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Financial Services Law Insights and Observations


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  • CFPB seeks feedback on LO comp

    Agency Rule-Making & Guidance

    On March 10, the CFPB issued a Request for Comment (RFC) seeking feedback on the Regulation Z Mortgage Loan Originator Rules, including the provisions often referred to as the Loan Originator Compensation or “LO Comp” Rule. (See also blog post here.) The Bureau states that a significant focus of the RFC is to assist in determining whether the Rule should be amended or rescinded to minimize the Rule’s economic impact upon small entities. 

    The Mortgage Loan Originator Rules, among other things, prohibit compensation to loan originators that is based on the terms of a mortgage transaction (or proxies for terms), prohibit a loan originator from receiving compensation from both the creditor and consumer on the same transaction, prohibit steering a consumer to a particular loan because it will result in more compensation for the loan originator unless the loan is in the consumer’s interest, require certain records related to compensation be kept, and implement licensing and qualification requirements for loan originators.

    The RFC is open-ended insofar as it requests public comment on any topic related to the impact of the Mortgage Loan Originator Rules pursuant to section 610 of the Regulatory Flexibility Act (Section 610). Section 610 mandates a review of all agency rules which have a significant economic impact upon a substantial number of small entities within ten years of its effective date. In conducting a Section 610 review, the agency must consider (i) the continued need for the rule; (ii) the nature of complaints or comments received concerning the rule from the public; (iii) the complexity of the rule; (iv) the extent to which the rule overlaps, duplicates, or conflicts with other Federal rules, and, to the extent feasible, with State and local governmental rules; and (v) the length of time since the rule has been evaluated or the degree to which technology, economic conditions, or other factors have changed in the area affected by the rule.

    Notably, the RFC references feedback it has previously received from stakeholders related to the Mortgage Loan Originator Rules, specifically referring to recommendations it has received related to (i) whether to permit different loan originator compensation for originating State housing finance authority loans as compared to other loans (i.e., on bond loans); (ii) whether to permit creditors to decrease a loan originator’s compensation due to the loan originator’s error or to match competition; and (iii) how the Rule provisions apply to loans originated by mortgage brokers and retail loan originators differently. Each of these topics has been a source of significant industry input, including in response to the CFPB’s 2018 Request for Information Regarding the Bureau's Adopted Regulations.

    The Bureau is most likely simply following standard procedure to comply with Section 610, which mandates the CFPB conduct a review within ten years for all rules that significantly impact small entities. But it is possible that the Bureau may be open to making certain adjustments to the Rule that industry has been clamoring for since the Rule was implemented, particularly as the Bureau chose to specifically reference three such recommendations. 

    Agency Rule-Making & Guidance Federal Issues CFPB Regulation Z Loan Origination Mortgages LO Comp Rule Compensation

  • SEC reopens comments on “pay versus performance” proposal

    Agency Rule-Making & Guidance

    On January 27, the SEC reopened the comment period on a proposed rule to amend the current executive compensation disclosure rule and implement Dodd-Frank’s “pay versus performance” requirement. Item 402 of Regulation S-K requires companies to disclose the relationship between their financial performance and executive compensation. The proposal (originally published in 2015, and covered by InfoBytes here), was intended to give shareholders new metrics by requiring registrants to clearly disclose “the relationship between executive compensation actually paid and the financial performance of the registrant.” All reporting companies, except smaller companies, would be required to disclose the relevant compensation information for the last five fiscal years. Smaller reporting companies would only be required to disclose the information for the past three fiscal years, and foreign private issuers, registered investment companies, and emerging growth companies would be exempt from the relevant Dodd-Frank statutory requirement.

    According to the SEC, the reopening of the comment period will allow interested persons to comment on the proposed rules in light of developments since the 2015 proposal was released. The SEC noted in its press release that, in reopening the comment period, the Commission is “considering whether additional performance metrics would better reflect Congress’s intention in the Dodd-Frank Act and would provide shareholders with information they need to evaluate a company’s executive compensation policies.” SEC Chair Gary Gensler signaled support for the proposed rule, noting that it would “strengthen the transparency and quality of executive compensation disclosure,” and would fulfill a Congressional mandate under Dodd-Frank. However, Commission Hester M. Peirce dissented, stating that while she agreed it is time to move forward on the “nearly twelve-year-old Dodd-Frank rulemaking mandate,” she disagreed with the approach and would have favored a re-opening release that asked the public “whether [the SEC] should permit companies greater flexibility to determine which financial performance measure is appropriate in this context and to determine how to calculate executive compensation actually paid.”

