How To Pay A Loan Officer A Fixed Rate

Transcription

1 Review of Loan Originator Compensation Rule Session 1 Presented by: v bso AllRegs Academy. Know it all.

2 . No part of this work may be copied, reproduced, or translated in any form or medium without the prior written consent of AllRegs. Permission may be granted to redistribute this material in its entirety provided that this copyright notice is not removed or altered. No portion of this work may be sold, either by itself or as part of a larger work, without the express written permission of AllRegs.

3 AllRegs Academy Welcomes you to Review of the Loan Originator Compensation Rule The session will begin at 2:00 PM EST AllRegs Customer Service: (800) Welcome to this training event hosted by AllRegs Academy or

4 Our Speaker Howard Lax Lipson, Neilson, Cole, Seltzer & Garin, P.C. Bloomfield Hills, Grand Rapids, Las Vegas Today s Agenda Define the parameters of the rule and various terms. Explain restrictions on loan originator compensation formulas imposed by the rule. Explain how the rule encourages loan originators to present loan terms that are in the consumer s interests. Present frequently asked questions about loan officer compensation. Present frequently asked questions about broker fees. Briefly explore some of the requirements that Dodd-Frank will impose when rules are promulgated. Briefly review minimum wage and overtime pay requirements of the Fair Labor Standards Act.

5 What is the Purpose of the Rule? FRB wanted to stop loan originators from varying loan terms, especially the practice of up-selling rates, fees, and other loan terms. HOEPA requires the FRB to outlaw predatory lending practices. Removing the monetary incentive for up-selling was the least intrusive method of eliminating these predatory practices. FRB also required loan originators to offer their best deals available to the consumer. Finally, to avoid the appearance that loan originators are double paid, loan originators may be paid by the lender or by the consumer, but not by both. When is the Rule Effective? The rule is effective for all applications received on or after April 1, Brokers and lenders do not have an application without the borrower s name, SSN#, income, property address, estimate of property value and loan amount. Applications are in writing if the loan officer does not write down this information on a Form 1003 or at least on the back of an envelope prior to April 1, 2011, the new rule applies. The rule is effective if a mortgage broker receives the application in March 2011, but sends it to the investor on April 1, Lenders and employers will apply the new rule well before April 1 to make mortgage broker fees and payroll procedures uniform for each pay period.

6 The Three Commandments The rule breaks down into three sub-rules, from which all of the effects flow. 1. Loan Originators shall not receive compensation based directly or indirectly on any loan term other than the loan amount. 2. Loan Originators shall not receive compensation both from the consumer and the creditor. 3. Loan Originators shall offer loan terms to the consumer that are in the consumer s interest. The First Commandment Loan Originators shall not receive compensation based directly or indirectly on any loan term other than the loan amount. - Regulation Z, Verse 36(d)(1)

7 The First Commandment We know what the loan amount is from prior regulations. The FRB gave us definitions of loan originator loan term and compensation in the rule. We have only examples of what directly or indirectly may mean. The FRB may or may not develop additional guidance, but we cannot count on additional guidance before April 1, It is best to err on the side of caution when developing policies and procedures. What is a Loan Originator? Any person or legal entity that arranges, negotiates, or otherwise obtains an extension of mortgage credit for a consumer in return for compensation or other monetary gain is a Loan Originator. A person or company is a Loan Originator if he/she/it expects to be paid for arranging, negotiating, or obtaining a loan, whether or not he/she/it is actually paid. Brokers and lenders (legal entities or individuals) that originate table funded loans in their own name are loan originators. All loan officers are subject to this rule, regardless of whether they work for a bank, credit union, mortgage company, or they are self employed.

8 The Equalizer: Expecting Payment You cannot get out of a violation of the rule simply by giving up your fee. Please note that this rule is the great equalizer between all loan officers across the entire spectrum of residential mortgage lending. It really does not matter that the rule does not apply to creditors while it applies to mortgage brokers. Loan officers are key to up-selling loan terms. Without the incentive to share profits with the loan originator, the predatory practices should stop. What is NOT a Loan Originator? The rule exempts true creditors, i.e. institutions that have a legitimate reason to negotiate loan terms. True creditors (recognized as Lenders under RESPA) are not Loan Originators : Entities and persons that fund loans with their own money or with a bona fide warehouse line of credit are not Loan Originators. The FRB did not define a bona fide warehouse line of credit. Loan servicers are not Loan Originators unless they originate refinance loans. A manager, underwriter, or processor who has no role in arranging, negotiating, or obtaining any loan for any individual, and who is not paid by the loan, is not a loan originator.

9 Why Should True Creditors Care? You may be asking why this rule is important to true creditors if they are exempt. The answer is: Your institution is subject to the rule for loans that are brokered out because you do not have a product for that borrower. You still get to control your rate sheets for loans in which you are the lender, but the person dealing with the consumer (the loan officer) has to follow this rule, which locks you into the rule. The only way out is a totally automated origination system with no loan officers, like an airline reservation system. Then the rule would truly not apply to creditors (at least until the FRB changes the rule). What is NOT a Loan Originator? Financial planners, attorneys, and others who are paid only by the consumer are exempted from the First Commandment. Creditors and financial planners have an advantage over simple mortgage brokers by having no restriction on income, while brokers that are paid by the creditor may only collect uniform origination income. A mortgage broker that is paid only by the consumer for a loan is exempt from the First Commandment for that loan. This exemption does not apply to loan officers.

