CFPB Files Rulemaking Items With Office Of Management And Budget

The CFPB recently made filings with the Office of Management and Budget (OMB) regarding the following rules:

• Loan Originator Compensation Requirements Under the Truth in Lending Act (Regulation Z).
• Discretionary Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X).
• Discretionary Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z).
• Defining Larger Participants of the Consumer Debt Collection Market.
• Defining Larger Participants of the Consumer Reporting Market 2025.

The filings indicate that each item is in the pre-rule stage.

Of great significance, the filing with regard to the Regulation Z loan originator compensation rule includes in the heading “Rescission,” apparently indicating the intent of the CFPB to rescind the rule. While the mortgage industry has lobbied for various revisions to the rule, it would not favor a complete rescission of the rule, as that would eliminate beneficial provisions that are not included in the Truth in Lending Act (TILA) loan originator compensation provisions, and were not included in the original rule adopted by the Federal Reserve Board (Fed).

The main restrictions under the TILA loan originator compensation provisions are that (1) a loan originator may not receive compensation that is based on the terms or proxies for terms of one or more loan transactions, and (2) if any loan originator receives compensation directly from the consumer in a transaction, no loan originator (whether the same loan originator or another loan originator) may receive compensation, directly or indirectly, from any other party in connection with the transaction. The latter prohibition often is referred to as the “dual compensation prohibition.”

When Congress added loan originator compensation provisions to TILA in Dodd-Frank, it included a provision under which a loan originator may not receive compensation from anyone other than the consumer if the consumer pays any upfront discount points, origination points or fees. However, Congress expressly authorized the CFPB to waive or provide exemptions to this restriction, and the CFPB did so. Under the CFPB’s loan originator compensation rule, a loan originator may receive compensation from a party other than the consumer, such as the originator’s employer, regardless of whether the consumer makes any upfront payment of discount points, origination points, or fees, as long as the loan originator does not receive any compensation directly from the consumer.

The CFPB also created an exemption from the TILA dual compensation prohibition that permits a loan originator organization to compensate its employee loan originator in connection with a transaction even when the originator receives compensation directly from the consumer in connection with the transaction. Without this exemption, mortgage brokers could not compensate the loan originator that worked on a loan if the broker receives compensation directly from the consumer. Both of the exemptions are important for the mortgage industry.

The CFPB’s loan originator compensation also contains provisions not included in TILA or the prior Fed rule that expressly authorize:

• An employer to make a contribution to a 401k or other designated tax-advantaged plan of an individual loan originator.
• An individual loan originator to receive compensation based on the mortgage-related profits of the employer, subject to a cap of 10% of the employee’s total compensation for the applicable period.
• An individual loan originator to receive compensation based on the mortgage-related profits of the employer without any percentage limitation, as long as the individual loan originator was a loan originator for 10 or fewer covered transactions consummated during the 12-month period preceding the date of the compensation determination.

While the industry would favor the retention of the exemptions and authorizing provisions noted above, it would support various changes, including provisions that would provide exemptions to the rule’s general prohibition against varying a loan originator’s compensation based on loan terms or proxies for loans that would permit:

• Varying compensation for certain products, including:
  • Down payment assistance, housing finance authority and similar loans, which are beneficial to consumers and typically are subject to limits on interest rates and fees that make it challenging to originate the loans and pay standard loan originator compensation amounts.
  • Construction and reverse mortgage loans, which require particular expertise to originate and typically take longer to originate than standard mortgage loans.
• Reducing a loan originator’s compensation for errors made by the loan originator that cost money for the employer, such as when an originator forgets to disclose a cost, or discloses a cost lower than the actual, known cost, in the Loan Estimate.
• Reducing a loan originator’s compensation to help provide for a reduction in the cost of a loan to meet or beat the terms offered by a competing creditor.

The headings of the filings with regard to the four other rules do not include “Rescission,” apparently indicating the intent of the CFPB to revise and not rescind the rules.

Similar to the loan originator compensation rule, the servicing rules in Regulation X and Regulation Z implement various servicing provisions set forth in the Real Estate Settlement Procedures Act (RESPA) and TILA, respectively. As previously reported, last year the CFPB proposed revisions to the Regulation X mortgage servicing rules. While the mortgage industry favors revisions to the servicing rules, it does not favor the approach taken by the CFPB in the proposal. The industry seeks changes that will streamline the loss mitigation process, require consumers to engage with servicers to work to achieve sustainable loss mitigation results, and account for investor guidelines.

The Defining Larger Participants of the Consumer Debt Collection Market rule and Defining Larger Participants of the Consumer Reporting Market 2025 rule were adopted by the CFPB under its authority to establish supervisory authority for larger providers of consumer financial services or products that are not specifically identified in Dodd-Frank as being within the supervisory authority of the CFPB. Thus, unlike the loan originator compensation and servicing rules, these rules do not implement specific statutory requirements. While parties subject to these rules would likely favor their elimination, as noted above the headings for these items in the CFPB filings do not specifically indicate an intent to rescind the rules. Potentially the CFPB may revisit who is a larger participant for purposes of the rules, particularly the Consumer Reporting Market Rule, given the specific reference to 2025 in the caption.