    Agency Rule-Making & Guidance SEC Compensation Dodd-Frank

  • Financial Stability Board releases supplementary guidance on sound compensation practices

    Federal Issues

    On March 9, the Financial Stability Board (FSB) announced the release of its Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices (Supplementary Guidance) relating to FSB’s Principles and Standards published in 2009. The Supplementary Guidance arises out of a 2015 workplan implemented to address concerns about compensation practices that could create misaligned incentives within financial institutions. The Supplementary Guidance, which does not contain new or additional principles and standards, provides recommendations presented in three parts: (i) “governance of compensation and misconduct risk”; (ii) “effective alignment of compensation with misconduct risk”; and (iii) “supervision of compensation and misconduct risk.” The Supplementary Guidance notes that “inappropriately structured compensation arrangements can provide individuals with incentives to take imprudent risks,” which may lead to potential harm for financial institutions and their customers or stakeholders. The Supplementary Guidance suggests that financial institutions use compensation tools as part of an overall strategy to limit risks and address misconduct, and cautions that “compensation should be adjusted for all types of risk.” 

    Federal Issues Financial Stability Board Risk Management Compensation

  • CFPB and New York Attorney General File Lawsuit Against Company that Lured 9/11 Heroes Out of Millions of Dollars


    On February 7, the CFPB announced that it has—in partnership with the New York Attorney General (NYAG)—filed a complaint in federal district court against a finance company and two affiliates that offer lump-sum advances to consumers entitled to periodic payouts from victim compensation funds or lawsuit settlements. A press release from the NYAG’s Office can be accessed here.

    The Bureau and the NYAG claim, among other things, that the defendants misled World Trade Center attack first responders and professional football players in selling expensive advances on benefits to which they were entitled and mischaracterized extensions of credit as assignments of future payment rights, thereby misleading their victims into repaying far more than they received. Specifically, according to the allegations in the complaint, the New Jersey-based companies:  (i) used “confusing contracts” to prevent the individuals from understanding the terms and costs of the transactions; (ii) lied to the individuals by telling them the companies could secure their payouts more quickly; (iii) misrepresented how quickly they would receive payments from the companies, and (iv) collected interest at an illegal rate.

    These actions, the two regulators argue, constitute violations of the Consumer Financial Protection Act ban on unfair, deceptive, or abusive practices, New York usury laws, and other state consumer financial protection laws. The lawsuit seeks to end the company’s illegal practices, obtain relief for the victims, and impose penalties.

    Courts Consumer Finance CFPB Compensation CFPA State Attorney General

  • SEC Adopts Final CEO Pay Disclosure Rule


    On August 5, the SEC adopted a rule requiring public companies to disclose the pay ratio of their CEO to the median compensation of their employees. The rule gives companies some flexibility in the method of determining the pay ratio while providing investors with information to assess the compensation of CEOs. Methods companies may employ to identify the median employee include using (i) a statistical sample of the total employee population; (ii) payroll or tax records that contain a consistently applied compensation measure; or (iii) yearly total compensation as calculated under the existing executive compensation rules. The total compensation for CEOs and total compensation for average employees must be calculated in the same manner. Under the new rule, companies must also disclose the methodology used for identifying the median employee’s annual compensation. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017. Smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers, and registered investment companies are exempt from the pay ratio rule, which will be effective 60 days after publication in the Federal Register.

    Dodd-Frank SEC Compensation

  • SEC Votes to Propose Executive Compensation Rules


    On April 29, the SEC voted 3-2 to propose rules that would implement Dodd Frank’s pay-versus-performance provision by requiring companies to disclose the relationship between their financial performance and executive compensation. According to SEC Chair Mary Jo White, the proposed rules “would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance.” All executive officers currently submitting their financials in the summary compensation table must abide by the proposed rules’ disclosure requirements. The rules would require that all reporting companies, except smaller companies, disclose the relevant compensation information for the last five fiscal years; smaller reporting companies will only be required to disclose the information for the past three fiscal years. Foreign private issuers, registered investment companies, and emerging growth companies will be exempt from the relevant Dodd-Frank statutory requirement. The comment period for the proposed rules will be open for 60 days after publication in the Federal Register.

    Dodd-Frank SEC Compensation

  • SEC Proposes Hedging Disclosure Rule


    On February 9, the SEC issued a proposed rule implementing Section 955 of the Dodd-Frank Act. The rule would require directors, officers, and other employees of public companies to disclose in proxy and information statements whether they use derivatives and other financial instruments to offset or “hedge” against the decline in equity securities granted by the company as compensation, or held, directly or indirectly, by employees or directors. The proposed rule would apply to equity securities of a public company, its parent, subsidiary, or any subsidiary of any parent of the company that is registered with the SEC under Section 12 of the Exchange Act.  Public comments will be accepted for 60 days following publication in the Federal Register.

