Employer to Employee Compensation:

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1 Fowler Williams, CMB Executive Vice President Crescent Mortgage Company Fed Rule Question and Answer Update This Question and Answer is provided based on customer questions received by Crescent Mortgage Company. This is for informational purposes and in no way should be interpreted as legal advice. As certain aspects of the rule are further defined by the Federal Reserve we will make every attempt to update this document accordingly. Changes to previous Q and A are in RED Effective Dates: Q. Customer: Does this apply to loans that are taken as applications on 4-1 or closed 4-1 and after? A. Fowler Williams: On loans where your institution is acting as the creditor (using own funds) the rule is effective for loan applications taken by your originators on or after On loans where CMC is acting as the creditor (using CMC funds) it is effective for applications received by Crescent on or after Wednesday Crescent defines the application as a complete loan submission meeting minimum published submission requirements. Employer to Employee Compensation: Q Customer: Due to the fact we are a small bank, I wear many hats. I am not only the mortgage originator but I am also the mortgage processor and the bank loan processor. We have policy in place where from time to time we would receive a bonus for a referral for loan or a service. Can I still get these bonuses and do they have to spell this out in the contract between myself and the bank? A. Fowler Williams: I believe that if the services you are paid a small referral fee are not mortgage loans (referring an in house mortgage loan) this would be deemed as acceptable. The new fed rule only covers how compensation can be paid and received on loans secured by real property with dwelling. It would not hurt to spell out how the referral is paid and that it is not mortgage related. Q. Customer: Does the new fed rule only apply to mortgage loans sold in the secondary market? Does it apply to portfolio loans our bank makes, construction loans, land loans?

2 A. Fowler Williams: The rule applies to loans secured by real property with a dwelling, not for business purposes (commercial, time share, etc). It applies to mortgages held by your bank, or sold in the secondary market. It would apply on construction loans since the loan would ultimately be collateralized by the dwelling, not just the land. It would not apply to loans made on land alone. Q. Customer: My compensation from the bank is a split. I get a salary plus a set 15% commission on every loan that we close. Will that still be allowed? A. Fowler Williams: No, if you are currently paid on a split of the fees derived, this is expressly prohibited. You can be paid salary plus a percentage of loan amounts, not split of fees that can vary from one transaction to the next. Q. Customer: Mortgage Company will pay commission/ origination based on loan amount as follows: Is this permissible? 3% up to $100,000. 2% over $100,000, up to $300,000. 1% over $300,000. A. Fowler Williams: No. Compensation must be based on a fixed percentage of loan amounts, not a variable percentage based on loan amount. Q. Customer: Mortgage Company will pay commission/ origination based on loan amount as follows: Is this permissible? 2% of loan amount with $1,500 minimum payment, and $5,000 maximum payment. A. Fowler Williams: Yes, permissible. Compensation can be paid on a fixed percentage of loan amount, but have a minimum and maximum amount (floor and ceiling). Q. Customer: Can employer to employee compensation agreements vary from one employee to the next? A. Fowler Williams: Yes, Fed rule does not require that all originators are paid the same, as long as no originators compensation varied on the loan terms, other than loan amount. The compensation can t vary from one transaction to another. Q. Customer: We sell loans in the secondary market and portfolio loans. If I am paid by a salary and compensation based on the loan amounts, can that percentage vary between portfolio loans and secondary market loans? A. Fowler Williams: Yes and No. I suppose it could if you could demonstrate an increase or reduction of fixed overhead costs on in-house loans vs. loans sold in secondary market. I wouldn t recommend it as any variance in compensation may lead to inquiry from the body that regulates your institution. You could be in a position of having to defend the variance.

