www.1300FastMoney.com The Federal Reserve Board's new rules governing originator
compensation are now in effect. After a five day court-imposed
administrative delay, the United States Court of Appeals denied a
request to further delay implementation of the rule. In March, the
industry received additional guidance related to the new loan originator
compensation rules effective April 6, 2011. Attorneys for the Federal
Reserve Board of Governors held an online webinar on Thursday, March 17,
2011, and on Friday, March 18, 2011, HUD released a newsletter
addressing GFE related-questions that have arisen as new compensation
structures form. Highlights from both the Federal Reserve Board webinar
and the HUD newsletter are included below.
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Federal Reserve Board Webinar Highlights:
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HUD "RESPA Roundup" Newsletter Highlights
According to HUD, the guidance contained in its official FAQs (latest revision April 2010) anticipates various compensation scenarios, including where compensation is based on factors other than the loan's interest rate - such as a flat rate or a fixed percentage of the loan amount.
Therefore, for mortgage brokers, GFE Block 1 will continue to include the fixed amount of Broker compensation even where the Broker's compensation is lender-paid. GFE Block 2 will continue to include the net payment from lender to mortgage broker, represented as a credit to the Borrower, even though this amount is no longer determined by the interest rate.
Additionally, HUD made the following comment related to volume-based compensation: "If a lender is basing its compensation to mortgage brokers on loan volume as described in the new FRB rule, please note that RESPA Section 8 prohibits the payment of things of value or kickbacks in exchange for the referral of business to settlement service providers, including creditors."
Federal Reserve Board Webinar Highlights:
- The loan originator compensation rules will be enforced by whichever authority examines an institution. For any entities that are not examined by an agency currently, the new Consumer Financial Protection Bureau will have extensive examining authority, including the authority to examine non-depository institutions.
- The Fed has not found any scenario where "point banks" are used to permit loan originators to offer pricing concessions to borrowers to be permissible under the new rules. According to the Fed, the point banks constitute originator compensation which may not be reduced based on terms or conditions of a loan. Pricing concessions must be made by the Creditor.
- GFE tolerance violations for a particular loan are not a permissible factor to consider when determining loan originator compensation. If closing costs must be reduced to satisfy RESPA tolerance requirements the creditor, not the loan originator, must bear this cost.
- There is no Safe-Harbor "disclosure requirement." Although the most logical method of documenting the provision of loan options required to qualify for the protection of the Safe-Harbor will involve some type of written document, the rule does not contain a "disclosure requirement." The rule prohibits steering and one method available to originators seeking to demonstrate compliance with the anti-steering rule is to qualify for the Safe-Harbor protection by satisfying the requirements set forth in that provision of the rule.
- Factors related to a loan's "profitability" are problematic if used as a basis for setting originator compensation. According to the Fed, only a very unusual definition of "profitability" would not turn upon a term or condition of the loan.
- One remaining unanswered question set forth by the Fed involves a loan for which the yield disclosed as a credit in GFE Block 2 is larger than the Borrower's closing costs. This could result in a scenario whereby the consumer pays the broker but the lender pays the consumer, which is problematic. To date, HUD has not commented on this issue.
HUD "RESPA Roundup" Newsletter Highlights
According to HUD, the guidance contained in its official FAQs (latest revision April 2010) anticipates various compensation scenarios, including where compensation is based on factors other than the loan's interest rate - such as a flat rate or a fixed percentage of the loan amount.
Therefore, for mortgage brokers, GFE Block 1 will continue to include the fixed amount of Broker compensation even where the Broker's compensation is lender-paid. GFE Block 2 will continue to include the net payment from lender to mortgage broker, represented as a credit to the Borrower, even though this amount is no longer determined by the interest rate.
Additionally, HUD made the following comment related to volume-based compensation: "If a lender is basing its compensation to mortgage brokers on loan volume as described in the new FRB rule, please note that RESPA Section 8 prohibits the payment of things of value or kickbacks in exchange for the referral of business to settlement service providers, including creditors."