Dodd-Frank Bill: Payments to Mortgage Originators And Steering
July 19, 2010
This CBA Regulatory Compliance Bulletin is the first in an occasional series that will summarize and analyze various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Reform Bill”).
In keeping with the regulatory focus of the Bulletin, we begin with Title XIV of the Reform Bill, titled the “Mortgage Reform and Anti-Predatory Lending Act” (“Mortgage Reform Act”). This title includes a number of amendments to the Truth in Lending Act and other laws intended to enhance consumer protections and help ensure safe and sound residential mortgage lending.
Generally, the regulations required by Title XIV are to be in final form no later than 18 months after the “transfer date” and will take effect no later than 12 months thereafter. The transfer date refers to the provisions of the Reform Bill that create the Consumer Financial Protection Bureau (CFPB”), pursuant to which partial responsibility to enforce certain enumerated consumer protection statutes, including TILA, is transferred to the new agency. A provision of Title XIV itself is effective when the corresponding regulation that implements the provision is effective. Where no regulation has been issued, then the provision is effective 18 months after the designated transfer date.
The key definitions used in the Mortgage Act are “mortgage originator” and “residential mortgage loan” (these are added to the 15 U.S.C. Section 1602, which is the definitions section of TILA). A mortgage originator is a person who, for compensation or gain does any of the following: (i) takes a residential mortgage loan application; (ii) assists a consumer in obtaining or applying for such a loan (inclusive of advising on loan terms, preparing loan packages, or collecting information); or (iii) offers or negotiates the terms of the loan. The definition also encompasses any person who represents to the public that he or she provides such services.
This broad definition immediately raises the need for close industry engagement in the rule-making process with respect to the Reform Bill, which requires or authorizes the issuance of scores of new agency regulations. In light of banks’ struggles with a parallel definition of mortgage originator in the Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”), how the Board refines this definition will be crucial. At the very least, the Federal Reserve Board’s (“Board”) regulation should clarify that the “compensation or gain” language implies that a person is a mortgage originator if he or she is compensated primarily to perform the three enumerated duties. Otherwise, almost any bank employee who interacts with customers potentially could “take” an application within the meaning of the statute and thus be covered as a mortgage originator.
A mortgage originator does not include a person who performs only administrative or clerical tasks for someone who performs the duties described above. Others excluded from the definition are licensed real estate brokers, unless they are compensated by a lender, mortgage broker, or other mortgage originator or their agents. Servicers are excluded, including servicers engaged in renegotiating and modifying existing mortgages with borrowers in default or likely to be in default. Creditors are also not mortgage originators for purposes of the bar on steering, discussed below.
A “residential mortgage loan” is a consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (or on residential real property that includes a dwelling). This broad definition is not limited to loans obtained for a consumer purpose, and thus would not exclude refinances, second lien loans, second home financings, or even business purpose loans secured by a residence. Extensions of credit related to interests in time shares are not included in the definition for certain purposes. There is also a limited exemption for certain forms of seller financing.
The provisions of the Mortgage Reform Act are designated as enumerated consumer laws, which are the statutes that will come under the purview of the new CFPB and which currently are primarily enforced by the federal banking agencies. However, most of the regulations that are to be issued under Title XIV will be written by the Board.
As a general matter, a mortgage originator must be “qualified” and, when required, registered and licensed as a mortgage originator in accordance with applicable laws, including the SAFE Act. Again, given the breadth of the definition of a mortgage originator, the requirement for “qualification” could prove problematic. In addition, originators face a new requirement to include on all “loan documents” their unique identifier provided by the Nationwide Mortgage Licensing System and Registry. The Board is required to write regulations to require banks and their subsidiaries to adopt procedures to comply with the requirements of this provision and the registration procedures of the SAFE Act.
YSPs And Other Broker Compensation
New subsection 129B©  prohibits yield spread premiums (“YSPs”) from being paid to or received by mortgage originators. Compensation paid to a mortgage originator in the form of YSPs or “other similar compensation” may not result in a mortgage originator’s total compensation to vary based on the terms of the loan, other than the amount of the principal. Incentive payments based on the number of loans originated within a specified period of time are not considered YSPs. This new provision also bars attempts to structure the payment of compensation to mortgage originators in another form that could have the same effect as YSPs, which is to steer consumers to higher priced loans.
A mortgage originator may not receive any origination fee, whether or not a YSP, except from the consumer, and any person who knows that a consumer is directly compensating a mortgage originator may not pay an origination fee. (Bona fide third party charges that are not retained by the creditor, mortgage originator, or an affiliate of the creditor or mortgage originator are not considered origination fees). If the originator receives no “compensation” directly from the consumer, and the consumer pays no upfront discount points or origination points (however designated), then the originator may receive, and any person may pay, an origination fee.
Presumably, these restrictions are based on the assumption that, ultimately, the origination fee comes out of the consumer’s pocket, and these payments would tend to steer a consumer to higher priced loans or otherwise increase the cost of the loan. But as the mortgage originator is entitled to compensation, this provision assures that the originator is allowed to be compensated, only once. Section 129B also provides that the Board may, by rule, waive or create exceptions to this provision.
Section 129B further directs the Board to write regulations to prohibit:
- mortgage originators from steering a consumer to obtain a loan that the consumer lacks a reasonable ability to repay;
- mortgage originators from steering a consumer to obtain a loan that has predatory characteristics (such as equity stripping, excessive fees, or abusive terms);
- mortgage originators from steering a consumer from a “qualified mortgage” loan (see below) for which the consumer is qualified to a loan that is not a qualified mortgage;
- abusive or unfair lending practices that promote “disparities” among equally creditworthy consumers based on race, ethnicity, gender, or age;
- mortgage originators from mischaracterizing a consumer’s credit history or the available loans or mischaracterizing or suborning the mischaracterizing of the appraised value of the property securing the loan; and
- if a mortgage originator is unable to suggest, offer, or recommend a loan that is not more expensive than the loan for which a consumer qualifies, discouraging a consumer from seeking a loan from another mortgage originator.
CBA will cover some of these provisions in depth in subsequent Bulletins. Obviously, many of the terms of this provision need to be interpreted by regulation. A great deal hangs upon how a mortgage originator is to determine what is “abusive,” whether “disparities” include disparate treatment or disparate impact or both, and so on. Violations of these provisions by a mortgage originator (other than a creditor) are subject to private rights of action in the same way that creditors are liable under Section 1640 of TILA. Mortgage originators in violation are liable for the greater of a consumer’s actual damages or three times the amount of compensation gained from the subject transaction, plus the consumer’s costs to bring an action, including attorneys’ fees.
The Act includes new subsection 1640(k) to TILA entitled “Defense to Foreclosure.” A violation of the ban on steering may be raised as a defense by recoupment or set-off of any action to collect a debt on a residential mortgage loan. These defenses may be asserted without regard to any otherwise applicable state statute of limitation (as provided in Section 1640(e) of TILA). The amount of recoupment or set-off is governed by the current limits under TILA Section 1640(a), plus the consumer’s enforcement costs, including attorneys’ fees. If a judgment is rendered after the time limit to bring a private action has run under Section 1640(e), the amount of damages in the form of paid finance charges and fees will be calculated up to the day before the expiration of the time limit.
A link to the text of the legislation is not being provided because, as of the time of this writing, the bill has not been signed yet by President Obama and the links to the bill are in flux. In a few days, it will not be difficult to obtain a copy. The next CBA Bulletin will cover new section 129C of TILA addressing a consumer’s ability to repay.
- The Mortgage Reform Act re-designates 15 U.S.C. 1639a of TILA as section 129A and adds new section 129B.
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.