MBA Compliance Essentials: Loan Originator Compensation Rule Resource Guide Sample

Richard J. Andreano, Jr.
Practice Leader, Mortgage Banking Group
Ballard Spahr, LLP
Loan Originator
Compensation Rule
Resource Guide
MBA COMPLIANCE ESSENTIALS℠
mba.org/compliance
ONE VOICE. ONE VISION. ONE RESOURCE.
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2014 Ballard Spahr LLP
MORTGAGE BANKERS ASSOCIATION
MBA COMPLIANCE ESSENTIALS
REVISED LOAN ORIGINATOR COMPENSATION RULE RESOURCE GUIDE
12 CFR § 1026.36(d) & (e)
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COPYRIGHT
©2014 Ballard Spahr LLP. This book is being provided to you with a limited license for use solely
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DISCLAIMER
PLEASE TAKE NOTE: These materials have been produced by Ballard Spahr LLP. These
materials provide an overview of the revised loan originator compensation rule adopted
in January 2013 by Consumer Financial Protection Bureau, with subsequent
amendments (CFPB Rule) , that generally applies to mortgage loans from January 1,
2014, as detailed below. The CFPB Rule will be set forth in subsections 1026.36(d) & (e)
of Regulation Z under the Truth in Lending Act. The original loan originator
compensation rule adopted by the Federal Reserve Board (Fed Rule)—which became
effective in April 2011 and which was covered in great detail in the original MBA
Compliance Essentials Loan Originator Compensation Resource Guide—was revised by
the CFPB Rule. These revisions and other material in the CFPB Rule are addressed in
this Guide. These materials are not intended to and do not provide legal advice, and do
not create an attorney-client relationship between the firm of Ballard Spahr LLP or any of
its attorneys and the recipient. Provisions of the CFPB Rule described herein are, in
many instances, paraphrased, and a careful reading of the CFPB Rule and any formal
interpretations thereof may reveal exceptions or different interpretations that might be
applicable to a particular set of facts. These materials cover areas in which the proper
interpretation of law and regulation can be highly dependent upon particular facts.
Accordingly, taking action simply upon the basis of information provided in these
materials is not advisable. These materials are not a substitute for consultation with
qualified legal counsel regarding the manner in which the laws and regulations
referenced herein may be interpreted and apply to particular facts or to particular
business models. These materials are for informational and educational purposes only,
and are not a solicitation and should not be construed as such.
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TABLE OF CONTENTS
Author Biography and Information about the Firm………………………………… Page 9
Introduction…………………………………………………………………………….......Page 12
Statutory and Regulatory Background……………………………………………….. Page 13
CFPB Rule……………………………………………………………………………… Page 13
Fed Rule…………………………………………………………………………………Page 13
Effective Date of Fed Rule……………………………………………………………. Page 14
Transition of Fed Rule to CFPB……………………………………………………….Page 14
Liability…………………………………………………………………………………...Page 15
Fed Rule……………………………………………………………………………. Page 15
CFPB Rule—Significant Increase in Liability Under Dodd-Frank……………. Page 15
Requirements and Implications………………………………………………………...Page 17
Overview and Scope……………………………………………………………….....Page 17
Overview and Scope—Basic Elements…………………………………………. Page 17
Overview and Scope—Covered Transactions…………………………………. Page 18
Overview and Scope—Loan Originator (Covered Persons), General………. Page 19
Overview and Scope—Loan Originator (Covered Persons), Exclusions…… Page 20
Overview and Scope—Loan Originator (Covered Persons), Guidance…….. Page 23
Overview and Scope—Loan Originator (Covered Persons), Illustrations…....Page 29
Overview and Scope—Covered Compensation, General……………………..Page 31
Overview and Scope—Covered Compensation, Exclusion of Third
Party Charges…………………………………………………………………. Page 32
Overview and Scope—Covered Compensation, Amounts for Non-Loan
Originator Activities…………………………………………………………….Page 33
