New Loan Originator Requirements Take Effect

Rule applies to most closed-end loans secured by a dwelling.

January 14, 2014

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 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.

Prohibited payments

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.

NEXT: Prohibition on steering

Prohibition on steering

Under Reg Z, a loan originator may not direct a consumer into a particular transaction secured by a dwelling to receive greater compensation from the creditor than in other transactions the originator offered or could have offered, unless the transaction is in the consumer’s interest. The rule also includes permissible transactions that don’t violate this prohibition on steering.

The rule provides a safe harbor for a loan with the lowest total dollar amount of discount points, origination points, or origination fees.

Loan originator qualification requirements

The amended Reg Z requires MLOs to be “qualified”—licensed or registered (if required) under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) or other state or federal law—and include their Nationwide Mortgage Licensing System & Registry (NMLSR) identification numbers on mortgage loan documents.

In addition, credit unions that employ MLOs must:

Ensure they properly register their loan originators to the extent the SAFE Act requires;

Obtain the following information for each unlicensed loan originator (which would be the case for most credit union MLOs): a state and national criminal background check (from the NMLSR or another source); a credit report from a nationwide consumer reporting agency; and information about any administrative, civil, or criminal findings by any court or government agency.

Determine the MLO’s financial responsibility, character, and general fitness that indicates the MLO will operate honestly, fairly, and efficiently. The credit union must consider whether any of this information indicates dishonesty, a pattern of irresponsible use of credit, or a disregard for financial obligations.

Provide periodic training to unlicensed MLOs that covers federal and state law requirements that apply to the individual MLO’s origination activities.

NMLSR ID on loan documents

The credit union must include the following on mortgage loan documents provided to a consumer or presented to a consumer for signature:

Its name and NMLSR identification number (if applicable); and

The name and NMLSR ID (if applicable) of the individual loan originator with primary responsibility for the origination.

The following loan documents must include this information:

The credit application;

The note or loan contract; and

The security instrument.

Prohibition on mandatory arbitration clauses

Reg Z prohibits the inclusion of clauses requiring a consumer to submit disputes concerning a dwelling-secured loan or HELOC to arbitration.

It also prohibits the application or interpretation of provisions of such loans or related agreements so as to bar a consumer from bringing a claim in court in connection with any alleged violation of federal law.

Prohibition on financing credit insurance

The regulation also prohibits the financing of any premiums or fees for credit insurance (such as credit life and credit disability insurance) in connection with a consumer credit transaction secured by a dwelling (including a HELOC secured by the consumer’s principal dwelling).

This prohibition doesn’t apply to credit insurance for which premiums or fees are calculated and paid in full on a monthly basis.

In the case of monthly-pay credit insurance, a creditor violates the provision if, upon the close of the monthly period in which the premium or fee is due, the creditor includes the premium or fee in the amount the consumer owes—and thus treats it not as a monthly charge that could be cancelled prior to being due, but as a “debt” that the consumer owes the creditor, which the consumer then would have a right to pay at some later date.

Policies, procedures, and record retention

Credit unions must establish and maintain written policies and procedures reasonably designed to ensure and monitor compliance with the provisions on compensation, steering, qualification, and identification.

Credit unions also must maintain records sufficient to show all compensation they pay to a loan originator, along with the compensation agreement that governs those payments, for three years after the date of payment.

VALERIE Y. MOSS is CUNA’s senior director of compliance analysis. Contact CUNA’s compliance department at