By Carmen Harper Thomas and Neil Grayson

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Wall Street Reform Act”) was enacted to reform Wall Street and develop a stronger federal consumer protection system. The bill was introduced in 2009.  The Wall Street Reform Act contains provisions restricting mortgage originator compensation in the Mortgage Reform and Anti-Predatory Lending Act, (the “Act”) Title XIV, sec. 1403.  Click here for full summary.  These provisions, which apply regardless of whether the mortgage operations are conducted in the bank or in a subsidiary, will force changes in the mortgage operations of many banks. 

Language affecting mortgage originator compensation

Section 1403 of the Act, adding section 129B(c)(1) to the Truth in Lending Act (“TILA”), prohibits a mortgage originator from receiving, “directly or indirectly, compensation that varies based on the terms of the loan.”  The definition of mortgage originator is a traditional mortgage originator.[1]  In addition, section 1403, adding section 129B(c)(4) to TILA, states that nothing in 1403 “permit[s] any yield spread premium or other similar compensation that would, for any mortgage loan, permit the total amount of direct and indirect compensation from all sources permitted to a mortgage originator to vary based on the terms of the loan (other than the amount of the principal).”  Thus, any compensation to a mortgage originator that is affected by the terms of the loan is prohibited.  The legislation targets yield spread premiums, but it may reach other compensation arrangements if the amount of compensation depends in some way on the terms of the loan. 

Origination fees

Although the Act prohibits compensation connected to the terms of the loan, borrowers can still pay mortgage originators an origination fee under certain conditions.  First, an originator can receive an origination fee only if “(i) the mortgage originator does not receive any compensation directly from the consumer; and (ii) 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).”  See Act sec. 1403, adding section 129B(c)(2)(B) to TILA (emphasis added).  They could receive the origination fee directly from the consumer pursuant to the Act, sec. 1403, adding section 129B(c)(2)(A) to TILA.

Other things you can do under the Act

The Act states that it does not “limit[] or affect[] the amount of compensation received by a creditor upon the sale of a consummated loan to subsequent purchaser.”  Act, sec. 1403, adding section 129B(c)(4)(A) to TILA.

The Act states explicitly that a borrower can finance the origination fee or costs, including through the principal or rate, as “long as such fees or costs do not vary based on the terms of the loan (other than the amount of the principal) or the consumer’s decision about whether to finance such fees or costs.”  Act, sec. 1403, adding section 129B(c)(4)(C) to TILA.

The Act does not “prohibit[] incentive payments to a mortgage originator based on the number of residential mortgage loans originated within a specified period of time.” Act, sec. 1403, adding section 129B(c)(4)(D) to TILA.

Mortgage originator personal liability

The amendments to TILA also create personal liability for mortgage originators for violations of section 129B.  If a mortgage originator violates section 129B, the maximum liability to a consumer is the greater of either the actual damages to the consumer or 3 times the total amount of direct and indirect compensation or gain accruing to the originator in connection with the loan, plus costs and attorney's fees.  Borrowers can bring class actions under TILA, and the Act raises the limit on class actions from $500,000 to $1 million.  Act sec. 1416, amending section 130(a) of TILA.

Effective date

The Act was signed into law on July 21, 2010.  Assuming no regulations are issued to implement the provisions of the section on mortgage originator compensation, the earliest those provisions could take effect is 24 months later, which would be about July 21, 2012.  If regulations are issued, the section takes effect when the regulations take effect, which would be no later than 3 years, or July 2013, but it could be sooner depending on how quickly the regulations are implemented.  The Federal Reserve Board is tasked with issuing regulations to implement the Act.  Act, sec. 1403, adding section 129B(c)(3), and sec. 1405(a), adding section 129B(e)(1) to TILA.

For additional information

If you have any questions about the new restrictions on mortgage originator compensation or how these restrictions may affect your institution, please contact either Neil Grayson at 864-250-2235 or Carmen Thomas at 803-255-9385.

[1] In addition, the amendments apply to any creditor previously covered by TILA.  TILA defines “creditors” as a person who both “regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required” and “is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement.”  15 U.S.C. § 1602(f).