Federal Reserve Board Issues Final Rule Implementing MLO Compensation and Anti-Steering Provisions of the Dodd-Frank Act



On Monday afternoon, the Federal Reserve Board issued a final rule effectively implementing the sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act dealing with loan originator compensation and the prohibition against loan steering.  The word “effectively” is used because essentially, this is a modified version of a proposed rule issued last August 26th (which is well before the Dodd-Frank Bill was even debated on Capitol Hill).

The new rules will become mandatory on APRIL 1, 2011, although if past rulemaking is any indication, many banks/investors will begin to implement changes sooner to ensure that loans made under the existing rules are closed before the deadline.

Here are some key details:

  • All loan originators will no longer be permitted to receive compensation based on the loan terms (interest rate, etc.), but will be allowed to be compensated based on a fixed percentage of the loan amount.  Based on the language in the Act and in the rule, it would appear that YSP is effectively eliminated as of April 1st.
  • On a given transaction, loan originator compensation may come from the consumer OR a third party (i.e. a bank in a brokered transaction), but NOT BOTH.
  • Loan originators will be explicitly prohibited from steering borrowers to loans that are “not in their interest” in order to receive more compensation.
  • It establishes a “safe harbor” tolerance for the steering prohibition, saying that no steering is deemed to have occurred if:
    • The Loan Originator presents the Consumer with loan offers for each product in which the consumer states they have an interest AND
    • The loan options that are presented include the lowest rate that the consumer is qualified for on a loan with no high-risk features like a prepayment penalty or negative amortization as well as the lowest origination fees and points that the consumer is qualified for on that loan.

The text of the final rule, which contains all of the provisions and requirements including in-depth detail on safe harbor, can be found at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816d1.pdf

In the actual text of the rule, the Federal Reserve Board gives some very specific examples of compensation that would and would not be permitted under the new rule.  A thorough reading of pages 100 – 107 of the rule may prove helpful to loan originators, managers and company owners alike.