CFPB Clarifies LO Compensation Rules Related to 401(k) and Profit-Sharing Plans

Acting in response to questions from mortgage originators and companies, the Consumer Finance Protection Bureau (CFPB) has issued a clarification on it rules governing loan originator compensation. The clarification specifically addresses employer contributions to qualified profit sharing, 401(k) Plans and employee stock ownership plans (collectively “Qualified Plans.”)

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act the CFPB was given rulemaking authority for Regulation Z and issued interim final rules recodifying provisions of that Regulation in December 2011. With a few of what CFPB calls “narrow” exceptions, the rules governing compensation provide that no loan originator may receive and no person may pay a loan originator compensation that is based on any terms or conditions of a mortgage transaction.

The Commentary released by the Bureau clarifies that compensation includes salaries, commissions, and annual or periodic bonuses and that none of these can be tied to the interest rate, loan to value ratio, or prepayment penalty provided for in a loan nor can compensation be based on a factor such as a credit score which could be used as a proxy for a term or condition such as the interest rate.

The intent of these rules is obviously to end any incentives to encourage loan originator to push more expensive products on customers when they are potentially not in the customers’ best interest in order to qualify for a higher commission on that product or to boost the base on which salary and bonuses are calculated.

CFPB staff has been asked whether a financial institution can, consistent with the Compensation Rules contribute to Qualified Plans for employees, including loan originators, if employer contributions to such plans are derived from profits generated by mortgage loan originations.  

The Bureau says that neither the Compensation Rules nor the Commentary expressively address whether the above rules apply to contributions made to qualified plans.  CFPB must adopt final compensation rules by January 21, 2013 or the existing provisions become permanent on that date so the Bureau does anticipate issuing a proposed rule for public comment in the near future.  Until those final rules are determined, CFPB’s view is that the Compensation Rules permit employers to contribute to Qualified Plans out of a profit pool derived from loan originations.  

Questions have also arisen about how the Compensation Rules should be applied to profit-sharing arrangements that are not in the nature of Qualified Plans.  These questions the Bureau said have tended to be plan specific and not appropriate for the type of general guidance the Bureau is putting out today.  These plans will be dealt with in greater detail when the final rules are proposed.

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