The Consumer Financial Protection Bureau (CFPB) this week released the latest edition of its “Supervisory Highlights” report, in which the Bureau calls out different kinds of loan originator compensation (LO comp) for different mortgage product types, including reverse mortgages.
In the report’s dedicated section on mortgage origination, the CFPB describes how it has “assessed mortgage origination operations of several supervised institutions for compliance with applicable Federal consumer financial laws including Regulation Z,” the report says. Regulation Z is the rule that implements the Truth in Lending Act of 1968 (TILA), and requires mortgage issuers and other lenders to give consumers written disclosures of important credit terms.
“Regulation Z generally prohibits compensating mortgage loan originators in an amount that is based on the terms of a transaction,” the CFPB report says. “It defines a term of a transaction as ‘any right or obligation of the parties to a credit transaction.’ And it provides that a determination of whether compensation is ‘based on’ a term of a transaction is made based on objective facts and circumstances indicating that compensation would have been different if a transaction term had been different.”
CFPB’s LO comp final rule from 2013 also clarified that it is “not permissible to differentiate compensation based on credit product type, since products are simply a bundle of particular terms,” according to the report.
However, CFPB examiners found that different product types sometimes created different compensation levels, the report said. This included reverse mortgages.
“As part of their business model, institutions brokered-out certain mortgage products not offered in-house,” the report said. “For example, the institutions used outside lenders for reverse mortgage originations, but had their own in-house cash-out refinance mortgage product. Examiners determined that the institutions used a compensation plan that allowed a loan originator who originated both brokered-out and in-house loans to receive a different level of compensation for the brokered out loans versus in-house loans.”
This constituted a violation of Regulation Z, the report explained.
“By compensating differently for loan product types that were not offered in-house, the entities violated Regulation Z by basing compensation on the terms of a transaction,” the Bureau said. “In response to these findings, the entities have since revised their loan originator compensation plans to comply with Regulation Z.”
CFPB examiners also found that mortgage lenders violated the Equal Credit Opportunity Act (ECOA) and its implementing rule, Regulation B, in a variety of ways. In the realm of fair lending, examiners found that certain lenders had granted pricing exceptions for consumers, including for competitive offers, based on prohibited bases protected under ECOA, the report said.
There could be changes on the front of the LO comp rule that apply to certain smaller lenders. In March, the CFPB issued an official request for comment as it conducts a review of Regulation Z’s mortgage loan originator rules, saying at the time that it was seeking to understand the economic impact the rules have on smaller mortgage businesses.
“These comments may assist the Bureau in determining whether the Loan Originator Rules should be continued without change, or amended or rescinded to minimize any significant economic impact of the rules upon a substantial number of such small entities, consistent with the stated objectives of applicable Federal statutes,” the Bureau said at the time.
At least one outside organization — the Community Home Lenders of America (CHLA) — supports changes to the LO comp rule. In May, the organization submitted a letter to CFPB Director Rohit Chopra saying that the current rule’s “inflexibility” in certain areas is a “detriment” to consumers.
“Many lender groups have for some time argued for targeted flexibility for loan originators in this situation, typically asking for such flexibility when there is ‘demonstrable price competition,’” the letter said.
The CHLA recommended five criteria to address concerns while also allowing for comp reductions including an agreed-upon compensation schedule between lender and originator; and taking borrower comparison shopping into account after the current lender has provided “substantial assistance” with finding the right loan option.