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CFPB seeks feedback on LO comp
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The Bureau states that a significant focus of the RFC is to assist in determining whether the Rule should be amended or rescinded to minimize the Rule’s economic impact upon small entities.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.
California Dept. of Real Estate reminds licensees of fiduciary duty requirements
The California Department of Real Estate (DRE) recently reminded real estate licensees with a mortgage loan origination (MLO) endorsement of their fiduciary duty to borrowers. DRE licensees (including brokers, salespersons, and broker-associates supervised by a broker) who provide mortgage brokerage services to a borrower act as a fiduciary of that borrower, the DRE said, explaining that this “includes placing the economic interest of the borrower ahead of their own.” The Bulletin noted that California courts have held that the fiduciary relationship not only requires the broker to act in the highest good faith toward their client but also prohibits the broker from obtaining any advantage over the client by virtue of the fiduciary relationship. Licensees who violate their fiduciary duties may face DRE-disciplinary action against their real estate license and/or MLO endorsement and may also expose themselves to civil liability.
Licensees are reminded that they are required to be aware of all laws, regulations, and rules governing their activities, including the federal Loan Originator Compensation (LO Comp) Rule, which “prohibits loan originators, including brokers, from receiving compensation based on the terms of consumer mortgage transactions.” Prior to the LO Comp Rule, mortgage brokers often received commissions that varied based on the terms of the mortgage loans they obtained for their clients, and in many cases received larger commissions on loans carrying less advantageous terms (e.g., loans with a higher interest rate would result in a larger commission than the same loan with a lower interest rate). The LO Comp Rule now prohibits this practice.
The Bulletin also reminded licensees that receiving greater compensation for acting against the economic interests of a consumer would also violate a broker’s fiduciary responsibility to place the economic interest of their client ahead of their own, should the decision be motivated by a financial desire to increase compensation. Further, licensees may not steer or direct a borrower to close a loan with a particular lender in exchange for receiving a higher commission unless the transaction is the best loan for the borrower. Licensees must also disclose to a borrower the costs and expenses associated with the loan, and disclose all compensation received in the transaction. Taking any secret or undisclosed compensation, commission, or profit is also prohibited, the Bulletin said.
Agencies remind banks of HMDA reporting changes on closed-end mortgages
On February 1, the OCC reminded banks and OCC examiners that the loan origination threshold for reporting HMDA data on closed-end mortgages has changed due to a court decision issued last year, which addressed challenges made by a group of consumer fair housing associations to changes made in 2020 by the CFPB that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA (covered by InfoBytes here.) Due to a court order vacating the 2020 HMDA Final Rule as to the loan volume reporting threshold for closed-end mortgage loans, the OCC explained that the loan origination threshold for reporting HMDA data on closed-end mortgage loans reverted to the threshold established by the 2015 HMDA Final Rule.
According to Bulletin 2023-5, the threshold for reporting HMDA data is now 25 closed-end mortgage loans originated in each of the two preceding calendar years rather than the 100-loan threshold set by the 2020 HMDA Final Rule. “Banks that originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years (referred to collectively as affected banks) may need to make adjustments to policies and procedures to comply with reporting obligations,” the OCC said. The agency added that it does not plan to assess penalties for failures to report closed-end mortgage loan data on reportable transactions conducted in 2022, 2021 or 2020 for affected banks that meet other coverage requirements under Regulation C.
The FDIC and Federal Reserve Board also issued similar guidance (see FIL-06-2023 and CA 23-1).
Texas adopts numerous mortgage-related provisions
Recently, the Texas Finance Commission promulgated amendments to regulations governing residential mortgage licensees. Specifically, rules applicable to (i) licensed Mortgage Loan Companies under the Residential Mortgage Loan Company Licensing and Registration Act, Tex. Fin. Code Ann. § 156.001 et seq., and (ii) licensed Mortgage Bankers and Mortgage Loan Originators (MLOs) under the Mortgage Banker Registration and Residential Mortgage Loan Originator Act and the Texas Fair Enforcement for Mortgage License Act, Tex. Fin. Code Ann. § 157.001 et seq., included several substantive updates.