Overview and Scope—Covered Compensation, Exclusion for Bona Fide
Returns on Equity Interests…………………………………………………...Page 34
Overview and Scope—Creditor Pricing…………………………………………. Page 35
Overview and Scope—Modification of Loan Terms is Permitted,
Modification of Compensation Based on Modification of Loan Terms
is Not Permitted……………………………………………………………….. Page 36
Overview and Scope—Variances Among Loan Originators………………….. Page 36
Overview and Scope—Compensation Source………………………………….Page 37
Prohibitions Against Compensation Based on a Term or a Proxy For a
Term of a Transaction………………………………………………………. Page 37
Prohibitions Against Compensation Based on a Term or a Proxy For a
Term of a Transaction—General……………………………………………..Page 37
Prohibition Against Compensation Based on a Term of a Transaction—
Determination…………………………………………………………………..Page 38
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Term of a Transaction…………………………………………………………Page 39
Multiple Transactions…………………………………………………………. Page 42
Pooled Compensation…………………………………………………………Page 43
Loan Product…………………………………………………………………...Page 43
Illustrations……………………………………………………………………...Page 43
Prohibition Against Compensation Based on a Proxy For a Term of a
Transaction—Background…………………………………………………….Page 44
Transaction—Guidance……………………………………………………….Page 46
Transaction—Illustrations……………………………………………………..Page 47
Prohibitions Against Compensation Based on a Term or a Proxy for a
Term of a Transaction—Limited Exception For Decrease in Loan
Originator Compensation, General…………………………………………. Page 50
Term of a Transaction—Limited Exception For Decrease in Loan
Originator Compensation, Illustration…………………………………….….Page 51
Term of a Transaction—Limited Profit Exceptions…………………………Page 52
Term of a Transaction—Limited Profit Exception for Designated
Tax-Advantaged Plans……………………………………………………….. Page 52
Term of a Transaction—Limited Profit Exception for Non-Deferred
Profits-Based Compensation Plans, General……………………………… Page 53
Profits-Based Compensation Plans, 10-Percent Limit Exception………...Page 56
Profits-Based Compensation Plans, 10-Percent Limit Exception—
Reasonable Reliance by Individual Loan Originator……………………….Page 56
Profits-Based Compensation Plans, De Minimis Exception……………… Page 56
Term of a Transaction—Limited Profit Exceptions, Illustrations……….… Page 57
Term of a Transaction—Changes to Loan Originator Compensation
Plan or Agreement……………………………………………………………..Page 59
Term of a Transaction—Market-Based Variances in Compensation…… Page 60
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Dual Compensation Prohibition…………………………………………………… Page 61
Dual Compensation Prohibition—General……………………………………… Page 61
Dual Compensation Prohibition—Compensation Source…………………….. Page 62
Dual Compensation Prohibition—Affiliates……………………………………... Page 63
Dual Compensation Prohibition—Exemption From Dodd-Frank
Provision……………………………………………………………………….. Page 64
Anti-Steering Prohibition…………………………………………………………….Page 64
Anti-Steering Prohibition—General……………………………………………… Page 64
Anti-Steering Prohibition—Consumer’s Interest……………………………….. Page 65
Anti-Steering Prohibition—Amount of Compensation…………………………. Page 66
Anti-Steering Prohibition—Safe Harbor………………………………………….Page 67
Record Retention……………………………………………………………………...Page 69
Depository Institution Policies and Procedures Requirement………………..Page 72
Appendix A
Calculation of 10-Percent Limit for Purposes of Non-Deferred Profits-Based
Compensation Plan Exception to Prohibitions Against Compensation
Based on a Term or Proxy for a Term of a Transaction…………………………… Page 74
Covered Profits………………………………………………………………………….Page 74
Relevant Time Period…………………………………………………………………..Page 75
Total Compensation…………………………………………………………………… Page 77
10-Percent Limit Examples…………………………………………………………… Page 78
Appendix B
Model Policies and Procedures for CFPB Regulation Z Loan Originator
Compensation Rule…………………………………………………………………….Page 81
Introduction……………………………………………………………………………...Page 81
I. Scope and Purpose of Policies and Procedures………………………………..Page 82
1.1 Scope of Policy and Procedures……………………………………………..Page 82