3 Q. Customer: Can a manager still receive an override of a fixed percentage on the overall production volume as a fixed percent not related to any loan term or condition? A. Fowler Williams: Yes, so long as your pay is not subject to the underlying profit of particular loans and based on volume or units. Q. Customer: Can the originator salary for the consumer paid option be as simple as a flat per loan fee, not related to loan amount, interest rate, etc.? A. Fowler Williams: No, Salary means salary with the Fed you could not have any type of compensation tied to a particular loan. My take on their commentary is that if an originator would receive more or less money based on if a transaction closes or not, they would not be considered salary or hourly by the fed. Q. Customer: I originate myself and have a team of originators I supervise, provide product training support and marketing/lead support for. I have always traditionally received an override of X basis points based on their loan volume Are you saying this is no longer permitted? A. Fowler Williams: Correct, a producing manager is not allowed to receive compensation based on profit derived on other originators loans. It appears the compensation could be tied to, for example, number of units, percentage of loan amounts, or total volume of loans. Not profitability or a traditional commission split of profits. Q. Customer: If you are a bank working as a correspondent, do you have to have a compensation agreement with each mortgage originator that works for you or do you just have to have an overall compensation plan? A. Fowler Williams: You should have an agreement with each individual originator. Q. Customer: If all staff is paid a set salary and not compensated via commissions, bonuses etc... Would we be impacted by the new rule? A. Fowler Williams: Yes, you would still need compensation agreements with your employer and with your creditor (CMC). You have more options and are more easily compliant when paid salary, but, not exempt from the rule or its provisions. Q. Customer: Can you pay an originator a base salary plus additional compensation based upon loan amount and number of loans done? A. Fowler Williams: Yes any combination of Hourly, Salary, Flat fee per loan, percent of loan amount etc., just not a percentage of profit. Q. Customer: Can Correspondent or Broker have different compensation agreements i.e.. ( 50 basis pts. 75 basis pts. 100 basis pts) of the loan amount with its Mortgage Loan Officers and can they each have a different minimum required i.e. (101.00, , )set by the Correspondent

4 or Broker, therefore each of them selling a different interest rate based on their Compensation agreement. A. Fowler Williams: Fed commentary states that you do not have to have all originators on the same compensation agreement. However on brokered transactions where CMC is the creditor, our compensation to your institution will not vary, therefore your institution would receive less or more compensation based on your agreements with creditors, however, you would be bound to pay the amount agreed upon in your employer to employee compensation agreement (not more or less depending on the compensation agreement variance with your creditors) Q. Customer: Since Our Bank can have only one compensation agreement with the employee/retail loan officer, yet our bank is sometimes a Creditor (Correspondent) and sometimes is a Broker (FHA sponsored originator) this means our bank has to pay the LO the same in either situation, even though the compensation to our bank may be different due to role our bank plays, right? A. Fowler Williams: Yes and No read the commentary I paste below from FED meeting with Mortgage Bankers Association, It is possible for compensating differently based on whether or not you are acting as a creditor, but creates a grey area you would have to defend. The more possibilities for different compensation to loan originators, the more you would open yourself up to examination. FED Commentary: (Mondor referenced below is Paul Mondor who is an attorney representing the FED on Dodd Frank MLO Compensation) When Creditors Broker Loans Another question submitted to the FRB staff concerned whether a creditor, who ordinarily closes and funds loans in its own name can pay an employee originator a different amount for loans that the creditor brokers to another creditor. In response Mondor stated that the fact that the loan is being brokered, rather than closed and funded in the company s name, is not a term or condition of the loan. However, he stated that creditors need to be mindful of the comments made by the FRB about proxies for terms and conditions. We noted that creditors would typically broker a loan when they do not offer the type of loan the borrower seeks, or the borrower does not qualify for a loan offered by the creditor. Mondor responded that, as long as the reason for brokering the loan is not a proxy for the loan s terms and conditions, then the compensation paid to the loan originator for brokering the loan could be different then that paid for loans that are closed and funded in the originator s own name. Crescent Compensation Agreements Q. Customer: If we set, for example, a 1% fixed percentage compensation agreement but the loan amount is low enough that it doesn t pay us at least our minimum dollar amount, how do we proceed?

