American Bankers Association
American Financial Services Association
Consumer Mortgage Coalition
Independent Community Bankers of America
July 23, 2012
The Honorable Richard Cordray
Consumer Financial Protection Bureau
1700 G Street, N.W.
Washington, D.C. 20552
Re: Loan Originator Compensation Rulemaking
Dear Director Cordray:
The undersigned appreciate the opportunity to comment on the Consumer Financial
Protection Bureau’s (“CFPB”) upcoming rulemaking to implement certain Dodd-Frank Act
provisions relating to mortgage loan originator compensation. These are important
provisions, yet their rulemakings raise a number of technical drafting issues. We hope that
this letter will help the CFPB to avoid unintended consequences in this important rulemaking.
I. Dual Compensation
The Dodd-Frank Act generally prohibits compensation to mortgage loan originators from
anyone other than a consumer. It has an exception that allows compensation from
someone other than the consumer under two conditions: (1) the loan originator does not
receive any compensation directly from a consumer; and (2) the consumer does not make an
upfront payment of discount points, origination points, or fees, other than bona fide third
We agree with CFPB that “implementation [of the dual compensation ban] without
exemption would significantly change the financing for most current mortgage loan
originations.”1 It would remove an important consumer benefit from the marketplace:
allowing consumers to compensate mortgage loan officers for their services while paying
discount points in order to reduce the interest rate on their mortgage loan. Without an
exception, once a consumer agrees to pay compensation to a mortgage loan officer, the
consumer would be denied the ability to pay discount points for a lower rate. This would
harm consumers because they might be forced to pay interest on costs over the life of the
Outline of Proposals Under Consideration, Small Business Regulatory Enforcement Fairness Act of 1996
(“SBREFA Outline”) pp. 7 – 8.
loan when they might have preferred to reduce their monthly payments and pay those
costs in cash at the beginning of the transaction.
Due to the potential that Dodd-Frank Act language would harm consumers, the
legislation gave the CFPB explicit authority to make exemptions.
[T]he Bureau may, by rule, waive or provide exemptions to this clause if the
Bureau determines that such waiver or exemption is in the interest of consumers
and in the public interest.2
The “clause” referred to is TILA § 129B(c)(2)(B), which permits an “origination fee or
charge” to be paid by someone other than a consumer if the consumer does not
compensate a loan originator directly, and the consumer does not pay upfront discount
points, origination points, or fees.
The CFPB is appropriately considering exemptions. However, it may sunset the
exemptions after three to five years. We agree with the CFPB that this sunset would be
“disruptive.”3 The CFPB can propose amendments to its rules at any time to address any
deficiencies, so we recommend that the sunset provision be included in the broader
exemption that the CFPB is considering.
A. Transaction-Specific Compensation to Employees Should be Excluded
from the Dual Compensation Ban
The language of the dual compensation ban is unclear in many respects. The CFPB may
interpret the Dodd-Frank language as not prohibiting salaries or hourly wages paid to
individual loan originator employees.4 We support this approach because salaries and hourly
wages do not present any risk of steering.
The CFPB says interpreting “origination fee or charge” to exclude commissions paid by a
creditor or brokerage is one permissible interpretation.5 We believe this is the only
permissible interpretation, as we explain in this letter.
Congress expected loan originators to be paid for their services; it only intended to
prevent inappropriate steering into loans that increase a loan originator’s compensation.
The Dodd-Frank Act prohibits loan originator compensation that varies by loan terms
other than principal amount,6 which is a steering prohibition. It is important to consider
Dodd-Frank Act § 1402, TILA § 129B(c)(2)(B)(ii).
SBREFA Outline p. 11.
SBREFA Outline p. 6.
SBREFA Outline p. 6 footnote 19.
Dodd-Frank Act § 1403, TILA § 129B(c)(1).
the effects of this steering rule when construing the dual compensation language. A
creditor or brokerage paying its employees a commission that does not vary by loan
terms other than principal does not create an incentive to steer consumers to more
costly loans. It merely supports the safety and soundness of lenders and brokerages by
tying their costs to their revenue. This is especially important in mortgage lending
because the business is cyclical.
