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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2013

What Defines a Loan Originator?

Be aware of which employee duties trigger new compliance requirements

In implementing the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) has been asked to bring a wide range of changes to the mortgage industry. Of particular note, however, are the CFPB’s loan-originator compensation requirements amending Regulation Z, which aim to address one of the most fundamental questions in the industry: Who should be — or could be — considered a loan originator (LO)?

The answer has a number of potentially costly consequences for mortgage banks and brokerages. This is because the CFPB’s  final rule on loan-originator compensation created restrictions on LO compensation, required LOs to meet qualification standards as to registration, licensing and background checks, and imposed certain record-keeping requirements. The rule also generated uncertainty as to what types of employees either met the definition of an LO or were excluded. Without further clarification, it appears that the rule could effectively expand the LO definition to include employees not traditionally considered LOs, such as tellers, greeters and other administrative professionals.

This past January, the CFPB implemented certain Dodd-Frank requirements that regulate LO compensation and establish restrictions on the financing of single-premium credit insurance, among other provisions. Under the rule as applied to the revised Regulation Z, an LO may include an employee, agent or contractor of the creditor or loan originator organization.

An LO is defined as a person who, expecting monetary gain or compensation, “takes an application, offers, arranges, [or] assists a customer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities.” The CFPB specifically excluded those who do not take credit applications or negotiate credit terms available from a creditor; that is, the CFPB excluded those who perform “purely administrative or clerical tasks” on behalf of an organization.

The bureau’s comments on the revised section provided further guidance on this provision, but unfortunately, they also contained significant ambiguity. One comment, for instance, excluded from the LO definition employees that both “provide loan originator or creditor contact information in response to the consumer’s request, provided that the employee does not discuss particular credit terms available from a creditor and does not refer the consumers … to a particular [LO].”

Industry professionals were concerned that the phrase “in response to the consumer’s request” could result in tellers, greeters or other such administrative personnel meeting the LO definition merely for providing contact information to a customer who did not clearly or explicitly request such information. Many of these personnel are instructed to follow a script that asks consumers whether they’re interested in a mortgage regardless of the consumer’s particular financial condition.

Classifying such employees as LOs would impose broad financial burdens on mortgage organizations, that would then need to implement training, licensing and certification requirements under Regulation Z. Organizations that employ large numbers of administrative staff responsible for interacting with customers on a daily basis would face significant compliance costs as a result.

Many mortgage professionals also were wary of the phrase “credit terms” as used in several comments. For example, one comment excluded from the definition of an LO persons who, among other things, do not discuss “specific credit terms or products available from a creditor with the consumer.” The fear was that the phrase “credit terms” could be construed broadly, transforming any person who provides general information to a consumer into an LO and subjecting that person’s employer to the associated compliance burdens.

This past June, however, in response to public comment, the CFPB issued proposed modifications to its final rule, including specific responses to the aforementioned issues. Regarding the “in response to the consumer’s request” clause, the CFPB proposed a limited expansion of the exclusion, removing the phrase in its entirety. The CFPB clarified that the exclusion still does not apply to LO employees and organizations who, while providing such contact information to a consumer, either direct that consumer to a particular professional based on the employee’s own assessment of the consumer’s finances or discusses specific available credit terms.

Moreover, in response to a comment excluding from the LO definition persons who describe “other product-related services” to consumers, the CFPB proposed amending the comment to provide examples of persons fitting into this exclusion, such as individuals who describe optional payment methods or the availability of 24-hour customer support. The amendment also clarified that persons performing the administrative task of coordinating closing processes were excluded from the definition of an LO, while persons who arrange credit transactions were not.

As to the phrase “credit terms,” the CFPB has clarified that, when an LO or creditor’s employee, agent or contractor offers or discusses particular credit terms based on that person’s assessment of the consumer’s finances, that person is considered an LO. That said, a discussion of general credit terms that a creditor or LO makes available and advertises to the public does not subject the employee, agent or contractor to LO status.

Essentially, as long as only general information is provided, loan originator organizations should be safe from the onerous compliance burdens that would otherwise be imposed on them when it comes to certain classes of employees. Conversely, mortgage banks and brokerages should recognize that allowing certain employees to recommend specific credit terms or services to consumers, either as part of a formal policy or on the employees’ own initiative, will bring these employees under the LO designation and all its attendant compliance costs.  


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