produces not only one effect, but a series of effects.
Of these effects, the first alone is immediate;
it appears simultaneously with its cause; it is seen.
The other effects emerge only subsequently; they are not seen;
we are fortunate if we foresee them.
What Is Seen and What Is Not Seen[i]
Since April 6, 2011, mortgage loan originators (MLOs) have struggled to comply with the many requirements imposed on them by the MLO compensation provisions of the Truth in Lending Act (TILA),[ii] as amended by Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). That date was the compliance effective date.[iii] Prior to that date, however, there were considerable and persistent efforts made to postpone its implementation.
I tracked the burgeoning protests and litigation in a series of articles[iv] and newsletters.[v] Associations resisted these TILA revisions on behalf of their membership. The National Association of Mortgage Brokers (NAMB) and the National Association of Independent Housing Professionals (NAIHP) sued the Federal Reserve Board of Governors (FRB). Amicus briefs were filed. Many members of Congress, from both sides of the aisle, also protested aspects of the new MLO compensation requirements. All for naught!*
the bad economist confines himself to the visible effect;
the good economist takes into account both the effect that can be seen
and those effects that must be foreseen.
What Is Seen and What Is Not Seen[xii]
The panel consisted of representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration (SBA), and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).[xv] On the panel were so-called small entity representatives (SERs), individuals who represent the business entities that would be subject to the CFPB’s proposal.[xvi] On July 11, 2012, the panel issued its report.[xvii]
Here are certain, salient topics that were reviewed by the panel:
- Payment of Discount Points
- Payment of Origination Points and Fees in Creditor-Paid Compensation
- Payment of Origination Points and Fees in Brokerage-Paid Compensation
- MLO Retirement Plans, Profit-Sharing, and Bonuses
- Pricing Concessions and Point Banks
- MLO Qualification and Training Requirements
Payment of Discount Points
It almost always happens that when the immediate consequence is favorable,
the later consequences are disastrous, and vice versa.
Whence it follows that the bad economist pursues a small present good that will be followed
by a great evil to come, while the good economist pursues a great good to come,
at the risk of a small present evil.
What Is Seen and What Is Not Seen[xviii]
Suggestions and Concerns
Suggestions for alternative resolutions were offered to the CFPB, such as improving disclosures, supplemental tools, and educational programs to help consumers better understand pricing tradeoffs. A request was urged for the CFPB to delay action until a study could be conducted of the current mortgage market to assess “post crisis” business practices and conditions and the efficacy of recent regulations.
Interesting and insightful concerns expressed by SERs included challenges involving (a) identifying restrictions in the existing rule on MLO concessions to address errors in the Good Faith Estimate or to cover rate lock extension fees, and (b) that MLOs tend to avoid consumers seeking low balance loans because MLOs’ compensation is set as a percentage of the loan balance, and (c) that rates and administrative fees have increased since promulgation of the MLO compensation rule.
Finally, the SERs asked the CFPB to not adopt an automatic sunset for at least five years, in connection with any regulation relating to points and fees. Their view was that an automatic sunset would disrupt an already fragile market.
- The CFPB should consider a proposal to allow consumers to pay upfront discount points and to solicit comment on mechanisms to ensure that the discount points are bona fide.
- The panel recommended that the CFPB should solicit public comment on a proposed requirement that lenders make available a no-discount point loan.
and has not yet learned to discern the effects that are not seen,
he indulges in deplorable habits,
not only through natural inclination, but deliberately.
What Is Seen and What Is Not Seen[xxi]
Suggestions and Concerns
There seemed to be a disconnect, in effect, between prohibiting overall origination fees from varying based on the amount of the loan and Dodd-Frank, which specifically permits MLO compensation to vary with the amount of the loan.
Some SERs stated that they “generally opposed a flat fee for core underwriting and processing services.” It was noted that several types of other origination fees vary with the amount of the loan, including secondary market, loan level pricing adjustments, and on other determinative factors, such as geography and type of loan. Thus, they wanted the CFPB to state explicitly that it will not require a single fee to cover all origination costs, and that variances in particular types of origination fees would still be permitted, based on other factors besides the loan amount. And there are anomalies as well to be considered; for instance, the fact that certain government-sponsored lending programs require origination fees to be charged as a percentage of the loan. Further, it was suggested that an exemption should be provided for any pass-through fees relating to any flat fee requirement.
Clearly, variances were a knotty subject. Prohibiting variances based on the amount of the loan would disadvantage borrowers with smaller loans, particularly low- and moderate- income borrowers. Thus, this led to a prediction that “brokerage firms and creditors would have to set their fees under the new system using some sort of average price that would exceed current fees for smaller amount loans.” Ultimately, the outcome of such a prohibition would “negatively impact” access to credit, because shifting costs into the rate would trigger a status as a high-cost mortgage.