The language in TILA § 129B(c)(2) is confusing, so it is important to consider its purpose. A
main purpose was to ban yield spread premiums:
However, nothing in the Act should be construed as permitting yield spread
premiums or other similar incentive compensation, affecting the mechanism for
providing the total amount of direct and indirect compensation permitted to a
mortgage originator, restricting a consumer’s ability to finance origination fees if
they were disclosed to the consumer and do not vary with the consumer’s decision
to finance such fees, or prohibiting incentive payments to a mortgage originator
based on the number of loans originated.7
That is, “nothing in the Act should be construed as . . . affecting the mechanism for
providing the total . . . compensation permitted to a mortgage originator.” The
mechanism for compensating mortgage originators was, and is, commissions. Moreover,
nothing in the law should be construed as “prohibiting incentive payments to a mortgage
originator based on the number of loans originated.” Incentive payments based on the
number of loans originated are expressly permissible.
In its originator compensation language, Congress distinguished between an “origination
fee or charge” and “compensation.” The language in the TILA § 129B refers to both
The House Report on what is now § 1403 explains its purpose:
Section 103. Prohibition on steering incentives This section provides that for any mortgage loan,
the total amount of direct and indirect compensation from all sources permitted to a mortgage
originator may not vary based on the terms of the loan (other than amount of principal). In
addition, the Federal banking agencies, in consultation with the Secretary and the Commission,
will jointly prescribe regulations to prohibit (1) mortgage originators from steering any consumer
to a residential mortgage loan that the consumer lacks a reasonable ability to repay, that does not
provide net tangible benefit, or that has predatory characteristics, (2) mortgage originators from
steering any consumer from a qualified mortgage (prime loan) to a loan that is not a qualified
mortgage, (3) abusive or unfair lending practices that promote disparities among consumers of
equal creditworthiness but of different race, ethnicity, gender, or age, and (4) mortgage originators
from assessing excessive points and fees to a consumer for the origination of a residential
mortgage loan based on such consumer’s decision to finance all or part of the payment through the
rate for such points and fees. However, nothing in the Act should be construed as permitting yield
spread premiums or other similar incentive compensation, affecting the mechanism for providing
the total amount of direct and indirect compensation permitted to a mortgage originator, restricting
a consumer’s ability to finance origination fees if they were disclosed to the consumer and do not
vary with the consumer’s decision to finance such fees, or prohibiting incentive payments to a
mortgage originator based on the number of loans originated.
H. Rep. 111-94, at 78-79 (2009).
“compensation” that cannot vary based on loan terms8 and “origination fees and charges”
paid to a mortgage originator or a third party.9 We believe that it is clear that the
meaning of compensation includes salary and other personal income. This clearly
implies that not all mortgage originator compensation consists of origination fees and
charges. It seems very unlikely that this was intended to treat the compensation that
creditors and brokerage firms pay to their employees as origination fees or charges.
The distinction between salaries on the one hand and commissions and other transaction-
specific compensation paid to employees is artificial – neither would be origination fees
or charges in the ordinary meaning of that phrase. Dodd-Frank does not provide a
definition that would change the meaning of origination fees or charges, and it does not
make a distinction between salaries and transaction-specific compensation. The reason is
that Congress intended for transaction-specific commissions based on the number of
loans closed to remain as permissible compensation, given the ban on yield spread
There are several reasons why the TILA § 129B(c)(2) language must be read to permit
creditors and brokerages to pay commissions to their employees. The prohibition on
compensation set by loan terms will prevent the steering and yield spread premiums that
Congress intended to prohibit.
B. Long-Term Compensation Unknown at Consummation Should be
The loan originator rule in place today treats compensation that is unknown at loan
origination as salary. Compensation is not based on the loan terms if it is based on any of
The long-term performance of the originator’s loans;10
The percentage of applications submitted by the loan originator to the creditor that
result in consummated transactions;11 or
The quality of the loan originator’s loan files (e.g., accuracy and completeness of
the loan documentation) submitted to the creditor.12
These compensation factors are not based on loan terms or conditions and do not present
steering risks. They incent responsible work performance. So, the compensation should
be treated as it is today.
TILA § 129B(c)(1).
TILA § 129B(c)(2).
C. The General Ban on Compensation Paid by a Party Other Than the
Consumer Should be Limited to Creditor Payments to Brokerages
The general rule is that a loan originator may not receive compensation from “any person
other than the consumer[.]”13 It is common for a third person, such as a home seller, a
relocating borrower’s employer, or a public agency that provides closing cost assistance,
to pay part of the loan originator’s compensation. Clearly, these arrangements benefit
consumers and do not present steering risks. It should be permissible for third parties to
pay loan originator compensation.
The general rule should be limited to instances where the creditor pays the brokerage
firm’s origination fees. No other situation presents risks of steering, or where there is a
potential for consumer harm.
