CFPB Issues Final Rules Governing MLO Compensation Restrictions and Other Requirements under Regulation Z

The Consumer Financial Protection Bureau (“CFPB”) recently issued a final rule (the “Final Rule”) implementing restrictions on mortgage loan originator (“MLO”) compensation under Regulation Z (Truth in Lending), along with additional interpretive guidance.  These restrictions, which prohibit MLO compensation based on mortgage loan terms, or “proxies” for such terms, were mandated under the Dodd-Frank Act.  In a number of prior blogs, we discussed the CFPB’s evolving guidance on these restrictions.  One issue of particular interest was whether profit-based retirement and bonus plans would be prohibited under the rationale that profit serves as a “proxy” for certain loan terms such as interest rate (a view taken by Federal Reserve staff members when the rule was first introduced).

The Final Rule and interpretative guidance address this question and others, and should be reviewed.  Generally speaking, contributions from mortgage business-related profits to certain tax-advantaged retirement plans, such as 401(k)s, will be permitted. Contributions to non-deferred profit-based compensation plans will be subject to a limit of 10% of an MLO’s total compensation.  Included in the Final Rule is additional guidance and a series of exemptions regarding whether certain persons, including mortgage loan business employees and referral sources, are subject to the rule.  The Final Rule also clarifies the test for determining whether a factor in a loan transaction serves as a “proxy” for a loan term.

The Final Rule implements additional requirements under Dodd-Frank other than restrictions on MLO compensation, including obligations with respect to MLO registration, identification, and qualification.  Most provisions of the Final Rule become effective January 10, 2014.  A ban on certain mortgage loan terms, including mandatory arbitration, waivers of consumer rights, and one-time financing of credit insurance, becomes effective June 1, 2013.  Publication of the Final Rule in the Federal Register is available here.