10 What is NOT a Loan Originator? The rule also exempts out those who incidentally negotiate or arrange mortgage loans as part of providing another legitimate service. For example, a real estate broker will be able to suggest or negotiate finance terms on behalf of a buyer and earn a commission solely for selling a home, without running afoul of this rule. What is a Bona Fide Warehouse Line? Is a warehouse line of credit bona fide if: the line of credit is used to fund loans sold to other institutions? Some warehouse lines of credit can only be used to fund loans sold to the warehouse line of credit lender. the cost to fund a loan using a warehouse line of credit is less if the loan is sold to the warehouse lender? a warehouse line of credit is provided by an affiliate of the institution purchasing the loan? the warehouse lender retains a security interest in the loan until the loan is sold and the warehouse line of credit lender is repaid? the investor and the loan originator enter into a mandatory repurchase agreement rather than a credit agreement? the loan is purchased before the loan is packaged for sale?

11 HUD Asks for Comments on the Role of Bona Fide Warehouse Lines HUD issued a request for comment on how to define a bona fide warehouse line (75 FR 71724, ), and whether consumer disclosures are needed. The solicitation for information may or may not lead to further guidance under RESPA. Any RESPA guidance can only be used for purposes of TILA if the FRB adopts the guidance by reference in its rule (e.g. the FRB allowed creditors to use the RESPA definition of an application for purposes of determining when disclosures must be provided under TILA). Disclosures required under RESPA have no bearing on TILA disclosures or requirements (e.g. do not confuse the amounts disclosed in Block 1 of the GFE and on line 801 of the HUD-1 for compensation that is subject to the TILA loan originator compensation rule). What is Compensation? Compensation is any portion of a fee or charge that is not passed through to a non-affiliated settlement service provider. Compensation includes all origination charges, discount points, and any other fee retained by the loan originator or retained by an affiliate of the loan originator, bonuses, prizes, tips, markups of third party fees, merchandise, leads, and other things of value. The FRB may consider the opportunity to originate a future loan to be compensation stay tuned for more guidance on point banks. Income retained by an affiliate of a Loan Originator is counted as the Loan Originator s income.

12 Compensation Based on Loan Terms Compensation for originating any loan may not be based (in whole or in part) on interest rate, annual percentage rate, variable or fixed rate, loan-to-value ratio, term of the loan, balloon payment, grace period, late fee amount, existence of mortgage insurance or amount of insurance, or the existence or amount of a prepayment penalty. Compensation may not be based upon underwriting considerations, such as consumer s credit score, credit risk profile, debt-to-income ratio, LTV, employment status, CRA credit, or family connections, if the terms of the loan vary based on these underwriting factors. What is an Affiliate? Affiliate has the same meaning as used in Section 32, and is defined in Regulation Y. Affiliates are entities under common control of a holding company. Entities under common control of an individual are not affiliates because there is no common control by a company. Certain revocable living trusts are also excluded from the definition of a company. The RESPA definition of an affiliate (1% ownership or control) does not apply to the TILA rule.

13 Some AfBA s May Be Victims Most AfBA s related to mortgage companies are organized to avoid being affiliates. Typically, the owner of the mortgage company also owns the AfBA rather than having the mortgage company or a holding company own the AfBA. An individual is not a company and, therefore, companies owned by an individual are not affiliates, even when there is common control. AfBA s are individually owned to avoid having AfBA fees count as points and fees for high cost loan thresholds. Individuals who do not originate loans are not restricted from receiving dividends from the companies they own. Some AfBA s May Be Victims Most AfBA s related to depository institutions are affiliates. Typically, the depository institution or a holding company owns and controls the AfBA. This results in the depository institution and the AfBA being affiliates that are treated as a single entity for purposes of the First Commandment. When the depository institution (or its affiliate) acts as a Loan Originator, income from an affiliated title agency or appraisal management company usually varies, resulting in a violation of the First Commandment. A recent MBA letter indicates that FRB advises that an affiliated title agency can earn a fee without having it be considered loan originator income. We will have to wait for FRB confirmation.

14 Exclusions from Compensation Third party fees passed through to non-affiliated third parties are not loan originator compensation. Third party fees that are cost averaged and result in some of the fee being retained by the loan originator are not compensation if: The third-party charge imposed on the consumer was bona fide and reasonable; and The loan originator does not know that the fee is higher than the range that will be charged; and The loan originator complies with state and other applicable law. At the moment, nobody is cost averaging since there is no TILA safe harbor for reasonable fees. Compensation Not Based on Loan Terms Compensation may be based on loan performance (default rate), hours worked on a loan, new vs. existing customer of the creditor, flat fees for each loan, a percentage of the loan amount, the number or dollar amount of loans originated, pull through or drop out percentage, compliance accuracy, overhead costs, and other terms that do not result in variable loan terms besides the loan amount. Volume based compensation is probably acceptable under TILA and RESPA for bona fide compensation paid to bona fide employees, but volume based compensation is not permitted under RESPA for mortgage broker fees. TILA does not override RESPA restrictions on referral fees.