5 A. Fowler Williams: CMC will adjust the pricing upwards to allow payment of minimum dollar amount agreed to. Q. Customer: We set our Origination Compensation Agreement at 2% but want to change it to 2.5 % can we do that? A. Fowler Williams: Yes. Compensation agreements can be changed periodically (CMC estimates quarterly) but loans already received by the creditor (CMC) must be processed and compensated based on the agreement in place at that time. Only future submissions would be subject to new origination agreement. Q. Customer: If for example you have a compensation agreement at 1 percent and lock a loan paying ½% how would this work? A. Fowler Williams: A borrower discount of.5 would need to be disclosed as collected by creditor (CMC). Q. Customer: Do we have to have a compensation agreement with Crescent since we are not paid on commission? A. Fowler Williams Yes, the compensation agreement with CMC is to establish how CMC will pay your institution. If you fund all loans with CMC, no compensation agreement is necessary. If you assert to CMC you are compensated salary only, you may use the borrower paid option and close the loan for more or less compensation than our compensation agreement on loans that CMC funds and borrower elects for lender to pay. Q. Customer: I am a banker that only uses Crescent Mortgage. My compensation is salary only. Do I still need a written compensation agreement with the bank? A. Fowler Williams Yes, although it could in my view simply assert that you are salary and that you are not compensation on any term or condition of an individual loan. Q. Customer: If you fund your own loans do you have to sign a compensation agreement? A. Fowler Williams Not with CMC, only with your employer. A compensation agreement is only executed when CMC may fund ANY transaction (perhaps FHA Sponsored Originator as example) Brokered Transactions Lender Paid Origination Q. If you are not a creditor (act as a broker using your lenders funds to close) can we set up an agreement where with Lender A our compensation agreement is 1%, with lender B our agreement is 2%, and with lender C, 3%

6 A. Fowler Williams: Yes (with a twist) the originating COMPANY can receive different amounts of compensations from multiple creditors, not the individual loan officer. I do not recommend this as it would require documentation for steering. Many assert then that they can set up their loan officers on a fixed percent of fees brought in. Example: 50% of fees. SO with lender A the LO is paid.5% (50% or 1%) with lender B LO is paid 1% (50% of 2%) and with lender C LO is paid 1.5% (50% of 3%). This is NOT ALLOWED. While CMC will not dictate your compensation agreements with your LO s we feel you should have sound advice and use best practices in following Dodd Frank/ TILA. Setting different compensation levels with different lenders opens the possibility of steering a consumer to a transaction to receive more compensation for your company. Fed Commentary: A similar question has been asked regarding mortgage brokerage companies and how they compensate their loan originator-employees. If a mortgage broker has an agreement with one creditor to pay it 1.5% per loan, and an agreement with another to pay it 2% per loan, can the mortgage brokerage have an agreement with its loan originator-employees to pay them a percentage of the fee paid to the mortgage brokerage company? We have gotten word that the Federal Reserve staff now asserts that, such a percentage fee split violates the rule. The Federal Reserve apparently believes that if the mortgage brokerage loan officer could earn more compensation by placing the loan with one wholesaler versus another, this could create a steering problem. So loan officers that work for mortgage brokers will need to be compensated the same as retail loan officers, either on a basis points per loan, or flat fee per loan basis Q. Customer: If we tell Crescent we want to make 2% and say the borrower wants a lower rate and to pay us directly to receive a lower rate how can that happen? A. Fowler Williams: After pricing is adjusted, the difference between your compensation agreement amount and final buy price will be disclosed and collected as a discount from borrower to CMC. Q. Customer: We have been charging a $ processing fee on all loans. Can we continue to charge this fee once the new changes come in to effect? A. Fowler Williams: Only if it is a transaction where all compensation is paid by borrower. If Lender (CMC) is paying compensation, and funding the loan, you cannot collect a separate fee from borrower payable to your institution. Q. Customer: Can we decide PER LOAN if it will be customer paid fees or lender paid? Or, will the agreement be that we do one way or the other for all loans? A. Fowler Williams: Loans can be nominated individually which will be lender paid or consumer paid. You do not have to decide all loans will be lender paid, or all loans will be borrower paid.

