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CFPB Clarifies Regulation Z Compensation Rules for Mortgage Loan Originators

The CFPB has issued a bulletin on the applicability of certain restrictions under Regulation Z with regard to Mortgage Loan Originator (“MLO”) compensation.  Specifically, the CFPB has clarified its position that MLOs may participate in an employer’s qualified profit sharing, 401(k), and employee stock ownership plans (“Qualified Plans”) even if employer contributions to such plans are derived from profits generated from mortgage loan origination.

In 2010, the Federal Reserve Board (“FRB”) issued a new rule pursuant to Dodd-Frank prohibiting certain practices with respect to the compensation of MLOs for the origination of closed-end consumer loans secured by residential property (the “Rule”).  See 12 C.F.R. § 226.36.  Subject to certain exceptions, MLOs could not be compensated directly or indirectly based on any of the terms or conditions of a residential mortgage loan subject to the Rule.  Such terms and conditions would include interest rate, loan-to-value ratio, and prepayment penalties.  FRB staff in 2011, in a series of presentations regarding the Rule, took the strict view that the Rule prohibits MLOs from participating in Qualified Plans to the extent employer contributions to such plans are based on company profitability.  Their rationale was that, because profitability would serve as a “proxy” for mortgage loan interest rates (a loan term), contributions to an MLO’s Qualified Plan based on profitability would be prohibited. 

Jurisdiction over Regulation Z has since transferred from the FRB to the CFPB.  The CFPB’s bulletin clarifies the CFPB’s stance that the Rule does not specifically prohibit contributions to Qualified Plans for MLOs, and that such contributions are permissible notwithstanding that they are derived from a profit pool derived from loan originations.  The bulletin does not provide guidance on profit-sharing arrangements not in the nature of Qualified Plans.  Final loan originator compensation rules are expected from the CFPB in January of 2013.

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