time, condition of the loan files and the employee’s yield of applications to closed loans. To the extent your mortgage loan originators are compensated based on these factors, you may be in compliance already. Otherwise, moving toward a model that emphasizes these factors should be a stated goal for your company.
What Is Not Allowed?
The key prohibition in amended regulation Z involves basing compensation on “terms of the transaction.” Most people probably have different definitions for what this entails, so the CFPB has provided a list of what it thinks are impermissible factors on which to base mortgage originator compensation. Although a full listing can be found in the final rule, these factors include interest rates, prepayment penalty, fees or charges requiring a good faith estimate or disclosure, products/services purchased (title policy through the lender), points, document fees and origination fees.
Where Do We Go From Here?
Get started. The effective date is January 10, 2014. Contact Spilman or competent counsel who can train your compliance teams on amended Regulation Z. Begin the process of looking at your job descriptions, as well as actual practices and policies, and then examine relevant employment agreements. Alter these documents as necessary. Finally, keep updated on this issue and follow this blog to stay apprised of new developments.