    Dodd-Frank SEC Compensation Agency Rule-Making & Guidance

  • UK FCA Identifies Additional Improvements For Retail Banks' Sales Incentive Schemes

    Federal Issues

    On March 4, the UK FCA released the results of its most recent review of sales incentives at retail financial firms. The FCA’s review revealed that retail banks have made progress in changing their financial incentive structures in response to the FCA’s supervisory focus on the issue starting in September 2012, which led to new guidance issued in January 2013. The FCA’s initial focus on the issue derived from its concerns about incentive structures that, among other things, allegedly fueled the sale of payment protection plans and other add-on products. Despite the broad progress, the FCA reports that roughly one in 10 firms with sales teams had higher-risk incentive scheme features where it appeared they were not managing the risk properly at the time of the FCA’s assessment. It believes firms should concentrate on, among other things (i) checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk; (ii) better monitoring behavior in face-to-face sales conversations; and (iii) managing risks in discretionary incentive schemes and balanced scorecards, including the risk that discretion could be misused. The FCA states that given the progress made, it is not proposing any rule changes at this time, but it intends to keep financial incentives on its agenda for 2014.

    Compensation Bank Supervision UK FCA

  • CFPB Settles With Mortgage Company, Senior Executives Over Alleged Loan Officer Compensation Practices


    On November 7, the CFPB announced it reached a settlement with a mortgage company and two of its executives accused of using compensation to incentivize loan officers to steer consumers into costlier mortgages. The proposed consent order, entered jointly and severally against the company and the individual executives, requires the defendants to pay more than $9 million in restitution to over 9,400 consumers and a $4 million civil money penalty. In addition, all defendants are subject to regular and mandatory compliance reporting and monitoring for a period of three years and are permanently enjoined from paying compensation to loan officers in a manner that violates the Loan Originator Compensation Rule. The order also mandates that the company maintain compensation records in compliance with federal law going forward. The defendants do not admit the CFPB’s allegations.

    The settlement resolves an action commenced by the CFPB in July 2013 in which the CFPB employed its civil litigating authority to charge that the company’s quarterly bonus program violated the Federal Reserve Board’s Loan Originator Compensation Rule and other consumer financial protection laws by, among other things, incentivizing loan officers to steer consumers into loans with higher interest rates. According to the complaint, after the rule took effect in 2011, the defendants eliminated from their compensation program any written reference to compensation based upon loan terms or conditions, but in practice continued to adjust loan officers’ quarterly bonuses based on the interest rates of loans closed during the quarter. The case was referred to the Bureau by the Utah Department of Commerce, Division of Real Estate.

    BuckleySandler recently hosted a webinar about this CFPB action and impending changes to mortgage loan originator compensation rules. Please contact any of the attorneys below for materials from the webinar or with any questions about this action or the new mortgage loan originator regulations.


    CFPB Mortgage Origination Compensation Enforcement

  • CFPB Sues Mortgage Company Over Alleged Loan Officer Compensation Practices


    This afternoon, the CFPB released a complaint it filed today against a Utah-based mortgage company and two of its officers for giving bonuses to loan officers who allegedly steered consumers into mortgages with higher interest rates. The complaint alleges that the company, and its president and senior vice-president of capital markets, violated the Federal Reserve Board’s Loan Originator Compensation Rule by instituting a quarterly bonus program that paid more than 150 loan officers greater bonus compensation based on the terms and conditions of the loans they closed.  The CFPB claims the program incentivized loan officers to steer consumers into loans with higher rates.

    According to the complaint, when the Loan Originator Compensation Rule took effect in April 2011, the company amended its program to eliminate any written reference to compensation based upon terms or conditions, making it appear on its face to be a compliant compensation program.  The CFPB alleges that although the company’s regular compensation was no longer tied to terms or conditions under the new program, the managers actually continued to adjust the quarterly bonuses based upon the terms and conditions established under the compensation program.

    The complaint further alleges violations of Regulation Z’s requirement that a creditor retain records of compensation paid to loan originators for two years.  According to the complaint, the company violated this requirement by failing to record what portion of quarterly bonuses paid to loan originators were attributable to a given loan and by failing to maintain accurate and complete compensation agreements.

    The case highlights a number of points:

    • The CFPB will look beyond a company’s written compensation and compliance plans to include analysis of a company’s actual compensation payments to its loan originators;

    • The CFPB is pursuing individuals in senior management;

    • $1 billion companies are within range for CFPB actions;

    • The CFPB is seeking an injunction, restitution, civil money penalties for each bonus paid, and costs; and

    • The case was referred to the CFPB by the Utah Department of Commerce.

    CFPB Mortgage Origination Compensation Regulation Z


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