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CFPB Issues Guidance On Loan Originator Compensation
In response to questions it has received from loan originators and their firms seeking to comply with compensation rules issued under TILA Regulation Z, the CFPB today issued Bulletin 2012-02. The Bulletin states that employers of loan originators may make contributions to employees’ qualified profit sharing, 401(k), and stock ownership plans (qualified plans) out of a profit pool derived from loan originations. The Federal Reserve Board previously had indicated that any compensation—even contributions to a qualified retirement plan—to a loan originator that derived from the profits of mortgage loan originations was “problematic” and likely prohibited by Regulation Z.
While the Bulletin expands the ability of lenders to contribute to their employees’ qualified plans, the Bulletin does not provide guidance about other types of profit-sharing arrangements, noting that such issues are “fact-specific.” According to the Bulletin, the CFPB will address these and other loan originator compensation issues in more detail in a proposed rule, which it plans to release in the “near future.” Under the Dodd-Frank Act, the CFPB is required to finalize loan originator compensation rules by January 21, 2013, and these rules must take effect by January 21, 2014.
Pursuant to rules issued by the Federal Reserve Board in September 2010 that became effective April 6, 2011, loan originators may not receive, either directly or indirectly, compensation that is based on any terms or conditions of a mortgage transaction, subject to certain limited exceptions. Commentary issued as part of that rulemaking describes compensation to include salaries, commissions, and annual or periodic bonuses, while covered transaction terms and conditions include the interest rate, loan-to-value ratio, or prepayment penalty. Moreover, compensation may not be tied to proxies for such transaction terms, such as credit scores.
In July 2011, administration of TILA Regulation Z was transferred to the CFPB, and employers have since been expressing their concern to the CFPB and asking for clarification. This CFPB guidance, issued almost exactly one year after the loan originator compensation rules became effective, signals a shift from the Federal Reserve's guidance, and employers should now be able to make contributions to qualified plans, even if the contributions derive from mortgage-origination profits. Originators and their employers also should look for the CFPB’s planned loan origination compensation rule, which may provide further clarification and guidance on these issues, but likely also will provide new general requirements for originator compensation.
Arizona Alters Financial Institution and Loan Originator Licensing Provisions
On March 16, Arizona enacted Senate Bill 1014, which make changes to fees and definitions affecting financial institutions. The new law sets a maximum fee of $250 that the Department of Financial Institutions (DFI) can charge to change the licensee name on a financial institution or enterprise license. The law tightens an exception to the definition of loan originator such that loan originators that originate five or fewer mortgage loans per calendar year are exempt only if the source of the prospective financing also makes five or fewer mortgage loans per calendar year. The new law now requires the Superintendent of the DFI to deny a license from an individual who (i) has been convicted of, pled guilty to, or pled no lo contere to a felony seven years prior to the application, (ii) has been convicted of, pled guilty to, or pled no lo contere to a felony involving fraud, dishonesty, a breach of trust, or money laundering at any time, or (iii) lacks the responsibility, experience, or competency to adequately serve the public. These changes take effect 90 days after the state legislature adjourns this year, which it is expected to do on or around April 17, 2012.
Freddie Mac Publishes Revisions to Selling Requirements
On March 15, Freddie Mac published Single-Family Seller/Servicer Guide Bulletin 2012-8, which (i) updates mortgage eligibility and credit underwriting requirements Borrower Funds and Mortgage Credit Certificates for Borrower qualification, (ii) revises Forms 16SF and 1107SF regarding warehouse lender agreements and facilities, (iii) eliminates certain requirements for document custodians on Form 1034A, and (iv) updates certain delivery requirements under the Uniform Loan Delivery Dataset and clarifies delivery requirements for certain refinances under HARP.
Washington Enacts Multiple Amendments to Consumer and Mortgage Lending Laws
On March 8, Washington enacted HB 2255, which alters state regulation of consumer loan companies, including mortgage originators, check cashers and sellers, and payday lenders. Under the Consumer Loan Act, which covers nonbank consumer lenders including nonbank mortgage originators, consumer lenders are prohibited from making a loan from an unlicensed location. The Director of the Department of Financial Institutions can, among other things, order refunds to customers, informally settle complaints and enforcement actions, and issue subpoenas. Entities offering retail installment sales using open loop prepaid cards are no longer exempt from the Consumer Loan Act. Under the Check Cashers and Sellers Act, which covers entities that cash or sell checks, drafts, money orders, or other commercial paper, as well payday lenders, the definition of “licensee” is amended to include out-of-state entities, as well as those that should have a small loan endorsement. The Director can informally settle complaints and enforcement actions regarding covered entities. The bill includes new prohibited practices for check cashers and sellers, including (i) selling open loop prepaid access in a retail installment loan, (ii) advertising a statement that is false or deceptive, (iii) failing to pay annual assessments on time, and (iv) failing to pay other monies due to the Director. The law allows for the transition of check cashers and sellers, escrow agents, and money transmitters to the National Mortgage License System and Registry. HB 2255 also eliminates the requirement that mortgage originators provide a state disclosure form, so long as the originator offers disclosures in compliance with federal Regulation X. All of the above changes take effect June 7, 2012.