Some SER panelists suggested that a flat fee requirement should be limited to subprime loans. Other SERs stated that there are certain government loan programs, such as those of the Department of Veterans Affairs, which prohibit fees exceeding one percent of the loan amount. So, if a flat fee exceeded that threshold, then the loan would not be permissible. Furthermore, prohibiting variances based on the amount of the loan would disadvantage smaller lenders, those that do not benefit from the same economies of scale available to larger lenders (i.e., the ability to hedge, or to cross-market other services and products).
The affiliate compensation issue also came up. Clarification was sought for the definition of an “affiliate”. Concern was raised about “the idea of subjecting fees paid by consumers to affiliates to the same restrictions as fees paid to MLOs and creditors.” The point was made that affiliates have separate operations and pricing and do not share profits with their affiliated MLOs and creditors.
Also, it was suggested that particular types of affiliates, such as real estate agents, should not be subject to a ‘points and fees’ provision.[xxii]
- The CFPB should consider the potential costs and unintended consequences associated with a flat fee requirement before determining whether to propose it for comment.
- The CFPB should propose and seek public comment on alternative approaches to exercising its exemption authority, in order to ensure that consumers are in a position to shop and receive fair value for origination points and fees, and to minimize adverse industry consequences.[xxiii]
It instructs us in all the effects of an act by making us feel them,
and we cannot fail to learn eventually,
from having been burned ourselves, that fire burns.
I should prefer, in so far as possible,
to replace this rude teacher with one more gentle: foresight.
What Is Seen and What Is Not Seen[xxiv]
Suggestions and Concerns
The CFPB was considering this exception because it would be difficult for brokerage firms to pay their brokers commissions that varied based on the loan amount (viz., which is expressly permitted by Dodd-Frank), if the brokerage firms had to charge origination fees that do not vary based on loan amount. Although there was not significant comment about this exception, the comments given were not without two interesting insights: (1) such an exception would not fix the broader problems with the general proposal to prohibit fees to vary based on the amount of the loan, and (2) some community banks have been discussing whether to create a separate brokerage firm for each originator.[xxv]
- The CFPB should proceed with its proposal to allow brokerage firms to allow their employee brokers a commission or other compensation tied to a particular transaction when a consumer pays a brokerage firm.
- Consider allowing consumers to pay brokerage firms commissions that vary with loan size in transactions with brokerage-paid compensation.[xxvi]
for one another
by compulsion or voluntarily,
that is to say, public services and private services.
The first, imposed and regulated by the law,
which is not always easy to change when necessary,
can long outlive their usefulness and still retain the name of public services,
even when they are no longer anything but public nuisances.
What Is Seen and What Is Not Seen[xxvii]
Suggestions and Concerns
One position asserted that restrictions on bonuses compel businesses to discriminate against their MLOs. Another view stated that using mortgage revenue as a standard would be “over-inclusive,” because the standard would capture income from all mortgage loans, including existing portfolio loans, rather than only newly originated loans.
Steering incentives were somewhat controversial, inasmuch as one view asserted that “existing protections were so strong that additional concerns about incentives to steer consumers were not warranted.” Furthermore, the CFPB was urged to consider incentives, by questioning whether the incentives were significantly different for benefits structured as qualified plans versus non-qualified plans.
Several observations were made regarding the CFPB’s proposal to “relax” requirements for qualified plans, since it was felt that the proposal would not help or would actively disadvantage particular segments of the industry. Amongst the concerns were (1) the proposal under consideration to allow nonqualified plans where a company’s revenues from mortgage-related business did not exceed a specified threshold, and thus would not help companies if mortgage revenue increased, (2) options involving qualified plans would not be helpful to small providers because the overhead involved in such plans makes them prohibitive for small companies, and (3) any mortgage-related revenue limit should be no lower than fifty percent.
Suggestions included: (1) there should be no limit because any limit would disadvantage small businesses that only originate mortgages, and that no limit is necessary provided bonuses were not tied to any one particular loan’s terms, and (2) the exemption for qualified plans should be expanded to cover all non-qualified plans in the case of small, federally-insured depositories.
- The CFPB should solicit public comment on the treatment of qualified and non-qualified plans and whether treating qualified plans differently than non-qualified plans would adversely affect small lenders and brokerages relative to large lenders and brokerages.
- Moreover, the CFPB should seek public comment on the ramifications for small businesses and other businesses when setting the revenue limit at fifty percent of company revenue or at other levels.
They would willingly eliminate the capitalist, the banker, the speculator,
the entrepreneur, the businessman, and the merchant,
accusing them of interposing themselves between producer and consumer
in order to fleece them both, without giving them anything of value.
the reformers would like to transfer to the state
the work of the middlemen,
for this work cannot be eliminated.