1.2 Purpose of Policies and Procedures…………………………………………Page 82
II. Roles and Responsibilities……………………………………………………….. Page 82
2.1 Board of Directors……………………………………………………………...Page 82
2.2 Compliance Department………………………………………………………Page 82
2.3 Employees……………………………………………………………………...Page 84
III. Covered Transactions, Persons and Compensation; Definitions……………. Page 84
3.1 Covered Transactions…………………………………………………………Page 84
3.2 Covered Persons—Loan Originators……………………………………….. Page 85
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3.2.1 Individual Loan Originator………………………………………………Page 86
3.2.2 Loan Originator Organization…………………………………………..Page 86
3.3 Covered Compensation……………………………………………………….Page 86
3.4 Investor………………………………………………………………………….Page 86
3.5 Creditor………………………………………………………………………….Page 87
3.6 Dwelling…………………………………………………………………………Page 87
3.7 Mortgage Broker………………………………………………………………. Page 87
3.8 Term of a Transaction…………………………………………………………Page 88
3.9 Timeshare Plan………………………………………………………………...Page 88
IV. Loan Originator Activities…………………………………………………………. Page 89
4.1 Distinctions Between Loan Originator Activities and Non-Loan
Originator Activities…………………………………………………………….Page 89
4.2 Job Descriptions, Scripts and Other Guidance and Instructions………… Page 91
4.3 Employee Referrals……………………………………………………………Page 91
4.4 Training………………………………………………………………………….Page 92
V. Compensation of Loan Originators……………………………………………….Page 92
5.1 Employee Compensation Plans…………………………………………….. Page 92
5.2 Third Party Loan Originator Compensation Agreements………………… Page 93
5.3 Company Compensation as Loan Originator……………………………… Page 95
5.4 Designated Tax-Advantaged Plan Participation…………………………… Page 96
5.5 Non-Deferred Profits-Based Compensation Plans…………………………Page 96
5.6 All Compensation Arrangements Through the Company………………… Page 97
5.7 Variances in Compensation…………………………………………………..Page 97
5.8 Payment of Expenses………………………………………………………… Page 98
VI. Anti-Steering……………………………………………………………………….. Page 98
6.1 Third Party Loan Originators………………………………………………….Page 98
6.2 Company as Loan Originator…………………………………………………Page 100
VII.Monitoring…………………………………………………………………………...Page 102
7.1 Pre-Closing Monitoring……………………………………………………….. Page 102
7.2 Post-Closing Monitoring……………………………………………………….Page 104
7.3 Monitoring Reports……………………………………………………………. Page 106
VIII. Training……………………………………………………………………………. Page 106
8.1 Employees………………………………………………………………. Page 106
8.2 Third Party Loan Originators………………………………………….. Page 107
IX. Record Retention………………………………………………………………….. Page 107
Appendix C
Sample Compliance Checklist For CFPB Regulation Z Loan Originator
Compensation Rule…………………………………………………………………….Page 111
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AUTHOR BIOGRAPHY AND INFORMATION ABOUT THE FIRM
Richard J. Andreano, Jr., is a Practice Leader of the Mortgage Banking
Group at Ballard Spahr, and a member of the Consumer Financial
Services and Privacy and Data Security Groups. He has devoted more
than 25 years of practice to financial services, mortgage banking, and
consumer finance law. Rich advises the mortgage and settlement
service industries on regulatory compliance and related matters,
including issues concerning the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank), Real Estate Settlement
Procedures Act (RESPA), Truth in Lending Act (TILA), Equal Credit
Opportunity Act (ECOA), Fair Housing Act, Fair Credit Reporting Act
(including FACTA), Home Mortgage Disclosure Act (HMDA), and Gramm-Leach-Bliley Act. He
assists clients with preparing for and handling CFPB examinations and with regulatory issues,
including implementation of the CFPB repayment ability to repay, loan originator compensation,
appraisal, escrow and servicing rules. Rich is the author of the original MBA Compliance
Essentials Loan Originator Compensation Resource Guide. Rich is Editor-in-Chief of Mortgage
Finance Regulation Answer Book 2011-2012, published by the Practising Law Institute; author
of its chapters on Dodd-Frank, HMDA and RESPA and co-author of its ECOA and TILA
chapters.