Virginia Enacts Two Mortgage-Related Bills
On March 1, Virginia enacted two mortgage-related bills, both effective July 1, 2012. HB 570 exempts employees of bona fide nonprofit organizations from licensing and registration requirements applicable to mortgage loan originators. It also, among other things, (i) adds definitions for dwelling and residential mortgage loan, (ii) revises the definitions for loan processor or underwriter, mortgage loan originator, real estate brokerage activities, registered mortgage loan originator, and unique identifier, (iii) revises the licensing requirement for mortgage loan originators and adds exemptions for certain individuals, and (iv) prohibits licensees from using unique identifiers for any purpose other than the SAFE Act and the Virginia Mortgage Loan Originators law. HB 572 exempts from licensure under the NMLS persons who make loans or extend credit for any part of the purchase price of real property that the person owns.
HUD Publishes Mortgagee Letters Regarding Underwriting and Premiums
On February 28, HUD issued Mortgagee Letter 2012-3 to address multiple underwriting changes for case numbers assigned on or after April 1, 2012. These changes include: (i) new documentation for self-employed borrowers for all FHA insured loans except non-credit qualifying streamline refinance loans and Home Equity Conversion Mortgage loans, (ii) new guidance for handling of disputed accounts or public records for all FHA insured loans except non-credit qualifying streamline refinances, and (iii) new definition of family member for the purpose of Identity of Interest Transactions for all FHA insured loans. A second letter, Mortgagee Letter 2012-4, issued on March 6, 2012 details recently announced changes to FHA single family mortgage insurance premiums.
Freddie Mac Announces Seller/Servicer Guide Updates To Implement Higher G-Fees
On February 29, Freddie Mac issued Bulletin 2012-06, which details Freddie Mac’s implementation of an upcoming increase in required spreads. As previously announced, effective April 1, 2012, Freddie Mac is increasing the required spreads for all products by 10 basis points. For Mortgages sold through the Freddie Mac Selling System Selling System, the 10 basis point increase is being implemented through the use of g-fee add-on functionality, and Freddie Mac has created a new Guide exhibit identifying the 10 basis point increase as the “Payroll Tax Cut Act Gfee Add-On.” Freddie Mac also has made a commensurate change in the pricing Sellers receive for Mortgages sold under the cash program. For all other delivery paths and executions, the 10 basis point increase will be reflected in the pricing provided to sellers.
Fannie Mae Announces Multiple Selling Guide Updates
On February 28, Fannie Mae issued Announcement SEL-2012-02, which describes Selling Guide updates related to the Project Eligibility Review Services (PERS), premium pricing recapture, and the maximum buyup of the mortgage backed securities (MBS) guaranty fees. Regarding PERS, effective April 1, 2012, Fannie Mae is increasing the base fee, eliminating the waiver for projects that require a mandatory review, and eliminating the maximum project review fee limit. The announcement also outlines other PERS fee structure changes. Additionally, the Selling Guide updates a remedy available to Fannie Mae when it has identified a lender as having unusual prepayment behavior. Effective immediately, Fannie Mae will be allowed to request reimbursement for any premium paid in connection with the purchase of a mortgage that is paid in full within 120 days from the whole loan purchase date or from the MBS issue date. Finally, for loans delivered on or after May 28, 2012 with MBS issue dates on or after June 1, 2012, Fannie Mae is increasing the maximum buyup of the guaranty fee of 25 basis points for fixed-rate loans and certain ARMs.
FHA Increases Mortgage Insurance Premiums
On February 27, the Federal Housing Administration (FHA) announced that it is increasing its annual mortgage insurance premiums and upfront premiums in two phases. First, for loans with case numbers assigned on or after April 1, 2012 the FHA is increasing by 10 basis points the annual mortgage insurance premium, and is increasing upfront insurance premiums by 75 basis points. Subsequently, for loans with case numbers assigned on or after June 1, 2012 that exceed $625,500, the FHA is increasing the annual premium by an additional 0.25 percent. The changes are designed to encourage the return of private capital to the residential mortgage market while supplementing the FHAs Mutual Mortgage Insurance Fund, which has fallen below the congressionally mandated two percent reserve threshold. At least one report recently suggested that based on current home price and default projections the fund will become insolvent without action. The increased premiums are projected to contribute more than $1 billion to the FHA's mortgage insurance fund, and on average will cost new home buyers $5 per month.
HUD Publishes Revised Proposal for Limiting Seller Concessions
On February 23, HUD published for comment a revised proposal for reducing seller concessions that supplants its initial July 15, 2010 issuance. In its previous issuance, HUD had proposed, as one of its initiatives to reduce risk to its insurance fund, reducing the cap on seller conditions from six percent of the lesser of the sales price or appraised value to three percent. In response to the significant public comment on its July proposal, HUD is now proposing to reduce the amount of seller concessions permitted as offsets to three percent or $6,000, whichever is greater, although the offsets would not be permitted to exceed the borrower’s actual costs. To address future increases to closing costs, the $6,000 cap would be indexed to increase at the same rate as the FHA national loan limit floor. HUD also proposes limiting acceptable uses of seller concession to payments toward borrower closing costs, prepaid items, discount points, the FHA Up Front Mortgage Insurance Premium, and an Interest Rate Buydown. Comments on this revised proposal are due March 26, 2012.