The Consumer Financial Protection Bureau issued its latest set of Supervisory Highlights and reminded us that “unforeseen” means “unforeseen.”
The CFPB’s regulations generally prohibit reducing a loan originator’s compensation in selective cases. While lower compensation sounds good for consumers, the CFPB asserts that allowing loan originators to decrease their compensation in selective cases is actually harmful at the macro level, because it incentivizes them to offer most consumers higher-priced loans at the outset. However, the CFPB determined that allowing compensation concessions to cover unforeseen increases in closing costs does not raise concerns about improper incentives, so long as those instances are truly unforeseen and are documented for the examiners.
According to the Supervisory Highlights, the CFPB found that certain loan originators received lower compensation to cover closing costs that were not unforeseen. The agency’s examiners found that the loan originators disclosed to consumers certain costs that were either known to be inaccurate or that resulted from clerical errors. Those amounts were covered by lender credits initially, but then recouped from the loan originators’ compensation. While it may seem reasonable to make a loan originator pay for his/her mistakes, the CFPB found that the mistakes did not come within the “unforeseen” exception. Accordingly, the loan originator must receive his/her standard compensation, and the lender must generally absorb those costs.
The only concrete example of an “unforeseen” cost that the CFPB has provided is a rate lock extension fee when closing is delayed due to an unforeseen title issue. The CFPB has otherwise explained that the “unforeseen” exception does not apply to events that are within a loan originator’s control or when the loan originator knows or reasonably is expected to know the amount of the closing cost in advance. If a loan originator makes repeated pricing concessions for the same categories of closing costs across multiple transactions, the CFPB continues to insist that the lender, and not the loan originator, must pay the price.