By: Kris D. Kully
The Consumer Financial Protection Bureau (CFPB) is considering putting strict limits on a creditor’s ability to price its mortgage loans, and on a consumer’s ability to choose among pricing options.
By way of implementing the far-reaching provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is proposing to require that when a creditor pays a mortgage loan originator’s compensation (which includes most mortgage loan transactions), any up-front amounts the consumer pays for the loan must be in the form of bona fide discount points that reduce the interest rate or a flat origination fee that does not vary with the loan amount.
You Call This an Exemption?
This proposal, which the CFPB announced last week in presenting a cost-benefit analysis for regulating small entities, is actually an attempt to pull back on the Dodd-Frank Act’s absolute ban on any “up-front payment of discount points, origination points, or fees, however denominated (other than bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate of the creditor or originator).” The Dodd-Frank Act would apply that ban on consumer-paid up-front costs any time a mortgage loan originator receives any compensation from a person other than the consumer – so, any time a creditor or mortgage brokerage pays transaction-specific compensation to their loan officers, or a creditor pays that compensation to a mortgage brokerage. As the CFPB notes, those “creditor-paid” transactions comprise nearly every mortgage loan origination.
The CFPB has rightly indicated, in its cost-benefit analysis, that the Dodd-Frank Act’s widespread ban on consumer-paid points or fees would “significantly change the financing” for most mortgage loan originations, could “negatively impact consumers’ access to credit,” and could lead to “significant unanticipated consequences.” However, as described below, the CFPB’s use of its exemption authority to rein in those consequences would likely create seismic shocks of its own.
Specifically, the CFPB would allow the consumer the choice of paying discount points in creditor-paid transactions, but only if: (1) the points actually result in a “minimum reduction” in the interest rate for each point paid; and (2) the creditor also offers the option of a no discount point loan. The CFPB does not provide any details for how that “minimum reduction” in the rate would be calibrated.
Similarly, the CFPB would allow a consumer to pay up-front origination fees in creditor-paid transactions only if it is a flat amount that does not vary with the size of the loan (and if it is not compensation to the individual loan originator).
The Dodd-Frank Act does allow consumers to pay bona fide third-party charges (even in a creditor-paid transaction). The CFPB would clarify that third-party carve-out, so that consumers could pay up-front fees to affiliates of the loan originator or of the creditor, provided that those fees are flat (although title insurance fees could still vary with the loan amount, even if paid to an affiliate).
While the CFPB appears willing to try to avoid a “significant restructuring” of mortgage loan pricing, its proposed restrictions on discount points and origination fees in creditor-paid transactions as described above are still severe, and would if adopted create their own uncertainties – including whether consumers can choose how to pay for their mortgage loan.
Commission Concessions for Unanticipated Costs
Mortgage loan originators are generally prohibited from offering concessions from their commissions to consumers. That prohibition, as it was interpreted by the Federal Reserve, prevents those originators from lowering their fees to, for example, avoid high-cost loan restrictions, cure a tolerance error in connection with the Good Faith Estimate (GFE) required under the Real Estate Settlement Procedures Act, or even to meet competition. The CFPB indicated, in its cost-benefit analysis, that it may allow the originators to help consumers cover costs, but only in connection with certain unanticipated increases in third-party settlement charges. It does not appear that the CFPB is willing to do anything more to lift the current prohibition and allow mortgage loan originator concessions that help lower consumers’ costs.
Mortgage Loan Originator Qualifications
The CFPB also is proposing to address mortgage loan originator qualifications. The Dodd-Frank Act amended the Truth in Lending Act (TILA) to require that a mortgage loan originator must be “qualified.” In implementing that requirement, the CFPB may (among other proposals) require banks and other depository institutions to ensure that their originator employees meet character, fitness, criminal background, and continuing education requirements. Interestingly, the federal banking agencies had previously stated that since their regulated institutions are subject to extensive federal oversight, educational or testing requirements for mortgage loan originators in those institutions are unnecessary. Now, the CFPB may impose training and other qualification requirements on those employees as a matter of TILA compliance.
Next Step: Proposed Rule
The CFPB will solicit the public’s input by issuing a proposed rule on these and other mortgage loan originator topics. It plans to issue the proposed rule this summer.