D. Payments to Third Parties Should Not be Included in Origination Fees
State mortgage revenue bond programs are a method by which states can subsidize home
financing options. These programs sometimes charge consumers a fee expressed as a
percentage of the loan amount. This practice should not prohibit the creditor from paying
otherwise permissible commissions to its employees because a steering risk does not exist.
Nor should it require the state bond programs to convert their fees to flat rates because
there would not be a consumer benefit, and it would disrupt these housing programs.
E. Flat Origination Fees Should Not be Required
The CFPB may require flat origination fees when a consumer pays upfront points and
fees and a creditor compensates a loan originator. We believe this would do more harm
The CFPB explains that points and fees present the possibility of consumer confusion.14 If
the problem is that some consumers would be confused, the solutions are clear
disclosures and better consumer education, not removing options that can benefit
consumers financially. The CFPB seems uniquely positioned to ensure that both clear
disclosures and appropriate consumer education is provided.
Flat origination fees will result in consumers being disadvantaged:
Flat origination fees are not tax deductible, while discount points may be
deducted. Requiring flat origination fees could be a direct cost to consumers.
Larger loans subsidize smaller loans, and removing this subsidy would hurt
The points and fees threshold for Home Ownership and Equity Protection Act
(“HOEPA”) and state high-cost loans, and the points and fees caps for qualified
Dodd-Frank Act § 1403, TILA § 129B(c)(2)(A).
SBREFA Outline p. 8.
mortgage (“QM”) and qualified residential mortgage (“QRM”) loans, are a
percentage of the loan amount. If origination fees were a flat amount, smaller
loans would withstand disproportionate impact. The proposed QM rule has a
slightly higher cap on points and fees for smaller loans, but it is only for loans
under $75,000, which is a small mortgage loan. Moreover, the cap only goes up
to five percent, and that is only for loans less than $20,000, which is truly tiny for
a mortgage loan. Given lenders’ unwillingness to make non-QM loans because of
the unlimited legal liability, flat origination fees might disproportionately exclude
lower-income families from the mortgage market.
Many state mortgage revenue bond programs and other consumer assistance
programs specify the permissible origination charges and limit them to a
percentage of the loan amount. A requirement for a flat origination fee would
disrupt those programs.
Requiring flat origination fees would interfere with the safety and soundness of certain
lender practices. Lenders set certain charges as a percentage of the loan amount because
the cost to the creditor varies by loan size. These charges include rate-lock fees,
extension fees, and adjusters for risk characteristics of a loan. We recommend that the
CFPB clarify that these are always permitted to vary by loan size.
Construction loans should not be subject to the no-fee or no-point requirements.
Construction loans frequently have long-term rate locks which protect the consumer from
large rate increases during the construction period. Consumers typically pay for these
long-term rate locks with upfront fees or points. Removing the lender’s ability to charge
upfront fees for long term rate locks would increase costs for consumers.
One option creditors would have for managing a flat fee requirement would be for
creditors to convert percentage-based fees into an increase in the interest rate on the loan.
However, this may not be beneficial to consumers because creditors may only move
interest rates on loans in increments of 0.125 percent. For example, converting a fee that
is ¼ of a point to a rate increase would increase the rate by 0.125 percent over the entire
life of the loan. The cost to the consumer would increase.
Another option would be for creditors to give consumers the option of a credit towards
closing costs in return for a higher rate. If the amount of the credit exceeds the closing
costs, the creditor could pay the remainder of the credit to the consumer. However, on
rate and term refinances, this would often not be possible because Fannie Mae and
Freddie Mac limit the cash out that is permissible in rate-and-term refinances. Cash-out
refinances may have higher interest rates than rate-and-term refinances. So, again,
consumers could be harmed.
Veterans Administration (“VA”) loans limit origination fees, and sometimes other fees,
to one percent of the loan amount. A CFPB rule requiring a flat origination fee would
conflict with this, and could unintentionally prohibit origination fees on VA loans.
Different loan products and programs have different origination costs. If the CFPB does
require flat origination fees, it should permit creditors to charge different flat origination
fees for different products or programs. Furthermore, creditors should be permitted to
waive origination fees.
Overall, the many disadvantages of flat origination fees far outweigh any possible
advantage. We suggest the CFPB address potential confusion about discount points
through consumer education programs and through its Know Before You Owe initiative.
F. “No Discount Point,” “No Fee,” or “No Point, No Fee” Options
The CFPB may require creditors, when a loan will have discount points, to offer the
option of a no discount point loan.15 Requiring creditors to offer a no discount point option
is not troublesome because, by definition, a discount point is a point that the consumer
chooses to pay to reduce the rate. However, the regulation must clearly state what the
creditor or brokerage firm must do to show that they presented this choice to the
Having an exact “zero” point option would be operationally challenging. Loan pricing
models consider a variety of factors, so even if a zero point option were available, when
certain factors are present, the number of points may be slightly above or below zero.
