Issue
On January 20, 2013, the CFPB adopted its Loan Originator Compensation Rule, which took effect in January, 2014. Among other things, the rule implements Section 1402(b)(1)(A) of Dodd-Frank, which requires the CFPB to establish regulations so that mortgage loan originators (LOs) that work for banks (depository institutions) meet a standard of being “qualified.” However, the rule the CFPB has adopted imposes none of the most important 2008 SAFE Act qualification requirements that apply to non-bank LOs, relying instead on minimal self-training requirements. As a result, the rule falls short with respect to consumer protections, and perpetuates an uneven playing field between banks and non-banks with respect to qualifications standards for their mortgage loan originators.
Action Needed by CFPB
The CFPB should use its statutory responsibility to ensure that ALL loan originators are “qualified” to require ALL loan originators, to pass the basic SAFE Act mortgage competency exam. With such a requirement, it is reasonable to waive bank LO pre-registration training requirements – as long as each bank LO completes 8 hours of annual SAFE Act continuing education courses. Finally, background checks for bank LOs should be done by objective third parties (as is done for non-bank LOs), instead of leaving this under control of the bank.
Consumers Not Adequately Protected by Bank LO Requirements
- Consumers utilizing loan originators to secure a mortgage loan are met with a patchwork of regulation that has gaps when it comes to the 400,000 depository institution (bank) mortgage loan originators. Non-bank LOs are subject to strict requirements – each must take 20 hours of SAFE Act pre-licensing courses and pass the basic SAFE Act competency test before they can originate loans and must also complete 8 hours of SAFE Act continuing education courses each year to stay current on federal regulations and ethics.
- However, the CFPB has exempted bank mortgage originators from ANY of these requirements, subjecting them only to minimal training requirements – and allowing such training to be done in-house within the bank.
- As a result, fewer less than 4% of all LOs that work at depository institutions have even taken the basic SAFE Act exam – and thousands of them have likely failed the test – without the consumer even knowing the bank LO that helped them get their loan is note qualified, since they failed the basic mortgage competency test
- Using historical SAFE Act exam pass rates, tens of thousands – and possibly even more than 100,000 – bank mortgage originators would likely fail the SAFE Act test if forced to take it.
Evidence Shows the Need for Stronger Bank Loan Originator Standards
- In rejecting a test requirement in favor of weaker training requirements, the CFPB wrote: “The Bureau has not found evidence that consumers who obtain mortgage loans from depository institutions . . . face risks that are not adequately addressed through existing safeguards and proposed safeguards in this rule.” However, there is evidence that more protections are needed with respect to bank mortgage lending, eg.:
- TARP. Congress approved $700 billion in loans and assistance to financial institutions, including hundreds of billions for banks, necessitated in large part by mortgage losses.
- Banks. Many FDIC-insured institutions ( eg., WAMU) made risky subprime mortgage loans.
- Justice Department sued major banks for their underwriting of mortgage backed securities – both because the loans were poorly underwritten and because investors were misled.
Requiring the SAFE Act Exam is Not Burdensome
The CFBP, in its rulemaking on Section 1402(b)(1)(A), expressed concern about the burden of imposing SAFE Act requirements on banks. However, requiring a test of all bank LOs imposes ZERO administrative burden on the bank – it merely requires each individual that wants to do mortgage loan origination to take a 3-hour test, which can be done on a Saturday. And the cost is minimal – typically around a $125 fee to take the test. The only other “burden” is that the individual must take the time to learn enough to pass the test.
[This material has been prepared by the CHLA for informational purposes only, and may not be used for public use without the express written consent of CHLA]