As legislation governing the mortgage banking industry evolves
and government scrutiny intensifies, Ballard Spahr offers broad
experience and strong industry relationships to help clients navigate uncharted territory and
develop strategies for success. Our attorneys are at the forefront of rapidly changing regulatory
developments, working with a wide range of clients in both the residential and commercial
mortgage banking industries. Our Mortgage Banking Group is part of the firm's nationally
recognized Consumer Financial Services Group. We combine broad regulatory experience with
formidable skill in litigation and depth in enforcement actions and transactions.
Our team represents clients worldwide, from start-ups to Fortune 500 corporations. Clients
include:
 Financial institutions, mortgage lenders, brokers, and servicers
 Secondary-market investors
 Insurance companies
 Investment bankers
 Settlement service providers
 Auction platforms
 Homebuilders
We also advise industry service providers such as technology vendors, collection agencies,
document preparation companies, telemarketers, loan fulfillment companies, and trade
associations.
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A national firm of more than 500 lawyers in 14 offices across the country, Ballard Spahr offers
mortgage banking clients a full range of legal services.
Industry Relationships
Our Mortgage Banking Group has strong industry relationships in both the private and public
sectors. Its presence in Washington, D.C., benefits clients who require experienced
representation before federal agencies such as the Consumer Financial Protection Bureau, the
U.S. Department of Housing and Urban Development, the Federal Trade Commission, the
Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the Justice Department.
An Educated Perspective
Our practice leaders literally wrote the book on mortgage banking. The Mortgage Finance
Regulation Answer Book, published by the Practising Law Institute, analyzes current regulatory
requirements and has been described as the “bible of mortgage finance” for industry leaders as
well as non-experts. The group also publishes Mortgage Banking Update, a biweekly newsletter
with analysis of the latest industry developments.
Mortgage Servicing Reform
We are on the leading edge of changes to the servicing industry—including those connected to
the national mortgage settlement and the CFPB’s servicing rules—and advise clients on
changes to policies, procedures, and operations. Our attorneys are experienced in reviewing a
servicer’s foreclosure practices, and we counsel clients who are likely subjects of future
regulatory investigations and compliance orders. Our Collection Documentation Task Force
focuses on the rapid spread of document-related scrutiny, including issues related to the
mortgage foreclosure process.
Fair Lending
Our Fair Lending Task Force combines three types of critical resources in an effective,
multidisciplinary approach—regulatory attorneys, litigators, and labor attorneys. Together, they
counsel providers of consumer credit in preventing, managing, and defending against fair
lending violation claims with an understanding of the statistical analyses that underlie such
discrimination claims.
Litigation/Enforcement Defense
Ballard Spahr is home to a preeminent financial services litigation practice. We defend clients
nationwide in class actions, single-plaintiff claims, regulatory proceedings, and other complex
mortgage litigation. We pioneered the use of pre-dispute arbitration in consumer financial
services contracts, and have designed and enforced arbitration programs for many of the
world’s largest financial institutions. We defend clients in administrative enforcement
proceedings and investigations, including CFPB examinations and enforcement actions and
Mortgagee Review Board actions. We help clients respond quickly and efficiently to state
attorneys general inquiries to avoid litigation and, when necessary, defend clients against
enforcement actions related to consumer finance laws.
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Compliance and Licensing
We advise on issues such as loan originator compensation and steering restrictions, risk
retention, repayment requirements, lending and servicing standards and restrictions, and
disclosure requirements. We counsel clients on state laws related to licensing, permissible fees,
unfair practices, disclosures, and advertising, among others. We also conduct due diligence and
compliance audits related to mergers and acquisitions, liquidations of distressed assets,
purchases and sales of mortgage loans, servicing rights and other assets, formation of joint
ventures and strategic alliances, and the establishment of warehousing and other credit
facilities.
Privacy and Data Security
We advise financial institutions nationwide on compliance, data mining, online marketing, and
mobile privacy and help clients respond quickly and confidently to security breaches. We draft
and implement compliance policies, represent clients in state attorneys general investigations
into privacy practices, and defend clients from claims arising under the Fair Credit Reporting Act
and state laws.
