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Thursday, September 12, 2013

MLO Compensation: Recouping Undisclosed or Uncollected Fees

QUESTION 
Does the MLO Compensation Rule specifically prohibits a lender from taking deductions from an MLO’s compensation to recoup undisclosed or uncollected loan fees, such as where the loan officer forgets to disclose or add mortgage insurance, transfer taxes, or other fees applicable to the transaction?

RESPONSE 
The MLO Compensation requirements under the Truth in Lending Act (“the Rule”), does not specifically prohibit a creditor from taking deductions to recoup undisclosed or uncollected fees, but such deductions, if taken, must comply with the Rule and other applicable laws.

In its Official Commentary to the Final Rule, the CFPB responded to an industry question that asked, whether an MLO’s compensation may be reduced to bear the cost of a pricing concession where the MLO assures the consumer that the interest rate is being locked but fails to actually lock the loan. 

The CFPB responded that, “This scenario is already covered by [the Rule] which allows reductions in MLO compensation to bear the cost of pricing concessions where there has been an unforeseen increase in a settlement cost above that estimated…or omitted” on the GFE.

While the CFPB’s response appears to treat the MLO’s conduct as an “unforeseen” event, repeated reductions for the “same categories of closing costs” could establish a pattern in violation of the Rule. The lender must retain appropriate records for proof of compliance in reductions.

Another industry question asked, whether a Lender could penalize the MLO for failure to comply with a creditor’s policies and procedures in the absence of a demonstrable loss to the creditor. In this scenario, there are no increases, changes or pricing concessions.

The CFPB responded that, “Unless the proxy analysis under [the Rule] applies, a reduction in MLO compensation as a penalty for the MLO’s failure to follow the creditor’s policies and procedures where there is no demonstrable loss to the creditor is outside the scope of § 1026.36(d)(1)(i) and thus need not be addressed by comment.” In other words, even where a reduction is not specifically prohibited or authorized by the Rule, such reduction cannot be based on the “terms and conditions” of the loan.

The CFPB also commented that, “Allowing reductions in MLO compensation to cover reduced, waived, or uncollected third-party fees may not result in any discernible benefit to consumers, and in any event the reduction, waiver, or collection of third-party fees is better addressed separately by the MLO and creditor outside the context of the transaction.”

As a final point to consider, state law may prohibit employer “self-help” cost recoupment measures, and may specifically prohibit deductions not otherwise authorized by law, or agreement. Wages and commissions may also be subject to varying protections under federal and state labor laws. 

Source: 12 CFR Part 1026: MLO Compensation Requirements under the Truth in Lending Act; (Regulation Z); AGENCY: Bureau of Consumer Financial Protection.

*Wendy Bernard
Director/Legal and Regulatory Compliance
Lenders Compliance Group