This would greatly complicate offering the option, with little or no consumer benefit. We
recommend that it should be sufficient to give the consumer a choice between a higher
rate that provided a percentage-based credit that the borrower could use towards closing
costs, or a lower rate with discount points. Economically, the consumer would have the
same options, and it would avoid unnecessary operational complexity.
The CFPB may require creditors to offer the option of a “no-fee” loan and a “no-point,
no-fee” loan.16 We are not sure what the difference is between the two, as a point is
merely a fee expressed as a percentage rather than an absolute number. In any event, fees
should not include third party charges because the lender cannot set them. Fees for
services the borrower elects likewise should be excluded because consumers can benefit
from optional services. Fees in connection with a property purchase should be excluded
because they do not relate to the loan.
We recommend against requiring creditors to offer a no point, no fee loan. Interest rates
are near historic lows right now, but will eventually rise. When they do, rolling costs into
the rate would become disproportionately harmful. Financing the loan costs is more
expensive when rates are high than when they are low.
The CFPB may require that the difference between the higher interest rate on the no-fee
loan and interest rate on the loan with upfront fees must be reasonably related to the amount
SBREFA Outline p. 9.
SBREFA Outline p. 10.
of upfront fees.17 Relating flat fees to the interest rate will disproportionately hurt
consumers with small loan sizes. An example will illustrate how. Assume that there are
flat fees of $4,000 on two loans, where one loan has a principal of $80,000 and the other
of $200,000. The $4,000 equals 5% of the smaller loan (five points) and 2% of the larger
loan (two points). If a rate difference of 0.25% for each point were the definition of
reasonable, then the rate on the smaller loan, in the absence of upfront fees, would
increase by 1.25% (five points times 0.25%) while the rate of the larger loan would
increase by 0.50% (two points times 0.25%). This means that the smaller loan is more
likely to reach the HOEPA or a state high-cost loan rate threshold and not be made at all.
Another problem with requiring creditors to offer a no fee loan is that Regulation X and
many state laws limit creditors’ ability to choose the settlement service providers and
negotiate with them for the costs of their services. As a result, if the creditor is required
to cover third party fees but cannot control the amounts of those fees, the creditor would
need to increase the rate to cover the range of possible third party charges. This would
The SBREFA Outline mentions the possibility of carving out fees such as rate-lock fees
and expedited handling fees.18 This is welcome because it would provide much-needed
flexibility. Additionally, consumers may elect such options late in the origination process,
when renegotiating the loan would be quite disruptive. However, it is not at all clear
what types of fees would qualify for the exclusion. There are many types of potential
fees on mortgage settlements, and they vary geographically. To the extent the list is
unclear, creditors would need to assume the fee is not permitted on a no-fee loan, and
increase the interest rate.
G. The Difficulty of Defining Bona Fide Discount Points
The CFPB may permit bona fide discount points on a loan when the creditor compensates
a loan originator, defining bona fide points as points that result in a minimum rate
reduction for each point.19 Creditors will need to be certain whether points meet this
definition before they offer that choice to a consumer.
The amount of rate reduction that discount points buy depends on a number of factors,
including, but not limited to, the expected duration of the loan and how long the reduced
rate will remain in effect. On most ARM loans, for example, the discount points buy
down the initial rate but not the margin, so the buy-down remains in effect only until the
first adjustment. Supply and demand also affect loan pricing, and they fluctuate
continuously. It would be quite difficult to put pricing factors into a regulation. In trying
to do so, the CFPB would have two possible approaches:
SBREFA Outline p. 10.
SBREFA Outline footnote 26, p. 10.
SBREFA Outline p. 9.
If the CFPB were to determine the required amount of rate reduction, it would
need to consider all of the myriad pricing factors, and it would be directly setting
prices in the marketplace. If it sets the reduction too low, consumers would not,
or should not, accept the loan offer. If it sets the reduction too high, creditors
would need to make up the actual market price. They would likely do so by
increasing the base rate on the zero point loan so the rate reduction will meet the
requirement, or, if that option is unavailable, would remove the loan product from
If the CFPB does not directly set the amount of the reduction but leaves creditors
to determine whether the points are bona fide under vague guidelines, creditors
will not have the certainty needed to offer the choice of discount points to the
Neither option would be beneficial to consumers. Whether discount points are bona fide
is an “all or nothing” question. Either the CFPB may set a minimum reduction
requirement at odds with what market forces will dictate, or a creditor may make a good
faith determination of what it considers to be a reasonable reduction and then be found,
after the fact, in violation. It would be preferable to eliminate the bona fide requirement
from these compensation requirements.