15 The Rule Does Not Restrict True creditors are not restricted from varying loan terms from customer to customer, and receiving whatever compensation the market will bear. The rule restricts loan officers from benefitting from different loans terms, so commissions cannot be a percentage of the creditor s profits of the loan. Mortgage brokers are not limited to receiving the same compensation formula from all creditors. The formula that a creditor uses to pay a particular mortgage broker should be uniform, and the broker s income from all sources for that creditor s loans must match this formula. Loan officers of mortgage brokers cannot receive a percentage of profits since income would vary from loan to loan. The Rule Does Not Restrict Commission rates may vary from broker to broker, and from loan officer to loan officer. A loan originator may be paid at several different levels. Loan officer pay may vary by hours worked (overtime pay), years of experience, etc. Mortgage brokers may be paid by different creditors using different formulas based on the amount of work they do and the amount of risk they assume (RESPA Statement of Policy ). A high producing loan officer can earn a larger percentage of the loan amount than a lower producing loan officer. Example of a good formula: 20 BPS for the first loan, 30 BPS for loans 2-4, 5- BPS for loans 5-10 per month. Compensation levels cannot be adjusting to simulate profits, and deferred income (bonuses) cannot be tied to or based upon profits (this restriction also applies to overall the bonus pool).

16 The Rule Does Not Restrict The Federal Reserve Board expects those who are the best loan officers to earn higher levels of compensation. The Federal Reserve Board realizes that overhead costs vary significantly from loan officer to loan officer. Hence, loan officers can be treated differently. What cannot occur is compensating a single loan officer differently based on the terms that the loan officer can negotiate with the consumer. The Rule Does Not Restrict Lender paid mortgage broker fees may vary from broker to broker based on a variety of factors. Loan originators may be paid different rates based on loan quality (default rates and compliance mistakes). Hybrid compensation formulas are permitted for mortgage brokers and loan officers, e.g. a flat fee per loan plus a percentage of the loan amount, reduced by a fixed amount for each compliance error, with a multiplier up or down for fallout rate, less a percentage of the loan amount if there is an early payment default.

17 The Rule Does Not Restrict Lender paid mortgage broker fees may vary from broker to broker due to loan quality. Losses on early defaults, prepayments, recapture of premiums, and indemnifications cannot be deducted on a dollar per dollar basis, since fees would then vary based on loan profits. A deduction based on loan amount or a flat fee per loan is permitted since this would not tie income to profits. This rule does not interfere in any way with HUD s 1999 RESPA policy statement regarding lender paid mortgage broker fees. Mortgage brokers should be paid more for performing more work and for producing a better product. The Rule Does Not Restrict The rule does not prohibit periodic evaluations of performance and adjustment of fees and commission rates based on these evaluations. Evaluations may occur every 6 or 12 months. MBA: FRB advice permits more frequent adjustments. The nature of the adjustment matters, and not the frequency. The rule does not restrict the amount of compensation that a consumer may pay to a mortgage broker when the creditor does not pay a mortgage broker fee. This does not mean that the mortgage broker may decide to only collect fees from the consumer to be able to pay its loan officers anything it wants. The compensation rules apply to mortgage brokers and loan officers independent of each other.

18 The Rule Does Not Restrict The rule does not prohibit loan officers from advising consumers to finance closing costs, even though the loan officer receives a higher dollar commission if the loan amount is higher (verbal advice from FRB). Watch out for the Third Commandment discussed later (the antisteering rule) This rule does not interfere with the usual human resources functions of employee performance evaluation and performance-based compensation, with the exception that compensation and compensation changes cannot be based on the profitability of any loan(s). Other Effects of the Rule on Brokers The FRB views a seller paid mortgage broker fee the same as a borrower paid mortgage broker fee. The borrower is paying the fee through a higher sale price. The rate sheets provided by a creditor to a mortgage broker may vary based on the formula used to compensate the mortgage broker. Brokers that are paid only by the borrower may apply part of their income to pay closing costs, whereas brokers paid by creditors may not apply part of their income to closing costs of borrower credits.

