The CFPB issued its first pronouncement—which it refers to as a Bulletin—regarding the Truth in Lending Act’s (“TILA”) loan originator compensation rule (the “LO Comp Rule”). The Bulletin is noteworthy for at least two reasons: the CFPB took a practical approach to resolve the issue, and the CFPB announced that it anticipates issuing a proposed rule for public comment in the near future on the loan origination provisions in the Dodd-Frank Act.
As most readers know, the Federal Reserve Board promulgated loan originator compensation rules under TILA and Regulation Z in September 2010, with an effective date of April 6, 2011. Pursuant to the Dodd-Frank Act, rulemaking authority under TILA transferred to the CFPB, which issued interim final rules recodifying the provisions of Regulation Z.
Subject to certain narrow exceptions, the LO Comp Rule provides that no loan originator may receive (and no person may pay to a loan originator), directly or indirectly, compensation that is based on any terms or conditions of a mortgage transaction.
The CFPB, in its Bulletin, noted that it had received several questions about whether and how the LO Comp Rule applies to qualified profit sharing, 401(k), and employee stock ownership plans (“Qualified Plans”). More specifically, industry members asked the CFPB “whether a financial institution can, consistent with the [LO Comp Rule], contribute to Qualified Plans for employees, including loan originators, if employer contributions to such plans are derived from profits generated by mortgage loan originations.”
In response, the CFPB articulated the position that employers are permitted to contribute to Qualified Plans out of a profit pool derived from loans originated by employees. The CFPB appears to have taken a reasoned approach on this issue. Qualified Plans are tax creatures subject to nondiscrimination rules issued by the IRS that prevent employer contributions from disproportionately favoring highly compensated employees. Employers almost universally satisfy this requirement using “safe harbor” allocation formulas that require uniform allocations to employees on the basis of their W-2 compensation—e.g. the employer makes a contribution to all employees equal to 4% of their W-2 compensation for the year. Thus, it is difficult to imagine an employer contributing to a Qualified Plan where the contributions would vary from one loan originator to another based on the profitability of each loan originator’s loans.
The CFPB also received questions about how the LO Comp Rules would apply to profit-sharing arrangements/plans that are not Qualified Plans. Because these questions about non-qualified plans were fact specific, the CFPB found it impractical to provide guidance in a Bulletin. However, the CFPB did say that it anticipates providing “greater clarity” on these types of arrangements when it publishes a proposed rule on the loan origination provisions in the Dodd-Frank Act, which the Bureau anticipates issuing for public comment “in the near future.”
While more Bulletins might be helpful, it appears unlikely the CFPB will issue additional Bulletins given its stated intent to issue implementing regulations shortly.