CFPB clamps down on originator compensation and prepaid cards
by: Henry Meier
The CFPB continued its incredibly frenzied pace yesterday. In the same day, it proposed federal regulations on prepaid cards and fined Franklin Loan Corporartion, a California-based mortgage banker for illegally compensating its loan originators. In the pre-Dodd-Frank days, either one of these would have been among the biggest news of the year for one of our federal regulators. But for our good friends at the Bureau that Never Sleeps, it’s all in a day’s work.
First, let’s talk about the illegal compensation settlement. In 2010, the Federal Reserve Board imposed restrictions on the way loan originators could be compensated. Specifically, the Federal Reserve Board promulgated regulations prohibiting compensating originators based on a term or condition of a mortgage loan. The CFPB is now responsible for enforcing this provision and to avoid making this discussion any more complicated than it has to be, my references are to the re-codified regulation. Before the Board’s prohibition, Franklin had a straightforward compensation system in which originators would get a percentage of each mortgage loan they closed. The compensation would be based on the total cost of the loan, which included an originating fee, discount points and the retained cash rebate associated with the loan. As a result, loans with higher interest rates generated higher commissions. After the Board passed it prohibition in 2010, Franklin instituted a new system. All loan officers were given an upfront commission for each loan they closed. However, on a quarterly basis, they would receive the difference, if any, between the adjusted total commission, which was based in part on the interest rate of the mortgage, and the upfront commission. In other words, the higher the interest rate the more a Franklin originator would be compensated.
The originator clearly crossed the line with its compensation structure. But remember, the regulation isn’t as clear cut as it first appears. Take a look at the official staff commentary accompanying 12 CFR 1026.36(d)(1)(I):
- Permissible methods of compensation. Compensation based on the following factors is not compensation based on a term of a transaction or a proxy for a term of a transaction:
- The loan originator’s overall dollar volume (i.e., total dollar amount of credit extended or total number of transactions originated), delivered to the creditor. See comment 36(d)(1)–9 discussing variations of compensation based on the amount of credit extended.