Amendment to the AFR Wholesale Broker Agreement regarding Amendments to Regulation Z Table of Contents Section 1 General Principles for Compliance 1.1 Mission Statement..... 2 1.2 Summary of TILA Amendment.... 2 1.3 Definitions...... 3 1.4 Overview of Compensation Rules. 4 1.5 Acceptable Forms of Compensation Loan Pricing. 5 1.6 Acceptable Forms of Compensation Borrower paid 5 1.8 Third Party Charges.. 6 Section 2 Steering 2.1 Loan Steering.... 7 2.2 Exceptions to Steering Rule. 7 2.3 Safe Harbor. 8 2.5 Loan Options Type of Transactions. 8 2.6 Loan Options Presented. 9 Section 3 Loan Officer Agreements 3.1 Agreement Terms for Compensation Paid by AFR.. 10 3.2 Agreement Terms for Compensation Paid by Consumer. 11 3.3 Agreement Terms Prohibiting Steering. 11 3.4 Disciplinary Action. 12 3.5 Disclaimer. 12 Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 1
Section 1 General Principles for Compliance 1.1 Mission Statement American Financial Resources, Inc. (AFR), its directors, executives and managers recognize the importance and significance of an articulated compensation policy. The foregoing policy statement is considered to be a core element of the company's Wholesale operational business plan. As appropriate and in accordance with the company s business model, the anti-steering and compensation procedures described herein shall apply to all residential mortgage transactions and represent the full scope of products, property types, branches, and geographic locations. The mission statement of the company compels corporate-wide awareness that discrimination in consumer credit transactions is prohibited. The company obligates every employee and every business associate to a commitment to responsible lending. The company considers its compensation practices as applicable to pre-application disclosures and all procedures for advertising, soliciting, taking applications, and issuing commitments and lock-in agreements. 1.2 Summary of Truth-in-Lending Amendment AFR shall comply with the laws established as an amendment of Section 226.36 of Regulation Z, administered by the Federal Reserve Board (the Rule). The law was extended to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. The rules apply to all persons who originate loans, including mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders. The Rule applies to closed-end loans secured by a consumer s dwelling and effective April 1, 2011 shall: Prohibit payments to the loan originator that are based on the loan s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted. Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 2
Prohibit a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person. Prohibit a mortgage broker or loan officer from steering a consumer to a lender offering less favorable terms in order to increase the broker s or loan officer s compensation. Provide a safe harbor to facilitate compliance with the anti-steering rule. The safe harbor is met if: The consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest, such as a fixed rate loan, adjustable rate loan or reverse mortgage; and the loan options presented to the consumer include the following a) The lowest interest rate for which the consumer qualifies b) The lowest points and origination fees, and c) The lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years 1.3 Definitions AFR shall comply with the definitions established under rule as follows: Loan Originator A person who for direct or indirect compensation or gain: a) takes residential mortgage loan application; b) assists consumers in obtaining or applying to obtain residential mortgage loan; or c) offers or negotiates terms of residential mortgage loan (as well as any person who represents to public that it will provide any services). Creditor A true creditor that closes a loan in its own name and funds the loan from a bona fide warehouse line of credit, its own money, or deposits held by the creditor is not a loan originator. Mortgage Broker A mortgage broker is considered a loan originator. Originators consist of both individuals and entities and an employee of a mortgage broker and/or creditor is a loan originator. Table-Funding Lender The funding lender in a table-funded transaction is a loan originator. Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 3
Other Examples Not Considered Loan Originators Persons who are not considered loan originators are persons who: a) Perform purely administrative or clerical tasks b) An employee of a manufactured home retailer who does not advise consumers on loan terms c) Real estate brokers and employees of licensed real estate brokers d) Person, estate or trust that provides mortgage financing for sale of 3 properties in any 12-month period provided loan is fully amortizing, where borrower has ability to repay and is either fixed or adjustable only after five years and meets other conditions; e) Servicer or servicer employee, agent or contractor, including but not limited to those who offer or negotiate terms of residential mortgage loan for purposes of renegotiating, modifying, replacing and subordinating principal of existing mortgage where borrower is behind in payments, in default, or has reasonable likelihood of being in default or falling behind; and f) Creditor except creditor in a table funded transaction under antisteering provisions. 1.4 Overview of Compensation Rules AFR shall prohibit mortgage originators from receiving from any person, and prohibits any person from paying to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal). This prohibition applies both to payments by AFR to independent mortgage brokers and payments by brokers or lenders to their employee sales force. AFR prohibits a mortgage originator from receiving compensation from any person besides the consumer, even if the originator s compensation is not based on the loan terms (is a flat fee or a percentage of the loan amount). Originators are prohibited from receiving compensation from any person, other than the consumer, or a person who does not know and has no reason to know that a consumer has directly compensated or will directly compensate a mortgage originator. AFR shall consider compensation to include salaries, commissions, or any financial or similar incentive provided to a loan originator, such as merchandise and prizes. Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 4