Employment, Employee Benefits, and Executive Compensation Law
Our mortgage banking industry clients are also employers. Ballard Spahr’s nationally
recognized employee benefits and executive compensation practice provides innovative legal
advice to all types of employers, from multinational corporations with more than 50,000
employees to well-known regional companies. Our lawyers work with senior executives and in-
house counsel on high-profile executive compensation issues, and we also pride ourselves on
working closely with our clients’ human resources teams on their day-to-day issues. Our
attorneys counsel clients on a wide variety of employee benefits issues. In addition, our Labor
and Employment Group has experience in counseling and litigating an array of workplace
disputes and in representing a large variety of industries.
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INTRODUCTION
This MBA Compliance Essentials Resource Guide addresses the Regulation Z Loan Originator
Compensation Rule that was issued by the Consumer Financial Protection Bureau (CFPB) in
January 2013, with subsequent amendments, and became effective in January 2014 (CFPB
Rule). The CFPB rule implemented Dodd-Frank amendments relevant to loan originator
compensation and revised the original loan originator compensation rule adopted by the Federal
Reserve Board (Board) in August of 2010, which became effective in April 2011 (Fed Rule).
This Guide addresses the CFPB Rule and notes where the CFPB Rule differs from the
Fed Rule.
The Fed Rule was set forth in subsections (d) and (e) of 12 CFR 1026.36 and the related
commentary to such subsections. The CFPB Rule will be codified in the same subsections (d)
and (e) of 12 CFR 1026.36 and the commentary to the subsections, and amends the provisions
of such subsections and commentary from the Fed Rule.1
The Fed Rule applies to covered transactions that were consummated, and for which
compensation was paid, before January 1, 2014. The Fed Rule also applies to covered
transactions that were consummated before January 1, 2014 and for which compensation is
paid on or after January 1, 2014 (except for any compensation associated with a designated
tax-advantaged plan that is paid on or after January 1, 2014, which is governed by the CFPB
rule). Except for compensation associated with designated tax-advantaged plans, the CFPB
Rule applies to covered transactions that are consummated, and for which the creditor or loan
originator organization pays compensation, on or after January 1, 2014. With regard to
designated tax-advantaged plans, the CFPB Rule applies to compensation paid on or after
January 1, 2014, regardless of when the covered transactions are consummated or applications
are received.
Please note, this Guide only addresses loan originator compensation as regulated by the CFPB.
There are other laws regarding the compensation of loan originators and loan originators in
general that companies must consider, including federal and state wage and hour and other
employment laws, federal and state mortgage banking and licensing laws (including the federal
Real Estate Settlement Procedures Act and Secure and Fair Enforcement for Mortgage
Licensing Act (i.e., the SAFE Act) and fair lending laws). Companies also must consider the
policies of business partners, such as lenders and investors. It is not uncommon for a lender or
investor to adopt policies regarding loan originator compensation that may not permit
arrangements that were permitted under the Fed Rule and it is likely this will continue with the
CFPB Rule.
1
For ease of reference, citations to the CFPB Rule are to the applicable provisions of the subsections and
commentary as they will appear once the provisions of the CFPB Rule are codified. The commentary to the Fed Rule
contains official interpretations of Regulation Z and is set forth in Supplement I to 12 CFR Part 1026, and the
commentary to the CFPB Rule contains official interpretations of Regulation Z and will be codified in Supplement I to
12 CFR Part 1026. For ease of reference, in this Guide the commentary to the Fed Rule or CFPB Rule, as
applicable, is referred to as the "Commentary".
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STATUTORY AND REGULATORY BACKGROUND
CFPB Rule
The CFPB Rule was adopted to implement amendments to the Truth in Lending Act (TILA) that
were made by The Dodd-Frank Wall Street Reform and Consumer Protection Act2
(Dodd-
Frank). In particular, Dodd-Frank Act section 1403 added TILA section 129B(c),3
which sets
forth specific limitations on loan originator compensation.
