Mortgage Origination - Regulation Z Violations

Violations of Regulation Z noted in Issue 26 of the Spring 2022 Consumer Financial Protection Bureau (CFPB) Supervisory Insights based on examination findings included the following.

Compensating loan originators differently based on product type

Regulation Z generally prohibits compensating mortgage loan originators in an amount that is based on the terms of a transaction. As explained by the Bureau in the preamble to the Bureau’s 2013 Loan Originator Final rule, it is not permissible to differentiate compensation based on credit product type, such as credit extended pursuant to government programs for low and moderate income borrowers since products are simply a bundle of particular terms.

Examiners found that certain lenders’ loan originator compensation agreements provided for higher loan originator compensation where Federal National Mortgage Association (Fannie Mae) conforming fixed rate loans surpassed a designated threshold percentage of the total loans closed by the loan originator. This compensation was higher than the compensation paid when such loans did not surpass the designated threshold percentage. Paying higher commissions under these circumstances constitutes paying compensation based on credit product type, which, in turn, violates the Loan Originator Rule as compensation based on the term of a transaction.

Insufficient documentation for changed circumstance

Regulation Z requires a creditor to provide the consumer with good faith estimates on the Loan Estimate for certain transactions. The closing cost estimates are generally considered to be in good faith if the amount paid by or imposed on the consumer does not exceed the amount originally disclosed. A creditor is permitted to use a revised estimate of a charge instead of the estimate of the charge originally disclosed to reset tolerances when there is a valid changed circumstance permitted by Regulation Z that resulted in the increased costs. One such valid changed circumstance is where the consumer requests revisions to the credit terms. For a creditor to successfully reset tolerances as permitted by Regulation Z, it must, among other things, maintain documentation explaining the reason for revision.

Examiners found that certain lenders failed to retain sufficient documentation to establish the changed circumstance’s validity. Specifically, the lenders disclosed an appraisal fee on initial Loan Estimates and subsequently disclosed appraisal rush fees, in a higher amount, on revised Loan Estimates. The lenders claimed the rush appraisals, which led to the

appraisal rush fees, were requested by consumers. However, in each instance, the lender failed to maintain sufficient documentation evidencing the consumer’s request of the rush appraisals; in fact, the documentation maintained reflected that either the appraisal management company notified the lenders that a rush appraisal would be needed or the lenders’ loan officers requested the rush appraisal. In certain instances, the lenders’ documentation included only a checked box indicating the consumer requested the rush appraisal, but there was no other evidence retained reflecting this occurred.

Disclosures failed to reflect the terms of legal obligation

Examiners identified instances where lenders’ Closing Disclosures failed to reflect the fully-indexed-rate as required by the promissory note because the lenders’ software miscalculated the disclosed rates. The software used a rounding method different from the method used in the corresponding promissory notes. The software automatically rounded up to the nearest one-eighth percent, despite the promissory note’s instruction to round to the nearest one-eighth percent – up or down. This practice resulted in Closing Disclosures that do not reflect the terms of the legal obligation between the parties, and likely affected files and loans transferred to other loan servicers.

It may be prudent to ensure such Reg Z. pitfalls are not present in your institution.