Commentary: Jonathan Foxx *

 

Since April 6, 2011, the mortgage industry has been required to implement the new loan originator compensation rules (Rule). The Rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011. The Rule placed restrictions on residential mortgage loan transactions in order to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person, and prohibits “steering” consumers to loans to receive greater compensation.

 

I have extensively explored the features of this Rule, unraveling its complexity in articles, newsletters, presentations, and panels. Indeed, I have even published a compendium of analysis, called the FAQs Outline – Loan Originator Compensation, which, as of this writing, consists of over 400 FAQs and reaches to over 130 pages. These are deep and narrow waters, and considerable caution is needed in order to navigate their many demanding twists and turns.

 

The development of these rules, from a regulatory perspective, stretches back to August 26, 2009, when the Federal Reserve Board (FRB) published a Proposed Rule in the Federal Register pertaining to closed-end credit; to July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) enacted Title XIV into law, which amended the Truth in Lending Act (TILA) to establish certain mortgage loan origination standards; then to August 16, 2010, when the FRB published its Final Rules amending Regulation Z (TILA’s implementing regulation); on through September 24, 2010, as the FRB issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions (Rule); and finally coming to a virtual full stop on January 26, 2011, when the FRB issued its “Compliance Guide for Small Entities on Loan Originator Compensation and Steering.” After that, the FRB offered some conference calls, a webinar – which cleared up some confusion, while causing still other confusion – and occasional updates of the oral, rather than the written, official variety.

 

When April 6, 2011 arrived, the mortgage industry was still scrambling to understand the Rule, how to implement it across various origination channels, and, most importantly, how to integrate it into operational, logistical, and financial components. Vendors provided considerable updates and integration features. Nevertheless, for months afterward the Rule continued to perplex and frustrate, particularly with respect to properly implementing disclosures and compensation plans. It still causes considerable consternation.

 

As we all know, generally there is no regulation issued – whether the statutes are at the federal or state level – that does not have a corresponding regulatory examination to assure enforcement. And so it goes: on October 6, 2011 - exactly six months to the day when the Rule became effective - the first examination guidelines for loan originator compensation were promulgated.

 

 

* Jonathan Foxx is the President and Managing Director of Lenders Compliance Group

 

LENDERS COMPLIANCE GROUP is the first and only full service, mortgage risk management firm in the country that specializes exclusively in residential mortgage compliance. The firm provides risk management outsourcing to the mortgage industry, offering a full suite of hands-on and automated services in residential mortgage banking.