I have to admit, I have printed so many versions of Reg Z (proposed versions, final versions and everything in-between) that I need to spend a weekend planting trees to replace the ones I have killed. I can’t help it–I’m a person that likes to read regulations on paper, rather than the computer screen. (By the way, the term “like” isn’t necessarily accurate as reading regulations is clearly a necessity in this job; I don’t do it for entertainment.) However, after I printed three regulations to take with me on the plane today, I decided it is time to go green. So, I am posing the question to our readers, IPad or Kindle (or neither)?
So, now that we have that out of the way, we can talk about the important compliance stuff that I read today.
I managed to read three different rules and I am going to spend my next three blog posts talking about each of them. I will start with the loan originator compensation rule. The mandatory compliance date for this rule applies to loan applications received on or after April 1, 2011. At first glance, I didn’t think this rule was that big of a deal. (Keep in mind that the first time I read it was a few months ago when April seemed so far away and I was immersed in the 900-page mortgage proposal issued the same day.) It still is not a big deal unless you provide “compensation” to loan originators that is based on a closed-end mortgage “transaction’s terms or conditions,” except the amount of credit extended.
Compensation that is based on the mortgage transaction’s terms or conditions appears to be a fairly straightforward premise at the outset. However, compensation includes salaries, commission, other incentives tied to terms or conditions, and amounts retained by the originator that are not bona fide and reasonable third party charges. So, if you up-charge for third party services and retain the amount (in certain instances), it may be considered compensation.
The rule also provides examples of prohibited and permissible compensation based on the transaction’s “terms or conditions.” Prohibited compensation would be compensation based on the transaction’s interest rate, APR, or existence of a prepayment penalty. Permissible compensation would include compensation fixed in advance for each originated loan or compensation based on the percentage of loan applications that were consummated and the quality of the loan files. Again, this appears fairly straightforward at the outset, but there are a lot of “cans,” “cannots,” and “exceptions” buried in this rule.
If you think you might compensate your loan originators based on a closed-end mortgage loan’s terms or conditions, you might want to read this rule and evaluate your compensation structure. It’s worth the paper it will take to print it on–just make sure it is 2-sided!