The CFPB's latest version of Loan Originator Compensation rule took effect on January 1, 2014 and although the rule seemed fairly straightforward—citing "no compensation based on loan terms," lenders are still facing a dilemma today on how they can and cannot appropriately pay their loan officers or brokers on mortgage loan transactions. This article tries to shed some light on the subject.
Ringing the Loan Originator
In the past, the loan originator compensation rule did not allow for a reduction in loan originator's compensation to be made on any one particular transaction. However, the latest modifications have allowed lenders such a reduction to be made under certain circumstances. Beginning January 1, 2014 an originator is now allowed to decrease compensation in order to cover any unprecedented cost that occurs against the information available at the time of the GFE (Good Faith Estimate).
Different Compensations & Loans
A lender may have always been willing to pay different compensations based on different types of loans, but since the earlier loan originator compensation rule did not shed much light on this issue, lenders were left in the quandary of whether their justification for such distinctions were valid and most shied away from creating more than one compensation model as a result. The new CFPB rule, however, provides a much clearer framework on how to address these concerns through what is known as a proxy analysis.
Poor Quality Loans
Most lenders are concerned about the loans they cannot sell to investors and loans that they are forced to repurchase as a result of early payment default. The question that arises is whether or not a lender has to pay the loan originator that drifts outside investor guidelines on a particular mortgage loan. The new rule states that the long-term performance of a loan is not a loan term and is permissible to be considered for a loan originator's future compensation.
In the wake of the new rule and the CFPB's candidature to enforce it, lenders are required to establish written compensation plans or agreements, review them carefully for mortgage compliance, and ensure that all the compensations to the loan originator are paid in accordance with stipulated mortgage regulations. The lender must duly maintain the record of the compensation paid for each transaction along with the set interest rate.
Seeking professional assistance for compliance consulting services from a third party advisor will help you keep your company compliant not only with the CFBP's loan originator compensation rule, but also with future updates in mortgage regulations and agreements.