19 Other Effects of the Rule on Brokers If the creditor finds that a loan will not justify the formula that the creditor uses for compensating a broker, the creditor may allow the broker to switch the transaction from a creditor paid broker fees to borrower paid broker fees prior to closing. This may occur when market rates change suddenly, or the borrower finds a more competitive deal. The broker cannot reduce its fee to make the deal happen if the creditor is paying the broker fee, but the broker can reduce its fee if the borrower is paying the broker. Make sure that the GFE is properly structured to allow the switch otherwise, RESPA restrictions may make this impossible. RESPA disclosures do not dictate how fees are paid for purposes of TILA. Evasion of the Rule is Prohibited Fees and commissions that are based on loan amount may only use one multiplier for the whole loan amount. Example of a prohibited formula: First $100K of loan amount earns 20 BPS; next $100K of loan amount earns 30 BPS; amount of the loan over $200K earns 50 BPS. Commission formulas cannot be restructured to pay loan officer compensation based on prior loan profitability. Example of prohibited evasion: (1) Loan officer s commission formula increases or decreases based on profitability of prior loans.

20 Exempt Transactions Loan modifications by a servicer (where the note is amended but not replaced) are exempt from this rule. Refinance transactions (in which the original note is cancelled and a new note is signed) are subject to this rule. Timeshares and home equity lines of credit are exempt from the rule. Seller financing is considered a loan originated by a creditor and, therefore, is not subject to the rule. The Second Commandment Loan Originators shall not receive compensation both from the consumer and the creditor. - Regulation Z, Verse 36(d)(2)

21 Banning Conflicts of Interest A Loan Originator cannot be paid by the creditor and the borrower. What about payments by third parties? The Seller cannot compensate the Loan Originator when the creditor pays the Loan Originator the FRB views this as a buyer payment. Points paid to the creditor are not considered borrower payments to the Loan Originator. Amounts passed through the broker s hands are not broker compensation so long as the broker does not skim any amount from these receipts. Determine whether broker custodial accounts pay interest, since the interest would count as compensation. Banning Conflicts of Interest Nobody else can compensate the Loan Originator when the borrower pays the Loan Originator. Remember that the First and Second Commandments do not limit the Creditor s compensation, but these rules do limit compensation paid by the Creditor to its loan officers. Just because a mortgage broker or creditor receives varying income from investor to investor does not mean that the loan officer s compensation may vary as well. Make sure that loan officers do not try to take money under the table, do not accept tips, and do not accept alternative forms of compensation.

22 Banning Conflicts of Interest When the borrower is paying origination fees, the Second Commandment prohibits a third party from paying compensation to a Loan Originator, as well as receipt of third party compensation by a Loan Originator. The third party violates the Second Commandment if it has knowledge or reason to know that the borrower is paying origination fees to the Loan Originator when it pays a fee to the Loan Originator. As a practical matter, a third party is obligated to determine that the borrower is not paying origination fees before promising to pay the Loan Originator. Expect third parties to ask for a copy of the GFE & HUD-1. Unexpected Impact of the Second Commandment Down payment assistance, and seller contributions to closing costs, may be restricted in brokered loans. Seller contributions and DAP programs will not be available when the borrower pays a broker fee since these payments indirectly defray the broker fee. Seller contributions and DAP programs are viewed as buyer payments, which would prevent lender paid fees. Even if state grants and gifts were OK, the First Commandment would make the grant or gift impractical the mortgage broker and loan officer cannot receive out of formula total compensation. Builder cash incentives could be viewed as buyer payments of broker fees.

23 Some AfBA s May Be Victims When the AfBA is an affiliate of the Loan Originator, the consumer cannot pay an AfBA fee if the creditor pays a mortgage broker fee to the Loan originator. Affiliates of the mortgage broker are deemed to be the same as the mortgage broker for compensation purposes. The loan originator cannot collect a fee from both the consumer and the creditor. This rule does not apply to creditors. Hence, the impact of this rule on AfBA s is limited to brokered loans. Some AfBA s May Be Victims A Loan Originator may not be able to earn dividends from an AfBA when the consumer is paying loan origination fees to the Loan Originator. Nobody else can compensate a Loan Originator if the consumer pays the Loan Originator. The prohibition on dual payment sources does not depend on whether compensation is based on loan terms or not. It does not matter whether the Loan Originator owns a controlling interest to qualify as an affiliate for purposes of the second commandment.

24 The Third Commandment Loan Originators shall offer loan terms to the consumer that are in the consumer s interest. - Regulation Z, Verse 36(e) Steering is Prohibited A Loan Originator cannot advise, counsel or otherwise influence a consumer to take a loan that provides greater compensation to the Loan Originator than other loans available through the Loan originator. How does this impact brokers? This rule dissuades a mortgage broker from unilaterally financing closing costs if the mortgage broker is paid a percentage of the loan amount. A mortgage broker, unlike a creditor, cannot credit part of its compensation to pay closing costs. This rule does not apply if the loan option is in the best interests of the consumer, or the mortgage broker follows the safe harbor for presenting loan options to the consumer, or the broker follows the First Commandment.