7 Q. Customer: Do we need to set or Lender Paid Compensation agreements at the same amount for all creditors or can it vary from one to the next? A. Fowler Williams: It certainly makes it easier to set them same. You would disclose all the same. You may not be subject to as much steering scrutiny if all of your creditors pay the same, you would not be steering a consumer into a loan for more compensation. The fed rule clearly states that if a loan is sent to the creditor that pays you the least amount of compensation, you have met the steering requirement. If all of your comp agreements with creditors are at the same level, you have always sent the loan to the creditor who is paying you the least compensation. Q. Customer: Can we make different amounts depending on the type of loan? For example, can I make a higher percentage on RHS loans then I do conventional loans? Obviously they are more of a pain then conventional and generally speaking they are smaller. A. Fowler Williams: No, compensation cannot vary on loan type. Only on loan amount. The fed commentary suggests that you can pay differently on different loan types if you could document that the overhead costs, etc, are different based on loan type. While your institution may be able to do this on employer to employee compensation agreements, CMC cannot assert to your costs and does not pay differently based on loan type unless further clarification/ guidance suggests otherwise. Q. Customer: If you have an agreement to be compensated by Crescent 2.5% can you price it for less and receive less as a broker? If pricing improves and the pricing is over the 2.5% does the overage go to the consumer as a credit? A. Fowler Williams: If you have a compensation agreement with CMC at 2.5% - we must pay you that amount, and you must receive that amount. You cannot make a concession in compensation on a lender paid transaction. You can make a concession on a borrower paid, or correspondent transaction. Any amount over the 2.5 is shown as a borrower credit from CMC. Any amount less that 2.5 would be collected as a borrower discount to CMC. Q. Customer: How will pricing work? One rate on the rate sheet? A. No. Rate sheets will work the same as they do now. If the option on a loan is to choose a lender paid origination (LPO) you will be priced on an origination adjusted rate sheet specific to your institutions agreed upon compensation based on loan amount. On a borrower paid origination (BPO) transaction, the rate sheet and pricing will be identical to rate sheets today. The only difference is, as mentioned above, YSP cannot be credited into origination, rather, can only be used to pay other noncompensation related closing costs. See example below. Example A:

8 A. Fowler Williams: (Continued) Example A. In the pricing comparison above, I have listed two sets of pricing. The pricing grid on the left is BPO. This would be the same rate sheet you view currently. No Adjustments have been made for the lender (CMC) to pay your origination. The pricing grid on the right represents a LPO transaction and makes an assumption of a compensation agreement of 2 percent between CMC and your company. As you can see by comparing the highlighted sections a note rate, 30 day lock, pricing has been adjusted by 2%. You still have coupons priced above par that overage would be credited to the borrower to pay non-compensation costs (title, appraisal, CMC Admin Fee, Etc.) and pricing is still able to account for loan level pricing adjustments (LLPA s) like loan amount, cash out, credit score, LTV, escrow waiver fee, etc.. Q. Customer: So Yield Spread (YSP) is gone, right? A. Fowler Williams: No, that is not what the rule says. What the rule does say is that YSP cannot be retained by a non-creditor as compensation unless it is a fixed amount uniform on all loans and paid by lender LPO. On LPO transactions 100 percent of all compensation to the broker must come from lender. Remember, under RESPA 2010, YSP was viewed as borrower funds, under TILA/ Dodd Frank it is considered compensation paid by the lender (CMC) and must be the amount agreed upon in our compensation agreement. Q. Customer: Can we close a LPO transaction and charge a separate processing fee? A. Fowler Williams: No. When setting the desired Origination Compensation agreement with CMC, your processing fee should be factored in to this amount. You can charge a separate processing fee in cases where it is a bona-fide third party fee (contract processing) or on transactions where all compensation is paid directly from the borrower (BPO). Example in a transaction where the borrower is paying all compensation, they can also pay a separate processing fee. Refer to Borrower Paid Origination changes above. Where CMC will collect the borrower origination and make payable to broker this fee must be inclusive of your processing fee.