What Is Seen and What Is Not Seen[xxviii]
Suggestions and Concerns
Some SERs stated that companies should be able to dock MLOs’ pay if their errors cost the companies money. There was a request to extend “flexibility” to companies to enable them to meet competing offers. Such flexibility, it was suggested, could be evidenced through the change in circumstances requirements and notices under the Real Estate Settlement Procedures Act (RESPA),[xxix] thereby documenting that concessions are being given in appropriate circumstances. Indeed, such flexibility is particularly critical for small businesses to compete with large ones.
A bit of deference to human nature came into discussions when one SER said that “allowing pricing concessions would reduce the current incentive to inflate charges on the Good Faith Estimate.” Whether reducing the “current incentive to inflate charges” on the Good Faith Estimate is a viable gambit in the context of such a suggestion to the CFPB is surely but one person’s opinion.
Nevertheless, the essential point to be made is that brokers want the CFPB to permit more flexibility on the use of concessions in order to allow them to compete with direct lenders. Some suggested that brokerage firms (rather than their MLO employees) be permitted the flexibility to “grant concessions,” which, according to this view, would help provide appropriate controls.
The controversial “point bank” system came through with thumbs-down results. Apparently, there was no SER using a point bank system in its business model. Indeed, the range of opposition to point banks starts with a disclaimer that it might be considered if necessary to be competitive, to concern that point banks create incentives for MLOs to upcharge some consumers in order to create flexibility for themselves to provide concessions to other consumers, to the view that point banks would permit loan officers to treat one consumer better to the detriment of another, leading to fair lending concerns, and across the spectrum to the observation that banks would cause brokers to become excessively bound to a lender that provided them with the most points, thereby creating incentives to steer consumers to that lender.
Needless to say, these sentiments led to the inevitable conclusion that it would be beneficial for the CFPB “to clarify the circumstances in which a factor used to determine compensation for MLOs was prohibited as a proxy for loan terms.”[xxx]
Point banks could lead to regulatory violations: the use of point banks could legitimize their use in such a way that they would place responsible MLOs on an uneven playing field with less responsible MLOs, including the possibilities of abuse in their use, causing allegations of fair lending and steering violations.
Clarification is needed regarding when factors used to compensate MLOs functioned as proxies for loan terms.
- The CFPB should continue to explore the use of pricing concessions and proceed with a proposal to allow pricing concessions where there are changes to terms not controlled by the MLO, the creditor, or affiliates.
- Comment should be solicited on whether there are other situations where pricing concessions should be allowed to provide MLOs with flexibility where the risk of abuse is low.
- The CFPB should go forward with its proposal under consideration to clarify that point banks are compensation, specifying that the CFPB should propose limiting their use.
- Finally, the CFPB should use the proposed rule to clarify when a “factor” used to determine compensation for an MLO serves as a “proxy” for loan terms.[xxxi]
and the outcome of the whole operation is an injustice,
all the more deplorable in having been perpetrated by the law.
What Is Seen and What Is Not Seen[xxxii]
Suggestions and Concerns
Indeed, it was further asserted that the CFPB’s proposal under consideration did not go far enough and should also impose the “same testing, training, and state licensing requirements on depository institution MLOs that were already imposed on nondepository institution MLOs.” One SER broker even stated that non-depository, institution-employed MLOs should not be permitted to “self-certify” that they are qualified.
In response, the SERs from depository institutions stated that they are already required by their prudential regulators to engage in vigorous screening of and training programs for their MLOs, and that “current standards are equivalent to the ones in the proposal under consideration.” So, in their view, the CFPB “should avoid layering on duplicative regulations and to coordinate closely with prudential regulators.” In fact, one depository SER opposed any requirement for loan officers of a depository institution to have to take the same training as that required for non-depository institution MLOs.
Non-depository institution lenders stated that an exemption for bona fide non-profit organizations under SAFE granted by the Department of Housing and Urban Development (HUD) had not actually helped non-profits, because many states had already decided to regulate them when the exemption was issued and had not repealed these regulations.[xxxiii]
The CFPB should be urged to consider developing a single national platform rather than allowing each state to set separate requirements. Clearly, this is an area of considerable disagreement between depository and non-depository institutions. The depository institutions urged the CFPB to avoid imposing new or adding “duplicative or ambiguous” requirements.
- The CFPB should solicit comment on ways to provide greater clarity about what is actually required for a MLO to meet the financial responsibility, character, and fitness criteria.
- Clarification should be provided regarding what role, if any, an individual’s credit score should have in the required financial responsibility determination.[xxxiv]
- Further, the CFPB should consider ways to ensure that depository institution and non-profit organizations are not required to provide training that is duplicative of training they are already required to provide to their MLOs.[xxxv]
coins, bank notes, and the other media
by which products pass from hand to hand,
in order to see only the products themselves,
which constitute the real substance of a loan.