25 No Guarantees of the Best Deal A mortgage broker is not required to sign up with the lowest paying investor to offer its products. The mortgage broker or loan officer is not required to offer loan options from more than one investor. The loan officer need not tell the borrower of loan options that the borrower will not qualify for. The mortgage broker and loan officer are not required to offer all loan types. The mortgage broker and loan officer each satisfy the Third Commandment by following the First Commandment (under the exceptions to the rule). Exceptions to the Rule Loan Originator Compensation for the loan suggested to or chosen by the borrower may be higher than for other loan options if the option suggested to or chosen by the borrower is in the borrower s best interests. How does a Loan Originator determine that one loan option is the best suited for the borrower? Does the Loan Originator have a crystal ball to show that a loan with a lower interest rate and a prepayment fee will be best because the borrower would never prepay the loan? Complexities of this rule and the threat of litigation in every defaulted loan will deter reliance on this exception.

26 Four Principal Safe Harbors There are four principal safe harbors from the point of view of the Loan Originator: First, the loan originator follows the First Commandment. Second, the loan terms from various investors are all the same, so it does not matter that lender paid broker fees vary from investor to investor. Third, income levels are all identical, so it does not matter that the loan terms from various investors are different. Fourth, the borrower may pick the loan terms from a list offered by the mortgage broker to avoid an allegation that the Loan Originator steered the borrower. Safe Harbor One: No Compensation for Steering It is presumed that if the Loan Originator is following the First Commandment that there is no improper steering. The presumption is that loan officers will act in the consumer s interest if they are not paid to do otherwise. This safe harbor applies principally to loan officers, but brokers may also benefit from this safe harbor. The dark side of this safe harbor is that creditors may set compensation formulas artificially low to convince independent mortgage brokers to come in from the cold.

27 Safe Harbor Two: Same Terms From All Investors The Loan Originator cannot steer if all loan products available to the consumer have the same terms. This will be rare. It will usually happen when there are very limited choices available to the consumer. It will also occur only when there are no changes in market conditions prior to closing. If it so happens that there are two choices of loan products, each having the same exact terms, then the Loan Originator may choose the one that pays the most compensation. The chance of a two loans will not have the same conditions at lock in and at closing will be great, dissuading reliance on this safe harbor. Watch out for defaulting borrowers who play Monday morning quarterback by filing a lawsuit to avoid foreclosure or eviction. Safe Harbor Three: Standard Compensation When the Loan Originator has the option of offering multiple loans to the borrower, each with different loan terms but with the same compensation, the Loan Originator does not violate the rule by offering the higher cost loan option. This exception will encourage Creditors to use one formula for lender paid broker fees for all brokers. Uniform lender paid broker compensation does not guarantee that all lenders pay their mortgage brokers by the same formula. Mortgage brokers and lenders are encouraged to offer standardized loan officer commissions, and not simply standardized commission formulas. Commissions paid by a Creditor to its loan officers that satisfy the First Commandment fall within this exception.

28 Safe Harbor Three: Lowest Compensation The Loan Originator is presumed to have offered the best loan option to the borrower if that option offers the Loan Originator the lowest lender paid broker fee of all options available to the Loan Originator. The borrower must be likely to qualify for the loan terms offered, but there is no requirement that the creditor underwrite the application before the loan terms are offered to the borrower. The Loan Originator is not required to provide a conditional commitment the Loan Originator should state the loan terms in the loan application sent to the creditor. There is no duty to tell the borrower that another option exists if the Loan Originator determines that the borrower is unlikely to be approved by the Creditor for the loan option. A Loan Originator cannot ask the Creditor to reduce the YSP. Safe Harbor Three: Lowest Compensation Problems with this safe harbor: The Loan Originator must prequalify the borrower to determine whether the borrower is likely to qualify for the loan terms with the lowest creditor paid compensation. The products offered to the borrower might not be the best deals. Loan Originators may not be able to identify loan products with the least compensation on a daily basis. The loan offer with the least Creditor paid compensation at closing may not be the offer with the least Creditor paid compensation at the time the loan is locked in and the loan documents are printed. Loan Originators can get around these problems by standardizing their compensation formulas, but will Creditors follow suit?

29 Safe Harbor Four: Consumer Choice Safe Harbor The rule permits the consumer to choose his poison (so to speak), even if the Loan Originator earns more from the loan option chosen by the consumer. The procedures required by this safe harbor must be followed expressly. Any error could result in loss of the safe harbor. The Loan Originator must present at least three options from each of the following categories of loans when the borrower expresses an interest: Fixed Rate, ARM, and Reverse Mortgage. These options must be offerings from loans available to the Loan Originator that the borrower is likely to qualify for, but they need not be the best deals available. If less than three options are available, all of the loan options available to the Loan Originator must be presented to the consumer. Safe Harbor Four: Consumer Choice Safe Harbor For each type of transaction (fixed rate, ARM, and Reverse Mortgage) in which the consumer expressed an interest, the Loan Originator must present the consumer with three loan options that are available to the borrower: 1. Choose a loan with the lowest interest rate, regardless of the fees, bells and whistles. 2. Choose the loan with the lowest interest rate without any bells and whistles; and 3. Choose the loan with the lowest total dollar amount for origination points or fees and discount points.