Compensation may be in the form of fees, such as a processing fee, paid to a loan originator. AFR shall draft compensation agreements for its clients relating to the amount of compensation AFR will pay the originator on all loans closed by AFR and originated by said originator (lender compensation). The agreements may be revised in specified time periods per the agreement not to be less than 60 days. 1.5 Acceptable Forms of Compensation Loan Pricing AFR shall utilize the following permissible forms of compensation in structuring agreements with its loan originators: 1. Compensation based on a fixed percentage of the amount of credit extended (which may be subject to a minimum or a maximum cap) in increments of 25 basis points. The available increment amounts may change from time to time and at AFR s discretion for new agreements only. 1.6 Acceptable Forms of Compensation - Borrower Paid Compensation AFR shall comply with the rule whereby a loan originator must choose between being paid by the consumer and being paid by AFR. If the loan originator receives compensation directly from a consumer, the loan originator may not receive compensation from AFR in connection with the transaction. This shall include payments from any person to the loan originator where the person knows (or has reason to know) that the consumer is paying the loan originator. Originators may receive an origination fee other than from the consumer if the originator does not receive any compensation directly from the consumer; and the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party charges not retained by the mortgage originator). AFR may accept the following forms of compensation paid by a consumer: A flat fee, paid by the consumer; or A fee that varies based on the principal loan amount, paid by the consumer; or A fee, paid by the consumer, based on any factor other than the loan terms or loan type Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 5
AFR may permit payment of an origination fee from someone other than the consumer, so long as the fee does not vary based on the terms of the loan (other than the amount of the principal), the originator receives no compensation from the consumer, and the consumer otherwise does not make an upfront payment for origination fees. If the seller of the property pays the Originator, the payment is deemed a payment by the consumer for purposes of the restriction against dual compensation under the Rule. If the Originator receives their compensation directly from the consumer, the amount of the fee will be capped at the amount of compensation the Originator has agreed to receive from AFR ( Comp Agreement ) in effect at the time of the rate lock. 1.7 Third Party Charges Originators are prohibited from paying some or all third party fees for a consumer (or crediting the consumer out of pocket) if the originator is being compensated by AFR. AFR will allow originators to pass along bona fide third party charges that are not retained by AFR, the mortgage originator, or an affiliate of AFR or originator. Originators may receive an origination fee other than from the consumer if the originator does not receive any compensation directly from the consumer; and the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party charges not retained by the mortgage originator). Section 2 Loan Steering 2.1 Final Rule Prohibition on Steering The originator shall comply with the final rule s Prohibition on Steering Incentives which prohibit mortgage originators from steering. The rule defines steering as Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 6
directing, advising, counseling, or otherwise influencing a consumer to accept a particular transaction. Originators may not steer a consumer to a loan based on the fact that the loan originator will be paid more on that loan (as opposed to other available loans), unless the loan is in the consumer s interest. AFR prohibits mortgage originators from: 1. Steering any consumer to a loan that (a) consumer lacks reasonable ability to repay, or (b) has predatory characteristics or effects such as equity stripping, excessive fees or abusive terms 2. Steering any consumer from a qualified mortgage to not qualified mortgage when consumer qualifies for qualified mortgage 3. Abusive or unfair lending practices that promote disparities among consumers of equal creditworthiness but of different race, ethnicity, gender, or age; 4. Mischaracterizing credit history of consumer or residential loans available to consumer 5. Mischaracterizing or inducing mischaracterization of appraised value of property securing extension of credit 6. If unable to suggest, offer or recommend to consumer loan that is not more expensive than loan for which consumer qualifies, discouraging consumer from seeking mortgage from another originator 2.2 Exceptions to Steering Rule AFR shall comply with the following two exceptions to this rule: 1. The originator directs the consumer to consummate a transaction, after presenting the consumer with a significant number of available loan options, those results in the least amount of creditor paid compensation. 2. The originator directs the consumer to consummate a transaction, after presenting the consumer with a significant number of available loan options, those results in the highest amount of creditor paid compensation if the terms and conditions for all of the loan options for which the consumer qualifies are the same. Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 7
The exception rule does not limit compensation to the Originator based on principal amount of the loan and does not restrict a person other than the consumer from receiving, or person other than consumer from paying an origination fee if: (a) the originator does not receive any compensation directly from consumer; and (b) consumer does not pay discount points, origination points or fees however denominated (other than bona fide thirdparty charges not retained by originator. 2.3 Safe Harbor The originator shall determine and attest if the transaction qualifies under the Safe Harbor exception established under the Fed final rule. The Safe Harbor exception is met if: 1. The consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage), and 2. The loan options presented to the consumer include the following: a) The lowest interest rate for which the consumer qualifies, and b) The lowest points and origination fees, and c) The lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years. 2.4 Loan Options - Type of Transaction A transaction does not violate the Final Rule if the consumer is presented with loan options that meet the conditions for each type of transaction in which the consumer expressed an interest. The term type of transaction refers to whether: A loan has an annual percentage rate that cannot increase after consummation A loan has an annual percentage rate that cannot increase after consummation Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 8
