State regulators have issued guidelines to mortgage examiners on how to test state-licensed nonbanks for steering and other violations of the Federal Reserve's loan origination compensation rule.
The Fed's loan officer rule is designed to prevent mortgage brokers and other table funders from engaging in unfair and abusive practices that increase their compensation at the expense of consumers.
"The purpose of the guidelines is to provide the examiner with a standardized set of procedures to reviewing institutions for basic compliance with the rule," according to the Conference of State Bank Supervisors, American Association of Residential Mortgage Regulators and National Association of Consumer Credit Administrators.
The loan officer rule prohibits "dual compensation" where a mortgage broker is paid by both the wholesaler and borrower. (Under current rules a mortgage broker can be compensated by either the wholesaler or borrower — but not both.)
The guidance advises examiners to test if the borrower has paid any fees to the broker and then check to see if any other person has made a payment to the broker or his loan officers.
Besides interviewing management, examiners should review samples of Department of Housing and Urban Development settlement statements, loan documents (particularly where yield spread premiums are paid) and payroll records to find evidence of dual compensation.
The Fed rule also prohibits mortgage brokers and their loan officers from steering borrowers into loan products that increase their compensation.
There are two basic tests for determining steering: "Did the loan originator make greater compensation than would have been made (all things being equal)," and "is the loan not in the borrower's interest. Both tests must be satisfied for possible violation," the guidance said.
If steering is suspected, the examiner must review a sample of similar loans made by the loan originator to determine if the loan officer received higher compensation on certain loans and to determine if the loans were not in the borrower's interest.
State regulators acknowledge that the Fed's rule is "both complex and nuanced" and the guidelines cannot provide instruction for every scenario that might arise. However, the regulators conducted "extensive industry outreach" in developing examination tools to determine compliance with certain "bright line" areas of the rule, according to the state bank supervisor group's president and chief executive, John Ryan.
"State mortgage regulators must ensure compliance with the final rule developed by the Federal Reserve, but we want to do so in a way that protects consumers while creating greater certainty and limiting regulatory burden for those providers we regulate," Ryan said.