30 Safe Harbor Four: Consumer Choice Safe Harbor What does this mean? 1. Lowest Interest Rate: Choose the loan with the lowest interest rate, regardless of the fees, bells and whistles. ARMs: use the fully indexed rate for this determination Stepped loans: use the highest rate during the first five years of the loan 2. Lowest Interest Rate, No Bells and Whistles: For a forward mortgage, choose the loan with the lowest interest rate without negative amortization, a prepayment penalty, interestonly payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; For a reverse mortgage, choose a loan without a prepayment penalty, or shared equity or shared appreciation; and 3. Lowest Costs: Choose the loan with the lowest total dollar amount for origination points or fees and discount points. Safe Harbor Four: Consumer Choice Safe Harbor For a loan from a creditor to be available for borrower comparison, the Loan originator must have a significant relationship with the Creditor. The Loan Originator and the Creditor may have an existing broker agreement; or The Creditor originated a loan through the Loan Originator in the current month or prior month; or The Creditor originated a loan through the Loan Originator at least 25 times during the 12 months prior to the month in which the present application was taken. Note that the loan originator cannot game the system by throwing options into the list that nobody would ever choose.

31 Safe Harbor Four: Consumer Choice Safe Harbor The Loan Originator must have a good faith belief that the borrower will qualify for the various choices presented to the borrower. The Loan Originator must at least prequalify the borrower based on application info and a credit report, and the rate and credit score criteria in the creditor s rate sheet, to have an affirmative good faith belief that the borrower will be approved. Fear of litigation, and complex requirements of the safe harbor, will dissuade Loan Originators from offering the consumer a choice of options within the three categories of loans. The Loan Originator faces a Catch 22 choice: Choose the best loan option to present to the borrower; or Assure that the borrower will qualify for the options presented. Ignoring information about the borrower is not an option. Safe Harbor Four: Consumer Choice Safe Harbor The Loan Originator may give the borrower the option of choosing from all of the loan options available to the Loan Originator rather than picking just three. If the Loan Originator gives the borrower a choice of more than three options for each loan type, then the Loan Originator must highlight which is the best choice for the consumer. The Loan Originator cannot possibly keep up with daily changes to each creditor s credit score, fee and rate standards in order to maintain a good faith belief that the consumer will credit qualify for each loan available to the Loan Originator. In effect, the Loan Originator backs into the same Catch 22 by offering the borrower a broad range of loan options.

32 Safe Harbor Four: Consumer Choice Safe Harbor Loan Originators may avoid the rule by working with only one Creditor so that only one set of loan options is available to the borrower. This strategy places the Loan Originator at a competitive disadvantage compared to other Loan Originators who can secure lower cost credit in the marketplace. Loan Originators risk going out of business if their only Creditor cuts them off. Brokering loans to only one Creditor invalidates the independence of the Loan Originator and makes the Loan Originator responsible for delivering the creditor s TILA disclosures. The Final Out The Loan Originator does not violate the Third Commandment if no loan closes. If the borrower picks a loan but fails to qualify, no loan will be made and the borrower has no cause of action. The downside is that the Loan Originator does not have the option to broker that loan somewhere else. If the Loan Originator eventually finds a loan for the borrower, the Loan Originator may have statutory and regulatory liability for selecting options that it should have known the borrower would not qualify for. When in doubt about compliance with the Third Commandment, deny the loan application (avoid making commitments). Remember that the Loan Originator is guilty until proven innocent, since it is the Loan Originator s obligation to prove compliance with the rule.

33 Action Points for Wholesalers Monitor mortgage broker compensation and offers. Check rates in the marketplace daily to make sure Creditor paid broker fees are consistent, or loan terms are better, and keep these records for at least six years. Be prepared to withdraw a loan approval if it appears that the mortgage broker did not comply with the rule. Review the settlement statement and compare service fee invoices to the amount collected to make sure that there are no up-charges or reductions in broker compensation. Require mortgage brokers to submit the offer sheet given to the borrower, and compare this against your loan products. Creditors must compensate mortgage broker affiliates uniformly. Look for hidden loan officer compensation. Action Points for Wholesalers Monitor mortgage broker compensation and offers. Do not negotiate creditor paid broker fees how you pay a mortgage broker must be uniform. The GFE and HUD-1 do not measure the mortgage broker s compensation since all origination charges and certain third party charges are included in Blocks 1 and 2 of the GFE and in Lines 801 and 802 of the HUD-1. You need a worksheet. A creditor can violate the First and Third Commandments without changing Blocks 1 and 2 by adjusting the split of origination income from loan to loan. Compliance officers must review closing agent disbursement checks and internal documents showing loan income to determine if mortgage broker fees match a uniform compensation formula.

34 Action Points for Wholesalers Check E&O policies to see if you have coverage for the cost of litigation alleging violations of the rule. Change your mortgage broker and correspondent agreements to require submission of records to prove compliance with the rule. Review fee and loan origination agreements. Restructure rate sheets. Draft acknowledgements of broker fees for consumers to certify the source and amount of the broker s compensation. Action Points for HR Staff Monitor loan officer compensation. Make sure that loan officers are not compensated under the table by managers. Make sure that marketing dollars are spent on or with potential referral sources (and are not retained as additional compensation). Keep records of compensation for at least six years. You are responsible for the acts taken by your loan officers while originating loans. Make sure that managers are not acting as Loan Originators if they are paid based on branch profitability. Make sure that employee loans and family loans (and other low compensation loans) are handled by a house loan officer paid on a salary basis rather than cutting loan officer commissions for these loans.