On August 17, 2010, the CFPB posted on its website a proposed version of the CFPB Rule,
which appeared in the September 7, 2012 Federal Register.4
On January 20, 2013, the CFPB
posted on its website a final version of the CFPB Rule, which appeared in the February 15,
2013 Federal Register.5
As originally adopted, the final CFPB Rule provided for an effective
date of January 10, 2014.
During 2013, the CFPB modified the final CFPB Rule that it had adopted in January 2013.6
Among the modifications, the effective date of the CFPB Rule was changed to January 1, 2014
from January 10, 2014. Other than an exception related to compensation associated with
designated tax-advantaged plans, the CFPB Rule applies to covered transactions
consummated, and for which the creditor or loan originator organization pays compensation, on
or after January 1, 2014. With regard to the exception for designated tax-advantaged plans, the
CFPB Rule applies to compensation paid on or after January 1, 2014, regardless of when the
covered transactions are consummated or applications are received.7
Fed Rule
The Fed Rule8
was adopted by the Board under, at the time, TILA section 129(l) (2),9
which was
added to TILA by the Home Ownership and Equity Protection Act (HOEPA).10
Although HOEPA
generally addressed high-cost mortgage loans, it also directed the Board to, by regulation or
order, prohibit acts or practices in connection with:
"(A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade
the provisions of this section; and
(B) refinancing of mortgage loans that the Board finds to be associated with abusive
lending practices, or that are otherwise not in the interest of the borrower.’’11
2
Pub. L No. 111-203.
3
15 USC 1639b(c).
4
77 Federal Register 55272 (2012).
5
78 Federal Register 11280 (2013)
6
On June 24, 2013, the CFPB posted on its website a proposal to clarify and modify the CFPB Rule, which appeared
in the July 2, 2013 Federal Register. 78 Federal Register 39902 (2013). On September 13, 2013, the CFPB posted
on its website a final version of the clarifications and modifications to the CFPB Rule, which appeared in the October
1, 2013 Federal Register. 78 Federal Register 60382 (2013).
7
78 Federal Register 60382, 60389 (2013).
8
75 Federal Register 58509, 58513 (2010).
9
15 USC 1639(l)(2) (before Dodd-Frank, now 15 USC 1639(p)(2)).
10
HOEPA was enacted in 1994 as Subtitle B to Title I of the Riegle Community Development and Regulatory
Improvement Act of 1994, Pub. L No. 103-325.
11
15 USC 1639(l)(2) (before Dodd-Frank, now 15 USC 1639(p)(2)).
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The directive from Congress applied to mortgage loans in general, and just not high-cost
mortgage loans subject to HOEPA.
In the summer of 2009, the Board proposed loan originator compensation requirements as part
of a major proposal to revise the closed-end mortgage loan provisions of Regulation Z.12
During
the rulemaking process, Congress enacted Dodd-Frank in July 2010. Dodd-Frank includes loan
originator compensation provisions that are similar, but not identical, to provisions that the
Board had proposed.13
Shortly after Dodd-Frank was enacted, the Board adopted loan
originator compensation provisions as a stand-alone rule and, except for a minor change, the
adopted provisions are the Fed Rule. Thus, the Fed Rule was based on the Board's section
129(l)(2) TILA authority, which pre-existed Dodd-Frank.14
EFFECTIVE DATE OF FED RULE
Although the Fed Rule was scheduled to become effective for applications received by creditors
on or after April 1, 2011, a lawsuit challenging the rule resulted in a delay in the effective date.
The Board revised the commentary to the Fed Rule to reflect the delay, and advised that
compliance with the Fed Rule was not mandatory until April 6, 2011.15
TRANSITION OF FED RULE TO CFPB
Under Dodd-Frank, the Fed Rule, along with TILA, Regulation Z and other federal consumer
protection statutes and regulations, was transferred to the CFPB on July 21, 2011. In
December 2011, the CFPB issued an interim final rule adopting a new Regulation Z as part of
the CFPB rules that is codified at 12 CFR Part 1026.16
In April 2012, the CFPB issued Bulletin 2012-02 to address questions regarding how the Fed
Rule applies to qualified profit sharing, 401(k), and employee stock ownership plans, and the
CFPB deferred addressing non-qualified plans until the planned rulemaking to implement the
Dodd-Frank loan originator compensation provisions. In connection with adopting the CFPB
Rule, the CFPB advised that Bulletin 2012-02 applies until the CFPB Rule became effective in
January 2014.17
12
74 Federal Register 43232, 43331-43333 (2009).
13
Dodd-Frank § 1403.
