Part I: Brief Overview
This article addresses the effects of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Dodd-Frank”) on the compensation of mortgage originators (defined below). This, Part I, provides a brief overview of the new regulations, while Part II discusses specific compensation options for brokerage companies.
Dodd-Frank is a massive piece of legislation that was created to address countless problems believed to have contributed to the 2008-2009 financial crisis. Signed into law on July 21st 2010, Dodd-Frank contains rules and regulations that significantly reform nearly every sector of the financial system of the United States.
Title XIV of Dodd-Frank is known as the “Mortgage Reform and Anti-Predatory Lending Act.” In Title XIV, Congress established a new set of rules to govern the mortgage loan industry, including strict regulations on the compensation of mortgage originators. Some of the most notable changes set forth in Title XIV include the following:
- For any residential mortgage loan, mortgage originators may not be compensated based on the specific terms of a loan (other than the principal amount of the loan).
- Mortgage originators may not be compensated by the consumer and the lender in the same transaction. Instead, mortgage originators may be compensated in one of two ways: by the consumer or by the lender (see below for an explanation of the rules under these two systems).
Pursuant to Title XIV, “mortgage originator” generally includes “any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain – (i) takes a residential mortgage loan application; (ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan; or (iii) offers or negotiates terms of a residential mortgage loan. . .”
“The term ‘residential mortgage loan’ means any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open end credit plan or, for purposes of sections 129B and 129C and section 128(a) (16), (17), (18), and (19), and sections 128(f) and 130(k), and any regulations promulgated thereunder, an extension of credit relating to a plan described in section 101(53D) of title 11, United States Code.”
The consumer-paid compensation structure is contemplated by Dodd-Frank, Section 1403. In consumer-paid loans, no mortgage originator shall “receive from any person other than the consumer and no person, other than the consumer, who knows or has reason to know that a consumer has directly compensated or will directly compensate a mortgage originator may pay a mortgage originator any origination fee or charge except bona fide third party charges not retained by the creditor, mortgage originator, or an affiliate of the creditor or mortgage originator.”
In other words, if the consumer pays the mortgage originator, no other party may compensate the mortgage originator for the same loan, except for actual third party costs associated with the loan.
The lender-paid compensation structure is also contemplated by Dodd-Frank, Section 1403. For lender-paid loans, a mortgage originator may receive from a person other than the consumer an origination fee or charge if:
1. the mortgage originator does not receive any compensation directly from the consumer; and
2. the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate of the creditor or originator). [Note: it is unclear, from the language of Dodd-Frank, which stage of the loan process is referenced by the term “upfront.”]
In other words, the lender-paid option allows compensation to a mortgage originator from his company as well as an institutional lender. However, under this system, the mortgage originator may not be paid by the consumer (except for actual third party costs associated with the loan).Specific requirements and options under the lender-paid compensation system are addressed in Part II: Questions and Answers about Lender-Paid Compensation.
Peter G. Sotiropoulos is a law clerk at Frascona, Joiner, Goodman and Greenstein, P.C.