Loan Originator Compensation: The New Paradigm

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1 Loan Originator Compensation: The New Paradigm Presented for Maryland Association of Mortgage Professionals on March 3, 2011 by Marjorie A. Corwin Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC 233 East Redwood Street Baltimore, Maryland Copyright, 2011 FRB Regulation Z Final Rule Federal Reserve Board issued a final rule amending Truth in Lending Act, Reg. Z and addressing loan originator compensation Published in the September 24, 2010 Federal Register Rule becomes effective for loan applications received by the creditor on and after April 1, 2011 Dodd-Frank Act The Dodd-Frank Act also regulates loan originator compensation It is largely similar to the FRB Rule Includes both compensation and steering prohibitions But there are a few significant differences We need to wait for regulations under the Dodd- Frank Act to truly understand the differences regarding steering. Will there be regulations clarifying the differences in loan originator compensation? 1

2 Liability Issues Traditional TILA Civil Liability for Creditors Actual damages Statutory damages (up to $4,000 for each individual action and potential class action) Attorneys fees and costs Enhanced TILA Liability for Creditors Refund all finance charges and fees paid by the consumer (unless the creditor demonstrates that the failure to comply is not material) Dodd-Frank Act Liability Issues New Civil Liability for Originators Greater of actual damages or three times compensation/gain for loan (liability even if there are no damages) Longer statute of limitations for loan originator compensation (and certain other) violations so that actions may be brought until end of 3-year (not 1- year) period from date of violation State Attorneys General authorized to enforce violations of loan originator compensation (and certain other) requirements Applicability of Final Rule Rule applies to compensation resulting from a closed-end, consumer loan transaction secured by a dwelling Includes: First liens Second liens Primary residences Second homes Reverse mortgages (but not HELOCs) 2

3 Applicability of Final Rule Rule applies to Loan Originators Any person who, for (or in expectation of) compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person Includes individuals and entities (employees and employers) that meet this definition Applicability of Final Rule Rule applies to Loan Originators This does not include managers or administrative staff that do not arrange, negotiate, or otherwise obtain credit for a consumer and whose compensation is not based on whether any particular loan is originated Does not include TILA-defined creditors (but does include a table funded originator) FRB Regulation Z Final Rule The Rule prohibits: Dual compensation Lender paid broker compensation based on loan terms or conditions Steering 3

4 Dual Compensation Prohibited The Rule prohibits: Dual compensation Loan originator compensation cannot be paid both from the consumer and from any other person in connection with the same loan transaction Compensation Loan originator compensation is broadly described (from salary to prizes) Compensation includes amounts retained by a loan originator Compensation does not include amounts received by the loan originator but paid for bona fide and reasonable third-party charges (for example, appraisal and credit report) Dual Compensation Prohibited Under the Rule, compensation paid by the consumer may be established on any basis It may vary based on loan terms and conditions What is unclear: How does an employer compensate an employee when loan originator compensation comes from the consumer? 4

5 Lender Paid Compensation The Rule prohibits: Basing loan originator compensation paid by (from) the creditor to the loan originator on loan terms or conditions (except loan amount) Compensation Based on Loan Terms or Conditions What is Loan Term Based Compensation? Compensation based on the loan s Interest rate Annual percentage rate Loan-to-value ratio Existence of a prepayment penalty Perceived risk Type of loan product Lender Paid Compensation Compensation based on loan amount must be based on a consistent, fixed percentage However, it may be subject to established minimum or maximum dollar amounts Cannot vary fixed percentage based on different levels or tiers of loan amounts Fixed percentage may be changed (but not too often) 5

6 The Rule prohibits: Steering Prohibition Steering - Directing a consumer to a particular loan based on the fact that the loan originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered (or could have offered) unless the loan that closes is in the consumer s interest Steering rule does not apply if loan is being originated for an employer who will be the creditor (but will apply in a table funded transaction) Steering Prohibition While not required, if originator directs consumer to the transaction that results in the lowest creditor paid compensation, the steering rule will be satisfied If originator directs consumer to a transaction that results in greater compensation, steering rule is not violated if terms and conditions of that transaction compared to other realistically possible loans available through that originator are the same It s complicated and vague (subject to attack) Steering Prohibition: Safe Harbor There is a safe harbor disclosure that loan originators may provide to ensure the steering rule is not violated Compliance with the safe harbor may be difficult, particularly for loan originators with many potential creditors 6

7 Steering Prohibition: Safe Harbor Disclose for each type of transaction in which consumer has expressed an interest, loan options that include: Loan with lowest interest rate Loan with lowest interest rate and no risky features and Loan with lowest total dollar amount for discount points and origination points or fees Steering Prohibition: Safe Harbor Types of transactions are: Fixed rate Adjustable rate Reverse mortgage Dodd-Frank Act The Dodd-Frank Act also regulates loan originator compensation It is largely similar to the FRB Rule Includes both compensation and steering prohibitions But there are a few significant differences 7

8 Dodd-Frank Act: Differences Definition of loan originator is different Under Dodd-Frank Act, a mortgage originator is any person who: (i) takes a residential mortgage loan application; (ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan; or (iii) offers or negotiates terms of such a loan. Dodd-Frank Act: Differences Definition of loan originator is different Mortgage originator is closer to the SAFE Act definition and likely will result in more individuals being subject to compensation and steering rules There is an exclusion for creditors from the definition of mortgage originator but the exclusion does not apply to the Dodd- Frank Act steering prohibitions Dodd-Frank Act: Differences Dual compensation is prohibited but Dodd-Frank does not allow consumer-paid compensation to vary based on loan terms If compensation is lender paid, then it appears no lender discount points, origination points, or fees will be permitted 8

9 Dodd-Frank Act: Differences Steering provisions are very different, including Imposes broker responsibility to consider borrower s ability to repay Favors qualified mortgages (e.g., plain and simple terms ) Prohibits abusive or unfair fair lending practices Prohibits mischaracterizing various aspects of the loan and lending process RESPA and State Law Concerns Rule suggests compensation may be based on number of loans delivered or pull through rates or similar bases, but RESPA Section 8 kickback rule still applies Rule suggests that minor overages retained by loan originator in connection with third-party fees may be acceptable, but Maryland Commissioner regulations prohibit such overages Document Concerns Broker agreements (and perhaps other documents) may need to be changed to reflect new compensation payment arrangements Compensation policies and agreements should be updated 9

10 New Recordkeeping Requirements The Rule requires creditors who pay loan originator compensation to retain records of the compensation paid as well as the compensation agreement in effect on the date the interest rate was set for the transaction Records should be retained for at least 2 years Thank you! Marjorie A. Corwin, Esquire Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC 233 East Redwood Street Baltimore, Maryland mcorwin@gfrlaw.com Copyright,