9 Q. Customer: If the agreed upon lender paid origination between our firm and a creditor (CMC) is 2%. In order to meet competition, can we receive the 2% but credit 1% to borrower netting 1% origination and giving a 1% borrower credit? A. Fowler Williams: No. Fed advised that it views this to be the same as a pricing concession and basing the Originator Compensation based on the rate. Q. Customer: If the agreed upon lender paid origination charge between our firm and a creditor (CMC) is 2%, and I cannot credit any of this 2 percent to the borrower, can I ask less of the creditor on a transaction to meet competition? A. Fowler Williams: No. While pricing to the consumer may be adjusted, compensation to the originator may not increase or decrease based on loan pricing. A loan can close outside of the Origination Compensation Agreement only if it is a BPO transaction where borrower is paying all compensation. Q. Customer: A lock extension fee is assessed on any transaction where CMC is the creditor. Can the fee to extend come out of our compensation? A. Fowler Williams: No, on a Lender Paid Origination or borrower paid origination to CMC transaction if CMC and your institution have agreed to 2% compensation and a lock extension fee or.25 is needed, it cannot be reduced from your compensation. The borrower can pay the extension, or CMC will have to assess if we will make the concession. The FED views any reduction of compensation on a LPO transaction as prohibited under the rule. Borrower Paid Origination Q. Customer: Does the level of compensation stay the same if the borrower pays the fees or the lender pays? You could charge less or more than what your compensation agreement is with CMC when CMC is paying the compensation to your institution. A. Fowler Williams: The fed has advised that the only way an increase or reduction in compensation on borrower paid can be achieved is if the loan officer is straight salary or hourly. The work around they provide is that if not salary, you can offer a borrower paid transaction so loan as the compensation is the same as your agreement with creditor on lender paid origination, it is paid to the creditor, and creditor pays originating institution based on comp agreement. Q. Customer: On VA loans are we limited to 1% origination on brokered, Lender Paid Origination transactions? A. Fowler Williams: You are only limited to the borrower (veteran) paying 1 %.( Borrower Paid) the amount of compensation can be larger than 1% if origination is paid by the lender. CMC Admin and settlement fees should be paid for by YSP above and beyond the lender paid comp agreement. These fees cannot be deducted from your origination, or paid directly by borrower. Example, on a VA LPO Brokered

10 transaction where your comp agreement is 1.5% - you will need to lock the loan at a price that pays additional YSP credit to the borrower above the 1.5 at an amount that pays for the lender admin fee and settlement charges that veteran cant pay per VA. CMC makes available a NO ADMIN fee VA loan that you can utilize and would only need enough borrower credit to cover settlement charges veteran isn t allowed to pay out of pocket.. Q. Customer: We typically act as a creditor (fund our own loans) however, under new FHA Sponsored Originator Process, CMC must fund our FHA loans. Am I as an originator subject to the compensation agreement between my employer and myself as an originator, or by the compensation agreement between CMC and my employer? A. Fowler Williams: Both CMC will have a compensation agreement between CMC and your employer on transactions that A) CMC Funds and B) are LPO transactions. This will dictate how CMC compensates your institution. How you as an originator will be compensated will then be based on the compensation agreement between you the employee and your institution, the employer. Correspondent Transactions Q. Customer: When our institution is acting as a correspondent, will we have to have a compensation agreement with Crescent Mortgage Company? A. Fowler Williams: No, any transaction that is not funded by CMC is not subject to a compensation agreement with CMC. Q. Customer: Will I, as a correspondent, have to have a compensation agreement with my employer? A. Fowler Williams: Yes, the rule dictates that your compensation from your employer cannot be based my any loan condition or term other than loan amount. Q. Customer: As a correspondent, can we make SRP (Servicing Released Premium)? A. Fowler Williams: Yes, Crescent Mortgage Company can pay your institution SRP; however, your originators compensation cannot be tied to overages on the loan. Affiliated Third Party Fees see update