Section 1403 does not require that discount points may only be paid if they are bona fide.
In contrast, the points and fees cap for QM loans and the HOEPA points and fees
threshold have bona fide discount point requirements. However, a loan may remain
under the QM and HOEPA points and fees cap and threshold even if the discount points
are not considered bona fide, providing creditors some measure of certainty.
II. Loan Originator Compensation That Varies Based on Loan Terms Other
The Dodd-Frank Act prohibits loan originator compensation based on loan terms other
than the principal amount. The CFPB is considering how to deal with a number of
complications resulting from this rule. The CFPB’s experience with a loan originator
compensation regulation20 has shown the need for clarification.
A. Mortgage Revenue as Share of Total Revenue
The CFPB may permit employers to pay bonuses or to contribute to non-qualifying
profit-sharing plans if the company’s mortgage-related revenue does not exceed, perhaps,
20 to 50 percent of total company revenue. If the company exceeds this limit, the CFPB
may permit bonuses or contributions to a non-qualifying profit-sharing plan only out of
12 C.F.R. § 1026.36(d)(1).
It is unclear why the CFPB would set differing compensation rules based on the share of
company revenue derived from mortgages, or how the difference would affect consumers.
To the extent there is any impact on consumers, we suggest that it would be so attenuated
as to be an unsound basis for a rule that many loan originators would view as unfair to
B. Senior Officers Should be Exempt
Tying executive compensation to the financial performance of the companies they
operate is a common, successful, and safe and sound practice.
Senior officers and managers are, and should be involved in individual loan originations
from time to time. Every mortgage origination is different, and issues do arise, especially
when the rules are in a state of flux. If an issue escalates to a manager or a senior officer,
that person should be able to resolve the issue quickly. The officer or manager needs
access to application and underwriting information, and needs to be able to offer specific
loan terms to a consumer. This is an important consumer protection. Foreclosure
preventions sometimes involve loan originations, so this protection is important when
default rates are high. There should be no need to “check with HR and Legal first” due to
a loosely-drafted compensation rule.
Comment 36(a)-4 needs to be clarified. It provides:
For purposes of §1026.36, managers, administrative staff, and similar individuals
who are employed by a creditor or loan originator but do not arrange, negotiate, or
otherwise obtain an extension of credit for a consumer, or whose compensation is
not based on whether any particular loan is originated, are not loan originators.
Officers’ and managers’ compensation is not directly based on their intervention in an
individual loan origination, but arguably it is indirectly based on that intervention in some
cases, however remotely. This comment needs to be clarified to exempt officers and
managers who occasionally participate in individual loan originations, and offer or
negotiate loan terms, but whose compensation is not directly affected by the loan. Senior
officers and managers who do not spend a majority of their time working on individual
loan originations should always be exempt from the compensation rules.
C. Pricing Concessions
The CFPB may allow loan originators to make certain types of pricing concessions. To
the extent that any loan originator can make a pricing concession to a consumer, it is
critical that a creditor be permitted to place restrictions on the loan originator’s discretion.
The creditor needs to reduce the likelihood of pricing differentials and potentially illegal
The CFPB may permit pricing concessions to cover unanticipated increases in third-party
settlement charges, where those settlement charges are not controlled by the loan
originator, the creditor, or their affiliates, and the charges exceed charges disclosed in the
Good Faith Estimate (“GFE”). Charges that exceed the GFE are due to a borrower-
requested change or to a change in circumstances. The CFPB gives the example of an
appraiser discovering structural damage or an environmental issue that necessitates a
special inspection. In this example, the CFPB’s approach would permit a pricing
concession, but had the borrower told the creditor about the issue at the outset, the CFPB
would not permit a pricing concession. This would treat a borrower who tells the creditor
that there may be structural or environmental issues worse than a consumer who
withholds that information. This would introduce unnecessary friction, and could
interfere with safe and sound underwriting. Concessions in the case of a borrower-
requested change or changed circumstances should not be a circumstance for a pricing
We do not object to permitting pricing concessions when charges increase within RESPA
tolerances, in the absence of a borrower-requested change or a change in circumstances.