What Is Seen and What Is Not Seen[xxxvi]
I will touch briefly on certain proposals set forth by the CFPB in response to taking into consideration the recommendations of the Small Business Review Panel.[xxxvii] My outline is meant to be not comprehensive, but suggestive of the overall direction of the CFPB’s views at this time.
Restriction on Upfront Points and/or Fees
- Before a lender or mortgage broker may impose upfront points and/or fees on a consumer, the lender must make available to the consumer a comparable, “alternative loan” with no upfront discount points, origination points, or fees that are retained by the creditor, broker, or an affiliate of either (a "zero-zero alternative"). [This requirement would not be triggered by pass-through fees to independent third parties that are not affiliated with the lender or mortgage broker.] The requirement would not apply where the consumer is unlikely to qualify for the zero-zero alternative.
- In transactions that do not involve a mortgage broker, there would be a safe harbor if, any time prior to application, the lender provides a consumer an individualized quote for a loan that includes upfront points and/or fees, and the lender also provides a quote for a zero-zero alternative. In transactions that do involve mortgage brokers, a safe harbor is provided under which lenders provide mortgage brokers with the pricing for all of their zero-zero alternatives. Mortgage brokers then would provide quotes to consumers for the zero-zero alternatives when presenting different loan options to consumers.
- Related issues requiring comment include:
- Whether the CFPB should adopt a bona fide requirement to ensure that consumers receive value in return for paying upfront points and/or fees, and different options for structuring such a requirement.
- Whether additional adjustments to the proposal concerning the treatment of affiliate fees would make it easier for consumers to compare offers between two or more creditors.
- Whether to take a different approach concerning situations in which a consumer does not qualify for the zero-zero alternative.
- Whether to require information about zero-zero alternatives to be provided not just in connection with informal quotes, but also in advertising and at the time that consumers are provided disclosures within three days after application.
o Continue the general ban on paying or receiving commissions or MLO compensation based on the terms of the transaction (other than loan amount), with some refinements:
Allow reductions in MLO compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances.
Clarify when a factor used as a basis for compensation is prohibited as a “proxy” for a transaction term.
- Clarify and revise restrictions on pooled compensation, profit-sharing, and bonus plans for loan originators, depending on the potential incentives to steer consumers to different transaction terms.
o Permit employers to pay bonuses or make contributions to non-qualified profit-sharing or retirement plans from general profits derived from mortgage activity if either: (1) the loan originator affected has originated five or fewer mortgage transactions during the last 12 months; or (2) the company’s mortgage business revenues are limited. The Bureau is proposing two alternatives, twenty-five (25) percent or fifty (50) percent of total revenues, as the applicable test.
o The amounts of contributions and bonuses could not be based on the terms of the transactions that the individual had originated, even though contributions and bonuses could be funded from general mortgage profits.
Continue the general prohibition on loan originators being compensated by both consumers and other parties, with some refinements:
- Allow mortgage brokerage firms that are paid by the consumer to pay their individual broker employees a commission on the transaction, so long as the commission is not based on the terms of the transaction.
- The proposal would clarify that certain funds contributed toward closing costs by sellers, home builders, home improvement contractors, or similar parties, are considered payments made directly to the loan originator by the consumer, when used to compensate a loan originator.
o Where a loan originator is not already required to be licensed under SAFE, the proposal would require the employer to ensure that the loan originator meets character, fitness, and criminal background check standards that are equivalent to SAFE requirements and receives training commensurate with the loan originator’s duties.
o Employers would be required to ensure that their MLO employees are licensed or registered under SAFE, as applicable.
o Employers and the individual loan originators who are primarily responsible for a particular transaction would be required to list their license or registration numbers on certain key loan documents.
Past is Prologue
not to judge things solely by what is seen,
but rather by what is not seen.
What Is Seen and What Is Not Seen[xxxviii]
Whether deserved or not, the mortgage and real estate crisis focused attention on the roles of loan officers and mortgage brokers in the loan origination process. Prior to the crisis, according to the CFPB, “training and qualification standards for loan originators varied widely, and compensation structures frequently gave loan originators incentives to steer consumers into loans with higher rates or other unfavorable terms.”[xxxix]
Now the CFPB is proposing new rules to implement Dodd-Frank requirements, as well as to revise and clarify existing regulations and guidance on loan originator compensation. In addition, the proposals are meant to address “broader consumer confusion about the relationship between certain upfront charges and loan interest rates.”[xl]
Certain proposals, such as allowing lenders to continue making available loans with upfront points and/or fees, so long as they also make available an “alternative loan,” seem to be an attempt by the CFPB to be responsive to all market participants.
The CFPB plans to issue final rules by January 2013. We will soon find out if, and the extent to which, the public comments influence final rules that may be considered beneficial to the stability of residential mortgage lenders and originators.
October 2012, Volume 4, Issue 10, pp. 31-49.