Federal Reserve Publishes Compliance Guide for LO Compensation

The Federal Reserve published a compliance guide for Regulation Z and provides additional information regarding prohibitions related to mortgage originator compensation and steering.

Regulation Z prohibits certain practices relating to payments made to compensate mortgage brokers and other loan originators. “The goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators,” said the Fed.

The rule prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction’s terms or conditions, except the amount of credit extended. The rule also prohibits any person from paying compensation to a loan originator for a particular transaction if the consumer pays the loan originator’s compensation directly.

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Loan originators are also prohibited from steering a consumer to consummate a loan that provides the loan originator with greater compensation, as compared to other transactions the loan originator offered or could have offered to the consumer, unless the loan is in the consumer’s interest. The rule provides a safe harbor to facilitate compliance with the prohibition on steering.

“To be within the safe harbor, the loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business. The loan originator can present fewer than three loans and satisfy the safe harbor, if the loan(s) presented to the consumer otherwise meet the criteria in the rule,” said the guide.

Several trade organizations have requested that the Fed delay the rule, which lenders are required to comply with starting April 11, 2011.  Earlier this week, the NAMB said the rule was a “game changer” for the mortgage industry and argued that mortgage brokers and lenders are ill-equipped with how to fully comply.

To view a copy, see here.

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