A mortgage loan product is a bundle of loan terms. That is what the Consumer Financial Protection Bureau (CFPB) reminds us in its latest Supervisory Highlights.
The CFPB first used that phrase back in 2013, but you may have missed it. It appeared in the fine print of footnote 82 in the CFPB’s lengthy final rulemaking preamble. In that discussion, the CFPB addressed public comments from “a diverse variety of industry commenters” wondering whether mortgage loan originators could receive compensation based on “variations in the amount of credit extended for different products, such as differentially compensating loan originators for jumbo loans, conventional loans, and credit extended pursuant to government programs for low-to moderate-income borrowers (which typically have smaller amounts of credit extended and smaller profit margins).” While Regulation Z prohibits compensation to loan originators that is based on the terms of closed-end residential mortgage loans, the commenters were concerned that the typical method of paying loan originators (through basis points on the loan amount) would create a disincentive for them to originate smaller loans. In responding to those concerns, the CFPB dropped the somewhat off-topic footnote 82, stating that it is “not permissible to differentiate compensation based on credit product type, since products are simply a bundle of particular terms.”
In the CFPB’s recent Supervisory Highlights, the agency cites footnote 82 to support examiners’ demands that mortgage lenders stop compensating loan originators differently for bond loans under state Housing Finance Agency (HFA) programs or for construction loans. After all, the CFPB stated, since it is not permissible to compensate loan originators based on loan terms, it is not permissible to do so based on product type, since a loan product is simply a bundle of loan terms.
Although the CFPB cites footnote 82 for its premise that loan originator compensation must not vary based on product type, the agency could have pointed to a lengthier discussion found elsewhere in its preamble. At the time of that 2013 rulemaking, through which the CFPB revised the Federal Reserve Board’s previously issued LO Comp Rule (as it has come to be known), commenters argued in favor of exemptions for certain loan types – for instance, for prime loans or government products. In addition, mortgage lenders and HFAs have for years urged the CFPB to exempt HFA products developed for lower-income households or poorly-served communities, loans offering down-payment or closing cost assistance, or loans under employees’ assistance programs for affordable homes near their work. The CFPB declined to allow compensation distinctions between loan products, however, responding that it would be contrary to the Dodd-Frank Act, regardless of the social or economic goals that the products may advance.
In addition to HFA loans, the Supervisory Highlights mention construction loans, which often require specialized expertise and additional time and effort to originate. Certainly it is difficult to imagine that a loan originator could steer a consumer into a construction loan in order to increase the loan originator’s compensation. Similarly, many lenders and loan originators argue that there is little risk of steering in connection with HFA products, because borrowers who obtain those loans generally are ineligible for other products. Still, the CFPB maintains that those and other loan products are bundles of loan terms, and loan originator compensation cannot vary based on loan terms.