11 Q. Customer: Origination Compensation does not include true third party fees. Is an Affiliated Business Arrangement entity recognized as a third party in this context? A. Fowler Williams: Fed Ruling clearly prohibits some affiliation payments. A title company or settlement firm your institution has ownership in: On LPO transactions, borrower could not pay from their funds the fees to settlement agent. Q. Customer: The attorney we use is on our banks Board of Directors. Would this cause dual compensation if we used them for settlement services? A. Fowler Williams: No, on LPO transaction your institution would have to have ownership in the directors firm to have dual compensation. The director could, however, have ownership in your bank. Update 3/16/11 Fed has is expected to give guidance on this rule on its webcast scheduled for 3/17/2011 here is an unofficial overview of what we expect to hear: Fed believes that the better interpretation of the rule and its commentary is that it permits a mortgage broker to receive compensation from a lender and to pay commissions to its employee loan originators even if the consumer pays bona fide and reasonable third party charges to the mortgage broker's affiliates. Therefore, neither the mortgage broker nor the lender will violate the dual compensation prohibition in the rule if the lender pays the broker when the consumer is paying the mortgage broker's affiliate a reasonable amount for third party charges such as title. Some possible caveats to the interpretation/ clarification: First, while the current rule supports this position, the Bureau is charged with writing the rule under the Dodd-Frank Act, and it is possible that the Bureau will drive the rule back to the Fed's initial interpretation. Moreover, because the Fed will not be revising the current rule or its official commentary, it is possible that a court (and even another regulator) would interpret the rule differently. The Fed intends to go on record with this new interpretation at its March 17 webcast. Second, limitations on up charging still apply. If the mortgage broker inflates and retains the amount in excess of the bona fide and reasonable third party charge, it will be considered part of the mortgage broker's compensation. Possible RESPA consequences should be considered Third, it is imperative that the mortgage broker affiliates charge only bona fide and reasonable third party charges. There is some grayness to this. The Fed warns that the fees should be reasonable in the market place. The Fed has "overwhelming concern" about its interpretation being seen as a loophole and manipulated. Therefore, the Fed will scrutinize affiliate arrangements and attendant fees and direct the other regulators to do the same to ensure that fees are not inflated or bogus. Again, be sure the parties are complying with RESPA as well. My take: Basically, your affiliated settlement provider has to charge a reasonable fee. If other settlement providers charge $500, and your affiliate charges $1,000 could be a problem. If you disclose a charge of $750 and your affiliate only charges $500, you can t keep the difference. You should not

12 receive additional compensation as an originator for using an affiliate service provider i.e. you are paid $150 dollars extra when the affiliate is used. Point Bank There was nothing in the fed rule or supplementary commentary prohibiting the use of a point bank on an employer to employee compensation agreements. A point bank was a much discussed method of allowing an employee originator to close a loan for less than their employer to employee comp agreement to be more competitive on a transaction. Many employers had envisioned a means by which if a LO made premium above what they were asked to by creditor, it could go in the point bank to use at a later date to supplement making a loan for less than what was required. The fed has made some commentary to suggest that only a creditor can make such a reduction. That allowing the originator to make less on a loan would be considered basing compensation on terms or conditions of the loan, and that offering them the ability to have a bank to put money in, and take money out would be problematic. CMC had discussed in previous correspondence our version of a point bank to our valued customers, where we may choose to make a concession on a loan in order for it to close, not make a reduction in the originators compensation. This we believe does not meet the definition of the problematic practice described above. Therefore we will still be willing to make concessions when applicable to our customers and your valued clients when it makes sense for it to do so. It will in no way provide extra income to you, increase cost to the borrower, and will never be based on any specific term or condition of a loan.