D. Point Banks
The CFPB states that a point bank may provide a loan originator with the ability to close
some transactions that may not otherwise have closed, and that a point bank could be
viewed as compensation because it provides “a financial or similar incentive” to the loan
originator. The CFPB may therefore clarify that point banks are compensation.
The CFPB may permit creditors to fund point banks if (1) the creditor does not base the
amount of the contribution to a point bank for a given transaction on the terms of the
transaction; (2) the creditor does not change its contributions to the point bank over time
based on terms of the loan originator’s transactions, or on whether the loan originator
overdraws a point bank; and (3) the creditor does not reduce the loan originator’s
commission on a transaction due to an overdrawn point bank.
The idea that if a loan originator is allowed to take any action that affects whether the
loan closes provides a “financial or similar incentive” that is “compensation” is extremely
broad. The loan originator’s job is to close loans for qualified borrowers. We assume the
CFPB means that a loan originator who has some discretion to ask the creditor to make a
pricing concession, but whose compensation for the loan is not directly affected by
whether, or to what extent, the creditor grants the concession, has not received
Point banks create the potential for pricing differentials and disparate impact, and
therefore the creditor should be able to restrict the use of point banks to limit this
E. Reduced Compensation Should Be Permitted For Errors
Under current law, if a loan originator makes a serious mistake, such as grossly
underestimating fees and charges on the GFE, the creditor is prohibited from using the
most effective tool to enforce compliance – reducing the loan originator’s compensation.
Comment 36(d)(1)-6 provides that creditors may periodically review loan performance,
transaction volume, or market conditions and prospectively revise loan originator
compensation. Retroactive compensation reductions should be permitted when they are
based on loan originator error or noncompliance with any rule or creditor requirement.
Any other approach serves to undermine important laws and rules, relating both to
consumer protection and safety and soundness.
F. Proxies for Loan Terms
Under current law, “if a loan originator’s compensation varies in whole or in part with a
factor that serves as a proxy for loan terms or conditions, then the originator’s
compensation is based on a transaction’s terms or conditions.”21 The CFPB may provide
examples of compensation that is or is not based on loan terms or conditions to clarify
which factors serve as proxies for loan terms. We support additional clarity because the
existing rule is unnecessarily rigid.
The CFPB may define a factor as a proxy for a loan term if: (1) it substantially correlates
with a loan term; and (2) the loan originator has discretion to use the factor to present a
loan to the consumer with more costly or less advantageous terms than terms of another
available loan, through the same loan originator, for which the consumer likely qualifies.
We agree that a factor should not be a proxy if the loan originator does not have
discretion to use the factor to steer a consumer. It would be helpful to confirm which
common factors do not involve discretion.
The loan purpose should not be a proxy. Whether a loan is a purchase or
refinance, and whether a refinance is a cash-out or a rate-and-term refinance, is
not at the loan originator’s discretion. The consumer, not the loan originator,
determines the loan purpose. The secondary mortgage market price of a loan
varies with the loan purpose, so creditors need to reflect this fact when pricing
Whether a loan is in a creditor’s Community Reinvestment Act (“CRA”)
assessment area, and whether the census tract or household is low- or moderate-
income, should not be deemed a proxy. Deeming these as proxies interferes with
the purposes of the CRA, which include promoting lending in low- and moderate-
income areas. Loan originators do not determine the creditor’s CRA assessment
area or where the consumer lives.
The borrower’s credit score should not be a proxy for a loan term. Again, the
loan originator has no discretion or influence over the credit score. The credit
score certainly influences the secondary market value of a loan, and the creditor
needs to reflect this when pricing the loan.
A flat “no proxy” rule does not recognize the fundamental reality that some types of
mortgage loan products or programs require more loan originator time and effort than
others. Under the current rules, creditors could require loan originators to keep
timesheets to document how much time they spent on each file and compensate loan
originators on an hourly basis. However, this is at odds with the need to compensate loan
originators on a commission basis. Tracking time would also be costly and cumbersome.
The CFPB needs to clarify that if a creditor or broker makes a good faith determination of
the time and effort to process a loan based upon the loan product or process, then it may
use that information to vary loan originator compensation by product or process. This
would decrease the likelihood of inappropriate steering to whatever product or process is
the least work for the loan originator, as under a flat no-proxy rule. It would also avoid
steering to whichever loan product requires the most work, as under hourly pay.