A loan has an annual percentage rate that may increase after consummation The loan is a reverse mortgage 2.5 Loan Options Presented Compliance with the final rule is met if the loan originator presents the loan options required by that paragraph and all of the following conditions are met: 1. The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include: a. The loan with the lowest interest rate b. The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and c. The loan with the lowest total dollar amount for origination points or fees and discount points. 2. The loan originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies. 3. For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified by the final rule. 4. The loan originator can present fewer than three loans and comply with the final rule if the loan(s) presented to the consumer satisfy the criteria if the provisions of the final rule are otherwise met Section 3 AFR s Compensation Agreements Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 9
3.1 Agreement Terms for Compensation paid by AFR (Lender Compensation) AFR shall establish compensation agreements with its originators to comply with the final rule. Compensation agreements and specific policies, outlined below, are subject to review and modification: 1. Specific terms of originators compensation paid by AFR will be set on a separate written agreement ( Comp Agreement ). 2. The Comp Agreement must be signed by an authorized representative of the originator prior to the expiration of an existing agreement. 3. The Agreement will be in effect until it is changed by both parties. 4. All loans with a rate lock date within the Agreement time frame will be subject to the terms of the Agreement in effect at that time. 5. Compensation is based on established upfront terms negotiated between the originator and AFR. 6. The compensation will be based on a set percentage of the loan amount and cannot vary from one transaction to another within the time frame of the Comp Agreement. 7. The consumer may pay discount points to reduce the interest rate to AFR. 8. The consumer may pay bona fide third party costs and Gateway fees by paying for them at closing, or by financing them through the loan principal or interest rate. 9. If lender paid compensation is chosen, the consumer cannot pay any compensation to the loan originator. 10. The loan originator cannot reduce the lender paid compensation amount by offering concessions or pay for tolerance violations. 3.2 Agreement Terms for Compensation Paid by Consumers Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 10
The originator must adhere to the final rule as outlined below if any of the originators compensation comes from the Consumer: 1. The loan officer will negotiate compensation directly with the consumer 2. The consumer may pay bona fide third party costs and AFR fees by paying for them at closing, or by financing them through the loan principal or interest rate 3. Premium pricing cannot be used to compensate the loan originator but may be used to pay allowable third party costs. 4. The originator may agree to reduce their compensation to pay for third party costs. 5. The consumer may pay discount points to AFR in order to reduce the interest rate. The originator will not receive any portion of a discount point paid by the consumer. 6. The consumer must pay compensation to the loan officer from their own funds or from the principal proceeds of the new loan. 7. No other person (other than the borrower) may provide any compensation to a loan originator, directly or indirectly, in connection with the loan transaction. 8. If the Originator receives their compensation directly from the consumer, the amount of the charge will be capped at the amount of compensation the Originator has agreed to receive from AFR ( Comp Agreement ) in effect at the time of the rate lock. For instance, if the Comp Agreement in effect is 200 basis points when the rate is being locked, the Originators charge to the consumer may not be more than 200 basis points. 3.3 Agreement Terms Prohibiting Steering Originator shall agree to comply with AFR s principles for anti-steering and exercise all steps and procedures required to support any safe harbor exceptions to the final rule. Originators are prohibited from steering, directing, advising, counseling, or otherwise influencing a consumer to accept a particular transaction and may not steer a consumer to a loan based on the fact that the loan originator will be paid more on that loan unless the loan is in the consumer s interest. Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 11
3.4 Disciplinary Action AFR shall enforce certain remedial efforts or corrective action, as appropriate and in accordance with the severity of the violation to the loan officer compensation and anti-steering policy. Violations found shall be immediately handled by senior management and may warrant disciplinary action up to including immediate termination of loan originator. Senior management shall be informed of any corrective action taken, which may include but are not limited to: 1) Revision of more favorable loan terms to the borrower 2) Reimbursement of fees to the applicant 3) Verbal counseling 4) Written counseling 5) Fair lending re-training 6) Enhanced scrutiny of loans 7) Supervisory review of all originations 8) Suspension of certain activities 9) Termination of agreement 10) Termination of broker 3.5 Disclosure The above Mission Statement and following AFR policy is to be complied with on all loans submitted to AFR. AFR s policy should not be used as legal advice and or legal interpretation of the Rule. You must consult with your legal counsel to set your own guidelines as it relates to all aspects of the Rule. Updated January 1, 2013 American Financial Resources, Inc. All Rights Reserved 12