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Is the CFPB Creating a “Seismic Shock” Through LO Comp Rule Making?

The question of the Consumer Financial Protection Bureau’s take on the way in which loan originators are compensated has sparked conversation this week following an outline of the CFPB’s plans for upcoming rule making which would place controls on discount points, origination fees and broker compensation. 

“The Consumer Financial Protection Bureau (CFPB) is considering putting strict limits on a creditor’s ability to price its mortgage loans, and on a consumer’s ability to choose among pricing options,” an attorney with K&L Gates explains in a memo. “By way of implementing the far-reaching provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is proposing to require that when a creditor pays a mortgage loan originator’s compensation (which includes most mortgage loan transactions), any up-front amounts the consumer pays for the loan must be in the form of bona fide discount points that reduce the interest rate or a flat origination fee that does not vary with the loan amount.

The CFPB says it’s listening to the mortgage industry for feedback and will respond accordingly. But the recent memo from law firm K&L Gates spells out the issue and points to a potential problem with the CFPB’s authority, which it calls a “seismic shock.”

K&L Gates’ Kris Kully writes:  

The CFPB has rightly indicated, in its cost-benefit analysis, that the Dodd-Frank Act’s widespread ban on consumer-paid points or fees would “significantly change the financing” for most mortgage loan originations, could “negatively impact consumers’ access to credit,” and could lead to “significant unanticipated consequences.” However, as described below, the CFPB’s use of its exemption authority to rein in those consequences would likely create seismic shocks of its own.

Specifically, the CFPB would allow the consumer the choice of paying discount points in creditor-paid transactions, but only if: (1) the points actually result in a “minimum reduction” in the interest rate for each point paid; and (2) the creditor also offers the option of a no discount point loan. The CFPB does not provide any details for how that “minimum reduction” in the rate would be calibrated.

Similarly, the CFPB would allow a consumer to pay up-front origination fees in creditor-paid transactions only if it is a flat amount that does not vary with the size of the loan (and if it is not compensation to the individual loan originator).

The Dodd-Frank Act does allow consumers to pay bona fide third-party charges (even in a creditor-paid transaction). The CFPB would clarify that third-party carve-out, so that consumers could pay up-front fees to affiliates of the loan originator or of the creditor, provided that those fees are flat (although title insurance fees could still vary with the loan amount, even if paid to an affiliate).

While the CFPB appears willing to try to avoid a “significant restructuring” of mortgage loan pricing, its proposed restrictions on discount points and origination fees in creditor-paid transactions as described above are still severe, and would if adopted create their own uncertainties – including whether consumers can choose how to pay for their mortgage loan.

Read the full memo

Written by Elizabeth Ecker

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