CFPB clears the way for loan originators to participate in qualified plans

Iowa Banking Law Dickinson Law Firm Des Moines, Iowa

Posted on 04/06/2012 at 12:23 PM by The Newsroom

Loan originators and their employers may breathe a slight sigh of relief as a result of a recently issued CFPB Bulletin. On April 2, 2012, the CFPB issued Bulletin 2012-02 addressing the loan originator compensation rule in Reg Z, which the Fed adopted in 2010 pertaining to mortgage loan applications received by lenders on or after April 6, 2011. (Note:  Reg Z rulemaking authority is now with the CFPB, not the Fed). That rule prohibits loan originators from receiving compensation based on terms or conditions of a loan or on a proxy for the terms or conditions of a loan.  Earlier, Fed staff had informally advised that a bank's profits from those loans were considered a proxy for loan terms or conditions, which then gave rise to the question of whether loan originators could participate in their bank's qualified benefit plans, since those were partly funded with profits made from the efforts of mortgage lenders. The Fed's informal position lead to the FDIC in turn informally taking the position that the compensation rule prohibited loan originators at banks from participating in qualified plans.  This raised very difficult questions for banks who allowed loan originators to participate in qualified plans because of possible examination criticism on an issue that was not truly settled. The Bulletin advises that the current loan originator compensation rule does permit banks to make contributions to qualified plans out of a pool of profits derived from loans made by those employees who are loan originators and that contributions can be made on those loan originators' behalf (i.e, they don't have to be excluded from the plans or have a portion of the contribution that would have been made on their behalf carved out). On the entirely different issue of how Reg Z's compensation rule applies to profit sharing arrangements that aren't qualified plans, the CFPB advised in the Bulletin that it doesn't believe it is practical to provide guidance in the Bulletin it just issued, noting that those inquires have been fact specific, but that it anticipates greater clarity will be forthcoming on such arrangements when its Dodd-Frank mandated rules on loan origination compensation are issued.  Those final rules are required to be adopted by January of 2013 and the CFPB is working on those rules. As we have with other banks, we are available to advise you on questions you may have regarding your loan originators' participation in qualified plans.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

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