The amendments to rules governing Mortgage Loan Company licensees include:
- 7 TAC 80.300, which provides in part that a “primary contact person” instead of the qualifying individual will receive any notice of examination.
- 7 TAC 80.101, .102, .105-.107, which sets forth new sponsorship requirements for MLOs, clarifies renewal procedures, and implements a 10-day notice requirement for any material changes made to a licensee’s Form MU1.
- 7 TAC 80.203, .204, .206, which sets forth new requirements for advertising, records storage, office locations, branch offices, and administrative offices, including requirements for licensees engaging in remote work.
- 7 TAC 80.2, which updates references to definitions.
The amendments to rules governing Mortgage Banker and Mortgage Loan Originator licensees include:
- 7 TAC 81.300, which provides in part that a “primary contact person” instead of the qualifying individual will receive any notice of examination.
- 7 TAC 81.101-.111, which sets forth new sponsorship requirements for MLOs, clarifies renewal procedures, implements a 10-day notice requirement for any material changes made to a licensee’s Form MU4, details new background check procedures for MLOs, and provides new criteria for reviewing an MLO applicant’s criminal history.
- 7 TAC 81.203, .204, .206, which sets forth new requirements for advertising, records storage, office locations, branch offices, and administrative offices, including requirements for licensees engaging in remote work.
- 7 TAC 81.2, which updates references to definitions.
These amendments are effective on November 4, 2021. It is recommended Mortgage Company, Mortgage Banker, and MLO licensees in Texas review the amendments to these new rules.
Washington passes law allowing mortgage employees to work from home
On March 24, the Washington legislature passed SB 5077, allowing licensed mortgage loan originator activity to be conducted from the mortgage loan originator’s residence if, among other things, certain state and information security requirements are satisfied.
Washington Department of Financial Institutions once again extends “work from home” guidance
On January 29, the Washington Department of Financial Institutions issued interim regulatory guidance to licensed mortgage loan originators and companies that sponsor them relating to temporary remote work. The guidance extends earlier interim guidance (previously covered here, here, here, and here) permitting mortgage loan originators to work from home, provided certain data security obligations are met. The guidance extends through December 31, 2021.
Washington Department of Financial Institutions extends “work from home” guidance
On October 26, the Washington Department of Financial Institutions issued interim regulatory guidance to licensed mortgage loan originators and companies that sponsor them relating to temporary remote work. The guidance extends earlier interim guidance (previously covered here, here, and here) permitting mortgage loan originators to work from home, provided certain data security obligations are met. The guidance extends through March 31, 2021.
Hawaii regulator extends authorization for reduced office hours, temporary closures
On October 2, the Hawaii Division of Financial Institutions extended interim guidance allowing Hawaii-located financial institutions to reduce hours or close offices during Hawaii’s Covid-19 state of emergency (see here and here for previous coverage). Similar to previously issued guidance, financial institutions and escrow depositories are required to provide notice of closures or reductions in hours. While mortgage loan originators, mortgage servicers and money transmitters are not required to provide notice, the regulator requests a courtesy notification of any closure or reduction in hours. The guidance is extended “in accordance with the county emergency orders found on each county website.”
South Dakota extends work from home guidance
On September 1, South Dakota’s Division of Banking updated Memorandum 11-003 (previously covered here and here) to extend the time period in which licensed mortgage loan originators can work from home until December 31, 2021, so long as certain conditions relating to data and records security are met.
Kansas extends remote work guidance for certain licensees
On August 27, the Kansas Office of the State Bank Commissioner extended its remote work guidance, previously covered here and here, for mortgage companies, mortgage loan originators, supervised loan licensees, credit services organizations, money transmitters, and credit notification registrants. Licensed or registered individuals and entities are permitted to work from their residences or a company designated location, provided certain requirements are met, through December 31, 2020.