FAQ – LO Compensation and Unforeseen Costs
June 21, 2023 BY MQMR Blogger
Question: Has there been any recent guidance on reducing Loan Originator Compensation due to unforeseen increases in settlement costs or clerical errors?
The Loan Originator Rule permits a loan originator to reduce its compensation in narrowly defined circumstances to lower costs to consumers if there are unforeseen increases in settlement costs. In November 2022, the Consumer Financial Protection Bureau (CFPB) published its Fall 2022 Supervisory Highlights. In the Supervisory Highlights, the CFPB explained that examiners found that lenders issued Loan Estimates to consumers based on fee information provided by their mortgage loan originators (MLOs). The lenders later discovered that the fee information entered was incorrect due to clerical errors by the MLOs. In each case, the lenders provided a lender credit to the customer to correct the tolerance issue. However, the lender then also deducted the lender credit amount from the MLO’s commission based on the exception set forth above which permits decreasing a loan originator’s compensation due to unforeseen increases in settlement costs.
Examiners found that the MLOs knew the correct fee amounts at the time of the initial disclosures as the settlement services had already been performed. The CFPB made clear that clerical errors are not “unforeseen”. Rather, these errors violate TRID as the lenders provided the disclosures without using the “best information reasonably available”. The cures which result from these errors may not be allocated to the loan originator.
Lenders should also be mindful of state labor and employment laws, which may prohibit such a claw back as well.