In January 2013, the Consumer Financial Protection Bureau (CFPB) amended Regulation Z (Truth in Lending) to implement certain Dodd-Frank Act requirements. These requirements concerned:
* The identification of MLOs on loan documents;
* Compliance procedures and record retention;
* Mandatory arbitration clauses; and* Credit insurance financing.
The rule generally became effective Jan. 1, 2014, except for the prohibitions on mandatory arbitration (effective June 1, 2013) and financing credit insurance (effective Jan. 10, 2014).
Types of loans covered
The provisions on compensation, qualification, identification, and the establishment and maintenance of written policies and procedures for compliance apply to almost all closed-end consumer credit transactions secured by a dwelling.
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 home equity lines of credit (HELOCs) secured by a consumer’s principal dwelling.
Definition of loan originator
The term “loan originator” means, with respect to a particular transaction, a person who for compensation or other monetary gain—or the expectation thereof—takes an application, arranges, offers, negotiates, or otherwise obtains an extension of consumer credit for another person.
An “individual loan originator is a person who meets the definition of loan originator.” And, a ‘‘loan originator organization’’ is any loan originator that isn’t an individual loan originator.
A loan originator can’t receive (directly or indirectly) compensation in an amount based on any transaction terms or conditions (or a proxy for any transaction terms or conditions). For example, the rule prohibits compensation to a loan originator based on the mortgage loan transaction’s interest rate, annual percentage rate, loan-to-value ratio, or the existence of a prepayment penalty.
The regulation permits employers to make contributions from general profits derived from mortgage activity to individual MLOs’ 401(k) plans, employee stock plans, and other qualified plans under tax and employment law. Employers also may pay bonuses or make contributions to “nonqualified” profit-sharing or retirement plans from general profits derived from mortgage activity if certain conditions are met.
The rule also generally prohibits a loan originator from receiving compensation (directly or indirectly) from a consumer and another person, such as a creditor, in the same transaction (“dual compensation”). Compensation directly from a consumer includes payments to a loan originator made pursuant to an agreement between the consumer and a person other than the creditor or its affiliates. There’s an exception to the rule for compensation that the credit union pays to its individual loan originators.
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