The CFPB Loan Originator Rule
What is the Loan Originator Rule?
The Loan Originator Rule generally regulates how compensation is paid to a loan originator in most closed-end mortgage transactions. Among other things, the Loan Originator Rule:
- Prohibits a loan originator’s compensation from being based on the terms of the transaction or a proxy for a transaction term.
- Permits certain methods of compensating loan originators using bonuses, retirement plans, and other compensation plans that are based on mortgage-related profits.
- Prohibits loan originators in a transaction from being compensated by both the consumer and another person, such as a creditor.
The Loan Originator Rule also imposes qualification duties on loan originators. They must be licensed and registered if required under the SAFE Act or other state or federal law. In addition, the rule requires that loan originators who are not required to be licensed and are not licensed be trained on the state and federal legal requirements that apply to their loan origination activities. The rule also makes background and character screening requirements more consistent for different types of loan originators.
Companies that hire loan originators must make sure their employees meet the Loan Originator Rule’s qualification requirements, including licensing or registration. Companies that hire loan originators under a brokerage agreement must make sure their brokers meet licensing or registration requirements, but do not have to ensure they meet other qualification requirements.
The Loan Originator Rule also implemented two other provisions of the Dodd-Frank Act that apply to most closed-end mortgage loans and to HELOCs secured by the consumer’s principal dwelling. These provisions:
- Prohibit mandatory arbitration clauses in contracts;
- Prohibit contracts from being interpreted to waive federal statutory causes of action; and
- Prohibit certain financing of credit insurance premiums or fees (but allow consumers to pay credit insurance that is calculated on a monthly basis).
Who is Covered?
The provisions on compensation restrict payments to “loan originators.” Under the Loan Originator Rule, a “loan originator” generally includes individuals and entities that perform loan origination activities for compensation, such as taking an application, offering credit terms, negotiating credit terms on behalf of a consumer, obtaining an extension of credit for a consumer, or referring a consumer to a loan originator or creditor.
A “loan originator” is either an “individual loan originator” or a “loan originator organization.”
- “Individual loan originators” are natural persons, such as individuals who perform loan origination activities and work for mortgage brokerage firms or creditors.
- “Loan originator organizations” are generally loan originators that are not natural persons, such as mortgage brokerage firms and sole proprietorships.
The Loan Originator Rule specifically excludes some persons from being a “loan originator,” including certain real estate brokers, seller financers, and loan servicers.
For purposes of the compensation provisions, creditors are defined as “loan originators” (and “loan originator organizations”) only if they are table-funded (i.e., they do not finance transactions at consummation out of their own resources). That means the Loan Originator Rule does not restrict payments made to a creditor unless the creditor is table-funded. But the rule restricts payments from all creditors to their loan originator employees or to other “loan originators” such as mortgage brokers.
For purposes of the qualification and identification provisions, the Loan Originator Rule includes both table-funded and other creditors in the definition of “loan originator organization.” Thus, for example, creditors and other companies that hire individual loan originators have a duty to ensure that their employees meet the rule’s qualification requirements. And all creditors have a duty to include NMLSR IDs and other identification information for themselves and other loan originators on loan documents .
The requirements to establish and maintain written policies and procedures to monitor compliance with the various rules applicable to individual loan originators apply to depository institutions (including credit unions).
The prohibitions on mandatory arbitration clauses, waivers of federal claims, and certain financing practices for credit insurance generally apply to creditors that offer either closed-end consumer credit secured by a dwelling (except for certain time-share plans) or HELOCs secured by the consumer’s principal dwelling.
What Loans are Covered?
Almost all closed-end consumer credit transactions secured by a dwelling (including any real property attached to the dwelling) are subject to the provisions on compensation, qualification, identification, and the establishment and maintenance of written policies and procedures for compliance. This includes loans made to consumers that are secured by residential structures that contain one to four units, including condominiums and cooperatives. It is not limited to first liens or to loans on primary residences.
The provisions on compensation, qualification, identification, and the establishment and maintenance of written policies and procedures do not apply to:
- Open-end credit plans including HELOCs; and
- Time-share plans
The prohibitions on mandatory arbitration clauses, waivers of federal claims, and certain financing practices for credit insurance apply to closed-end consumer credit transactions secured by a dwelling (except certain time-share plans) and to HELOCs secured by a consumer’s principal dwelling.