35 Action Points for HR Staff Change loan officer compensation formulas as frequently as you wish, but only commensurate with performance reviews or changes in economic conditions and not as a ruse to make up for excess or lost profits. Limit overtime worked by loan officers. Revise rate sheets for mortgage brokers and for loan officers to eliminate credits and charges for varying loan terms, loan amounts, and underwriting criteria. Rate sheets may vary from office to office, from loan to loan, and from LO to LO, but compensation structures must be uniform. Loan officer will not steer borrowers when no additional compensation is paid. Why bother offering varying loan terms? Action Points for HR Staff Review bonus plans to make sure they are not tied to profitability. Bonus pools cannot be established based on the level of profits generated by originating loans. Loan officers cannot have a profit sharing plan due to the prohibition against paying loan originators based on loan profitability. Contact legal counsel to determine whether other employees can have a profit sharing plan, or whether the ERISA prohibition against discrimination in employee benefit plans restricts profit sharing for other employees. Make sure that non-producing staff have no functions in arranging, negotiating, or obtaining any loan for any individual if they are paid on a loan by loan basis, or they are paid a bonus.

36 Just the FAQ s, Ma am Just the Creditor FAQ s How does a lender know if its warehouse line of credit is a bona fide warehouse line of credit? The FRB provided no official staff comment on this issue and refused to provide private guidance on this issue. It is advisable that lenders pursue credit lines that are available to finance loans sold to any institutional investors on equal terms. Avoid lines of credit that may be used only to sell loans to the line of credit lender or its affiliate, and avoid lines of credit that offer different terms depending on which institution purchases the loan. Avoid repurchase agreements that substitute for warehouse lines of credit.

37 Just the Creditor FAQs Does this rule outlaw YSPs? HUD prefers that you use the term lender paid loan origination fee when talking about a yield spread premium (YSP). The Federal Reserve Board (FRB) really does not care what you call it it is compensation all the same. Compensation cannot be based on any loan term other than the loan amount. Lenders may pay mortgage broker fees and loan officer commissions based on the loan amount, credit quality and risk, compliance, hours worked, and other factors. Just the FAQs May creditors contribute toward the cost of a housing counselor? The short answer is maybe. Lenders will not be able to subsidize the fee paid by a consumer to a credit counselor if the counselor assists the consumer to negotiate loan terms or to find a mortgage loan. If the creditor pays the entire housing counselor fee and if the counselor assists the consumer to arrange a loan, the fee should not be based on loan terms (e.g. the fee may be uniform from consumer to consumer).

38 Just the Creditor FAQ s Can creditors increase the interest rate of the loan in order to pay for certain closing costs and origination charges? Yes. The rule applies to Loan Originators, not creditors. The rule expressly permits the lender to negotiate loan terms with the borrower. May creditors allow the broker or loan officer to accept lower compensation in order to decrease the borrower s interest rate or pay the borrower s closing costs? No. Loan Originator compensation may not vary up or down based on loan terms. Just the Creditor FAQ s May Loan Originators be paid bonuses on the basis of loan volume or loans closed? Loan officers may be paid on the basis of loan volume they originate. However, HUD has never approved volume based compensation for mortgage brokers under RESPA. May compensation be greater for a CRA loan or purchase money loan than for other loans? No. The FRB expressly considered and rejected paying more for loans that meet CRA criteria. However, creditors may establish minimum and maximum compensation levels to encourage mortgage brokers and loan officers to originate small loans and not concentrate solely on large loans. Lenders may also pay an hourly rate above the usual percentage commission if the loan officer works a file for more than the usual number of hours.

39 Just the Creditor FAQ s May Loan Originators be credited with a point bank of creditor funds to negotiate loan terms if the loan originator is not paid these funds? The initial reaction from the FRB to this question is that the opportunity to make another loan based on the ability to negotiate closing costs or interest rates is compensation and, therefore, point banks are not allowed. We are waiting for additional guidance from the FRB. May different rate sheets and compensation plans be established for rural vs. urban loans? The answer is yes if a loan originator is only originating loans in urban or rural areas, since the loan originator s compensation formula will be uniform. A creditor cannot pay a loan originator based on two compensation formulas. Just the HR FAQ s May different loan officers be paid at different rates, and may a lender change compensation formulas? Yes to both questions. Higher producing loan officers can be paid at higher rates per loan or per loan amount. Compensation plans may provide for stepped percentage payments based on loan volume (e.g. 30 BPS for 1-3 loans/month and 50 BPS for 4-10 loans per month). Rate structures may be modified at regular intervals commensurate with performance reviews. Changes to compensation structure should not apply to or be based upon prior loans, and should not be structured to compensate for prior income levels or loan profitability. How does a lender measure loan quality for compensation purposes? The FRB did not provide any guidance on this issue.

