Heeding pleas from industry players and trade groups across the country, the Federal Reserve issued additional guidance this week to help smaller mortgage lenders and loan brokers comply with the agency's new loan officer compensation rules that take effect April 1, 2011.
Amendments to Regulation Z of the Truth in Lending Act (TILA) dealing with loan officer pay were initially announced last August as part of a mortgage regulation revamp that is intended to protect consumers from what the central bank describes as ""unfair, abusive, or deceptive lending practices.""
The widely used pay structure in which mortgage brokers and loan officers are compensated based on the interest rate or other loan terms has been blamed for pushing consumers into high-cost, unsustainable mortgages and contributing to the nation's mortgage crisis and rising delinquency numbers. The new rule prohibits this practice to ensure consumers are not steered into high-risk loans they can't afford.
According to the newly published guidelines entitled ""Compliance Guide to Small Entities,"" the prohibitions related to mortgage originator compensation and steering apply to closed-end consumer loans secured by a dwelling or real property that includes a dwelling. The rule does not apply to open-end home equity lines of credit (HELOCs) or
time-share transactions. It also does not apply to loans secured by real property if the property does not include a dwelling.
For purposes of these rules, loan originators are defined to include mortgage brokers, either individuals or mortgage broker companies. This includes companies that close loans in their own names but use table-funding from a third party. The term loan originator also includes employees of creditors and employees of mortgage brokers that originate loans, i.e., loan officers.
Creditors are excluded from the definition of a loan originator when they do not use table-funding, whether they are a depository institution or a non-depository mortgage company, but employees of such entities are considered loan originators.
The rule prohibits a creditor or any other person from paying 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.
The rule states that a loan originator is prohibited from steering a consumer toward a loan that provides the originator with greater compensation, as compared to other transactions the loan originator could have offered to the consumer.
Creditors who compensate loan originators must retain records to prove their compliance with Regulation Z for at least two years after a mortgage transaction is completed.
Fed officials say the new rule will prevent loan originators from increasing their own compensation by raising the consumers' loan costs, such as by increasing the interest rate or points. Loan originators can continue to receive compensation that is based on a percentage of the loan amount.