14
Based on amendments to TILA made by Dodd-Frank section 1433(a), former TILA section 129(l) is now section
129(p), and the CFPB now has the authority under the section.
15
76 Federal Register 43111 (2011).
16
76 Federal Register 79768 (2011). (Although the CFPB noted that the interim final rule "substantially duplicates
the Board's Regulation Z as the [CFPB's] new Regulation Z, 12 CFR part 1026, making only certain non-substantive,
technical, formatting, and stylistic changes", the CFPB also corrected what it termed a "typographical error" in the
commentary to the Fed Rule that addressed whether managers and administrative staff are loan originators. The
original text could be read to suggest that the manner of compensation of an individual by itself could make the
individual a loan originator. The correction was intended to make clear that an individual must perform loan originator
activities to be a loan originator. 76 Federal Register 79768, 79768-69, 80012 (2011).)
17
78 Federal Register 11280, 11336, n. 100.
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Liability
FED RULE
Because the Fed Rule was adopted under TILA section 129(l)(2),18
violations of the Fed Rule
are subject to the special damages provision that also applies to high-cost mortgage loans. In
addition to the standard damages applicable to mortgage loans under TILA, the special
damages provision provides for damages of an amount equal to the sum of all finance charges
and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is
not material.19
CFPB RULE—SIGNIFICANT INCREASE IN LIABILITY UNDER DODD-FRANK
Dodd-Frank made significant changes regarding TILA liability that apply to the CFPB Rule.
• Dodd-Frank20
amended TILA to make the loan originator compensation provisions that
are implemented by the CFPB Rule subject to the same damages that apply to HOEPA
violations,21
and to extend the one-year statute of limitations that applies to the Fed
Rule to three years for the CFPB Rule.22
• Dodd-Frank23
amended TILA24
to permit borrowers to assert a violation of the CFPB
Rule as a matter of defense by recoupment or set off without regard to the statute of
limitations if the creditor, assignee or other holder of the loan, or anyone acting on behalf
of the creditor, assignee or holder, initiates a judicial or nonjudicial foreclosure or any
other action to collect the debt in connection with the loan.
• Dodd-Frank25
amended TILA26
to create liability for loan originators under TILA27
for
violations of the CFPB Rule. The liability is capped at the greater of actual damages or
an amount equal to three times the total amount of the direct and indirect compensation
or gain accruing to the loan originator in connection with the covered transaction, plus
the costs to the consumer of the action, including a reasonable attorney's fee.
The significant potential liability for violations of the CFPB Rule suggests that companies take a
prudent approach to compliance.
In November 2013, a mortgage company agreed to a stipulated final judgment and order to
resolve a complaint brought by the CFPB against the company and two of its officers.28
The
18
Based on amendments to TILA made by Dodd-Frank section 1433(a), former TILA section 129(l) is now section
129(p), and the CFPB now has the authority under the section.
19
TILA § 130(a)(4), 15 USC 1640(a)(4).
20
Dodd-Frank § 1416.
21
TILA § 130(a), 15 USC 1640(a). As noted above, violations of the Fed Rule also are subject to the same damages
that apply to HOEPA violations.
22
TILA § 130(e), 15 USC 1640(e).
23
Dodd-Frank § 1413.
24
TILA §130(k), 15 USC 1640(k).
25
Dodd-Frank § 1404.
26
TILA § 129B(d),15 USC 1639b(d).
27
TILA § 130, 15 USC 1640.
28
Consumer Financial Protection Bureau v. Castle & Cooke Mortgage LLC et al, Case No. 2:13CV684DAK (C.D.
Utah 2013).
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ba.org/com
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MBA Compliance Essentials: Loan Originator Compensation Rule Resource Guide Sample

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