Take Note of Zero-Zero Alternative in Final LO Comp

Markku Vitikainen/Markku Vitikainen - Fotolia

Last Friday, the CFPB issued final proposals relating to loan officer compensation.  By January of 2013, these proposals will be finalized into rules, subject to any adjustments made as a result of the upcoming comment period. 

For the most part, lenders will probably perceive these rules as positive, providing some additional flexibility from existing regulations and/or the statutory changes mandated to go into effect in 2013.

Of greatest interest, the up-front points and fees compensation “ban” under Dodd Frank would be replaced with the requirement that lenders provide consumers with a comparable zero-zero alternative (a loan with no upfront points or lender fees) loan in every transaction where the borrower was likely to qualify for the loan. There would be no requirement of a flat origination fee as was previously discussed although the CFPB is still considering whether there should be “adjustments” to affiliate fees to make it easier for consumers to compare loans offered by different lenders. Creditors dealing with borrowers through brokers would comply with the law by providing the broker with the zero–zero alternative. The CFPB is also considering whether to institute a “bona fide” requirement to ensure consumers are receiving a discount corresponding to the upfront points and fees charged. In addition, the CFPB is still considering whether there should be additional formal disclosure requirements of the zero-zero alternative and what to do for consumers who do not qualify for the zero-zero alternative.

Another change beneficial from the lenders perspective is that loan officer compensation could be reduced as a result of unanticipated increases in closing costs. While this proposal does not go as far as most in the industry would want (i.e., allowing reductions as a result of originator mistakes), it still represents additional flexibility from current laws. In addition, the CFPB intends to issue a more precise definition of the term “proxy,” although no definition is provided in the proposal. 

With respect to LO compensation, the CFPB would permit payments from mortgage profits into and participation in qualified retirement plans. The CFPB would also permit the use of mortgage profits into non-qualified plans, provided there are limitations as to the percentage and extent that mortgage operations fund these non-qualified plans. Further, under any scenario, the terms of the transactions originated by a loan officer could not impact the amount of the contribution for the employee’s benefit.

There are additional outstanding proposals from the CFPB, but those listed above provide the highlights regarding loan officer compensation.