III. SAFE Act
The Dodd-Frank Act imposes a duty on loan originators to be “qualified” and, where
applicable, registered or licensed as a mortgage originator under state law and the federal
SAFE Act.22 The CFPB may require that to be “qualified” under TILA, loan originator
entities must ensure that individuals who work for them are licensed or registered as
required by the SAFE Act. It may also require under TILA that entities whose loan
originator employees are subject to SAFE Act registration but not licensure (because the
entity is a depository institution): (1) to ensure that their loan originator employees meet
character and fitness and criminal background standards equivalent those the SAFE Act
applies to licensees; and (2) to provide appropriate training to their loan originator
employees commensurate with the size and mortgage lending activities of the entity,
analogous to the continuing education requirement that applies to individuals who are
subject to SAFE Act licensing, without a minimum number of training hours.23
The CFPB explains its reasoning:
The proposed character and fitness, criminal background check, and training
requirements would improve parity among the minimum standards that apply to
individual [loan originators] working for different types of entities. . . . To the
Dodd-Frank Act § 1402(a)(2), TILA § 128B(b)(1)(A). The SAFE Act is the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008, Pub. L. No. 110-289 §§ 15011517, codified at 12 U.S.C.
§ 5101 – 1517.
SBREFA Outline pp. 25-26.
extent that some small [loan originators] face competitors with lower costs or other
advantages resulting from their lesser requirements for registration, the proposed
requirement will increase parity between these firms and reduce potential
This assumes that small lenders are nondepositories and large lenders are depositories.
Of course, many credit unions, small banks and thrifts make mortgage loans, as well.
The CFPB may also require under TILA that all loan originator entities, regardless of
charter type, comply with applicable state law requirements for legal existence and
foreign qualification.25 The CFPB does not provide a reason for this, and it does not
identify a problem this would resolve.
In effect, this approach would apply TILA litigation risk and liability to SAFE Act
A. The CFPB Should Reduce Compliance Costs to Accomplish its Goal
The CFPB is correct that the cost of SAFE Act compliance is different for depository
institutions than for nondepository institutions. It is also the case that the costs of TILA
and SAFE Act compliance increase the cost of housing credit. If the goal is to reduce
regulatory disparity, we question why the approach is to increase the costs for
depositories rather than reduce it for nondepositories.
The SAFE Act does not require licensees to be licensed in each state in which they
originate loans. It requires loan originators to have either a license or a registration, in
[A]n individual may not engage in the business of a loan originator without
(1) obtaining, and maintaining annually—
(A) a registration as a registered loan originator; or
(B) a license and registration as a State-licensed loan originator[.]26
Unfortunately, Regulation H as written today goes much farther that the SAFE Act, and
thereby created a regulatory burden for registrants that licensees do not bear. It requires a
licensee to be licensed in every state where they originate loans:
(a) Except as provided in paragraph (e) of this section, in order to operate a
S.A.F.E.-compliant program, a state must prohibit an individual from engaging in
the business of a loan originator with respect to any dwelling or residential real
SBREFA Outline p. 26.
SBREFA Outline p. 26.
SAFE Act § 1504(a), 12 U.S.C. § 5103(a).
estate in the state, unless the individual first:
(1) Registers as a loan originator through and obtains a unique identifier from the
(2) Obtains and maintains a valid loan originator license from the state.27
There is no reciprocity for licensees where two states have very similar licensure
requirements. Nor is there reciprocity where a loan originator is licensed in a state that
requires more for licensure than another state where the individual wants to originate
loans. This is an unnecessary regulatory burden for licensees that registrants do not bear.
Registrants must register only once, and can then originate loans in any state. Rather
than impose great costs on depository institutions, the more sound approach would be to
permit reciprocity where a loan originator is licensed and meets sufficient standards.
Moreover, increasing the regulatory costs on registrants is unnecessary. As the CFPB
acknowledges, “the CFPB believes that many of these entities already have adopted
screening and training requirements, either to satisfy safety-and-soundness requirements
or as a matter of good business practice.”28 This is correct. Depository institutions are
subject to extensive safety and soundness standards too numerous to cite – they permeate
all of federal and state banking law. There simply is no need for the CFPB to duplicate
safety and soundness standards.
If it does duplicate the existing safety and soundness standards, the CFPB should at least
grandfather loan originators from going through additional background checks. Bank
loan originators have a background check when they are hired, and had another when the
SAFE Act required their registration. Criminals cannot work at depository institutions,29
so there is no reason for a third background check.
12 C.F.R. § 1008.103.
SBREFA Outline p. 26.