40 Just the HR FAQs How do we compensate loan officers for friends and family loans? A loan officer may only have one compensation formula. Lenders may wish to employ one loan officer (perhaps a part time employee) on a strictly salary basis or on a flat rate per loan basis to originate reduced price loans (e.g. employee loans, loans with lower fees or interest rates for competitive reasons, etc.). May loan officers receive tips or tickets to events from consumers or from sellers? The short answer is no. First, loan officers cannot take tips from the seller or other parties when the borrower pays origination fees since loan officer indirectly receives income from the borrower. Second, tips, cash cards tickets and other similar items are compensation. The loan officer s compensation cannot vary from loan to loan. Just the HR FAQs May loan officers earn larger commissions if they work overtime? Loan officers cannot receive more or less compensation based on loan terms other than loan amount. It is easy to manipulate a loan officer s hours to evade the restrictions on paying more or less for one loan over another. Hence, this rule must be coordinated with FLSA overtime pay requirements. In essence, mortgage brokers and lenders should restrict non-exempt loan officers to working 40 hours per if the amount of commissions vary from loan to loan, in order to avoid the insinuation that they are paying higher compensation for some loans. Salaried loan officers are less likely to be able to manipulate hours of work to receive higher compensation per loan. Management should be vigilant to avoid the appearance of impropriety in compensation systems.

41 Just the HR FAQs May loan officers each have a different rate sheet adjusted to their compensation level? Nothing prevents a mortgage company from paying one loan officer on a different basis than another loan officer. Creditor rate sheets may differ from branch to branch and from loan to loan. Mortgage brokers are stuck with the formula set by each creditor, but may be paid by a different formula from each creditor. Watch out for lending practices that create a disparate impact on some protected basis (e.g. race or sex). A practice that results in a disparate impact based on some protected factor is illegal, even when there is a legitimated business purpose for the practice, if the business purpose can be achieved by a different practice that has less of a disparate impact. Watch out for FHA examiners that restrict total origination fees to one percent of the loan amount. Ghost of Regulations Yet to Come

42 Wall Street Reform (Dodd-Frank) Section 1403 of the Wall Street Reform Act imposes several additional restrictions to stop steering. Creditors that pay mortgage broker fees will not be able to charge points or other origination charges to the borrower (subject to possible exceptions by FRB rule). The FRB will outlaw excessive fees. The Loan Originator must determine that the borrower has the ability to repay the loan. The law provides a safe harbor (Section 1411) for determining when the borrower has the ability to repay the loan. The safe harbor only applies to loans that charge points and fees of 3% or less, excluding certain discount points. Section 1414 outlaws prepayment fees for ARM s and restricts prepayment fees for fixed rate loans. Wall Street Reform (Dodd-Frank) Prohibited practices include: Mischaracterizing the borrower s credit history to make the borrower believe he/she will qualify. Mischaracterizing certain loans as unavailable or that the borrower is unqualified for certain loans. Mischaracterizing the value of a property or the value stated in an appraisal (e.g. cutting an appraised value or overstating an appraised value without a valid basis). Discouraging the borrower from shopping for loans elsewhere if the Loan Originator does not have a loan available that is lower cost than what is offered.

43 Wall Street Reform (Dodd-Frank) Statutory damages may be imposed on mortgage brokers, creditors, and loan officers for up to 3 years. Dodd-Frank inserted the concept of a covered person being subject to statutory penalties, and not just the creditor. Statutory damages are increased to the greater of actual damages or three times the amount of any illegal fee. Wall Street Reform (Dodd-Frank) The new consumer financial regulatory board has broad authority to promulgate regulations to outlaw practices that are abusive, unfair, deceptive, or predatory. The new consumer financial regulatory board has broad authority to promulgate regulations to insure that affordable credit is readily available. What this will mean is anybody s guess. This summary is not complete more restrictions are found in the Act.

44 Switching Gears to Wage and Hour Rules Minimum Wage Requirements Workers are entitled to receive a minimum wage for all hours worked, even when no loans are originated. The Federal minimum wage requirement is $7.25/hr. States may set higher minimum wage rates (e.g. Washington State s minimum wage is $8.55/hr.) Minimum wages may be paid as a guaranteed draw against commissions. If no commissions are earned, minimum wages are still paid. Minimum wages cannot be clawed back to satisfy recapture and repurchase requirements.

45 Overtime Pay Requirements Anyone who works more than 40 hours in a work week, and is not exempt from FLSA, must be paid 1.5 times the applicable compensation rate for that workweek for all time worked over 40 hours. Pay periods may be extended by policy or agreement to smooth out commission compensation. Consult your human resources expert for further information concerning how to calculate overtime when compensation is partially based on a salary and partially based on commissions. Administrative Exemption from Overtime Pay DOL Fact Sheet #17M: To qualify for the administrative employee exemption, all of the following tests must be met: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; The employee s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer s customers; and The employee s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.