The Federal Deposit Insurance Act provides that, absent approval of the Federal Deposit Insurance
(A) any person who has been convicted of any criminal offense involving dishonesty or a breach
of trust or money laundering, or has agreed to enter into a pretrial diversion or similar program in
connection with a prosecution for such offense, may not—
(i) become, or continue as, an institution-affiliated party [employee, officer, director, and
certain outsiders] with respect to any insured depository institution [national or state bank, and
federal or state thrift];
(ii) own or control, directly or indirectly, any insured depository institution; or
(iii) otherwise participate, directly or indirectly, in the conduct of the affairs of any insured
depository institution; and
(B) any insured depository institution may not permit any person referred to in subparagraph (A)
to engage in any conduct or continue any relationship prohibited under such subparagraph.
12 U.S.C. § 1829(a). The same prohibition applies to credit unions. 12 U.S.C. § 1785(d)(1). Violations
are punishable by a million dollar fine and imprisonment for five years. 12 U.S.C. §§ 1829(b) and
Moreover, the federal banking agencies and the NCUA can suspend a person from a position at a
depository institution if the person is indicted – not convicted, just indicted – for a crime involving
B. The CFPB Lacks Authority to Rewrite the SAFE Act
In enacting the Dodd-Frank Act, Congress certainly could have removed the fundamental
distinction between banks and nonbanks from the SAFE Act, but elected not to do so.
Given that Congress intended that distinction to remain, it does not appear that the CFPB
has authority to remove it.
We do not see any reasonable basis or authority for applying SAFE Act licensure
requirements when the SAFE Act expressly and clearly permits registration without
C. Character and Fitness Standard is Undefined
If the CFPB will create a character and fitness standard, it will need to be clear. State
authorities usually review loan originators’ credit reports. If the CFPB were to adopt a
similar requirement, it will need to be precise about what factors disqualify a loan
originator. Credit reports come in endless permutations, so clarity would be especially
D. Training Costs are Underestimated and Unnecessary
Any new training requirement should be clear as well. An initial concern is that the
CFPB has not established any lack of training today, and underestimates the cost. The
CFPB partially calculates the cost of this training:
The typical cost of a stand-alone 8 hour continuing education course is
This does not recognize the largest cost of training. An eight-hour training course
requires eight hours of the employee’s time. Eight hours of time of each loan originator
employee of every depository institution in the country that makes consumer mortgage
loans is a significant cost. At the end of March 2012, there were 379,605 depository
institution loan originators in the NMLSR Registry. If each registered loan originator
were to spend eight hours in training, it would require over 3 million hours. If each
training course cost $129, for the course itself rather than the time, the cost would be
dishonesty or breach of trust that is punishable by imprisonment for more than a year, under either federal
or state law, or for money laundering. The alleged crime does not need to relate to the depository
institution. 12 U.S.C. §§ 1818(g)(1)(A) and 1786(i)(1)(A). A conviction for such a crime can, or
sometimes must, result in a permanent prohibition, 12 U.S.C. §§ 1818(g)(1)(C) and 1786(i)(1)(C), from the
entire industry, 12 U.S.C. §§ 1818(e)(7) and 1786(g)(7), and acquittal does not bar the person’s removal
and prohibition. 12 U.S.C. §§ 1818(g)(1)(D)(ii) and 1786(i)(1)(D)(ii). Violations of such a removal or
prohibition order are punishable by a million dollar fine and imprisonment for five years. 12 U.S.C.
§§ 1818(j) and 1786(l).
SBREFA Outline p. 27.
$48.97 million. This is a very substantial cost for a duplicative requirement that does not
add any value.
Another major concern is that the number of hours required before an employee may
perform loan originator activities needs to be reasonable because a new training
requirement can be highly disruptive, as each loan originator would not be able to
perform their normal job functions. Training that has already taken place should be
credited towards compliance, and training that is informal, such as in-house training,
should be credited.
The training needs to allow the employee to act as a loan originator in all states, without
state-specific training requirements. This would significantly reduce the unnecessary
costs of a duplicative training requirement. It is also consistent with the SAFE Act.
We appreciate the CFPB’s continuing work on the many Dodd-Frank Act Title XIV rules.
In doing so, we –
Encourage the CFPB to permit loan originator commissions as Congress intended,
consistent with the Dodd-Frank Act prohibition on compensation that varies by
loan terms other than principal;
Believe flat origination fees would create unnecessary consumer harm; and
Encourage the CFPB to avoid creating rules that create compliance dilemmas.
We also recommend that the CFPB go through multiple rounds of public iterations of its
Title XIV rulemakings to avoid unnecessary disruptions in the nation’s housing markets.
American Bankers Association
American Financial Services Association
Consumer Mortgage Coalition
Independent Community Bankers of America