Guide To Borrower Paid Vs. Lender Paid Compensation April 2014 1
Answers to Frequently Asked Questions General Questions Borrower Paid Compensation Questions Lender Paid Compensation Questions The Pros and Cons Compensation Differences Rebate / Rebate Credits (Premium Rate-Pricing Credit) Changing Compensation Types Important Information 2
General Questions 1. Does the compensation rules apply to all property types? CSL s policy is that the Broker Compensation guidelines, apply to all properties, regardless of occupancy type. 2. The Broker executed a NEW Lender Paid Compensation Agreement 02/01/2014 which changed his compensation from 2.00% to 2.75% after the borrowers application dated 1/28/2014 was accepted by Lender. What compensation percentage will the Broker receive on this loan? The compensation tier is based on application date (1/28/2014) i.e. when the Broker provides all required submission requirements and CSL accepts the application. In the scenario above, the Broker would be paid 2.00% Lender Paid Compensation based on the agreement in effect at the time of the application. Terms of the new agreement would be effective for loans in the pipeline or new submissions with application dates on or after 2/1/2014. 3. If the borrower receives Seller Contributions, can they use the funds to pay the broker fee or broker processing fee? Depends on the compensation method. Seller contributions are considered paid by the borrower. Therefore, under the borrower paid compensation method, seller contributions may be used to pay broker fees. However, under the Lender Paid Compensation method, the broker can be paid by the lender and no one else. Therefore, seller contributions can only be used to pay third party closing costs and lender fees. 4. If the Broker pays for a bona fide third party fee (e.g. appraisal fee or credit report), can the Broker be reimbursed at closing? Yes. Furthermore, the Broker must be reimbursed at closing. Under current compensation rules, the Broker cannot provide credits towards closing costs. Failure to reimburse the Broker in this scenario would be a violation. 5. How will RESPA tolerance issues be resolved under current compensation rules? The Broker s compensation may not be credited or reduced due to RESPA tolerance violations under current compensation rules. 3
General Questions (Continued) 6. Is Borrower Paid Compensation (BPC) an APR fee? Yes. 7. Is Lender Paid Compensation (LPC) an APR fee? No. APR - LENDER PAID AND BORROWER PAID Let s compare the differences of the two types of transactions with the same rate and fees. Now if no one told you and you didn t look at any paperwork you would not have the slightest idea that the two transactions were different you would end up with the same interest rate, you would have the same amount of net closing costs so that would mean you pay or you would receive the same amount of proceeds at closing, you would make the same payments for the 30 years of the transaction. So what is different? - Well what is different is the APR. Now the APR is defined as the actual cost of borrowing, but the APR is higher on the Borrower Paid Transaction. So how is that possible? - When you receive a Lender Paid Transaction the lender pays the LO, so the there is a zero sum of origination fee and credit that will not affect the APR. This would be considered paid by the Lender not the Consumer therefore, it is not considered an APR Fee. On a Borrower Paid you have the origination fee, but the credit must be used to offset costs OTHER than the origination fee. So as the origination fee is part of the APR calculation and most of the other costs are not even though everything is identical the APR is higher. 4
Borrower Paid Compensation 1. Under a Borrower Paid Compensation scenario, can a Down Payment Assistance (DPA) program be used to pay the Broker s fees? No. Funds from down payment assistance can never be used to pay the Broker s fees. The Broker s fees must be paid in cash by the borrower, financed through the Loan proceeds, or paid by the seller. 2. Under a Borrower Paid Compensation scenario, what are the requirements for the Seller to pay Broker fees? The seller can contribute funds towards all or a portion of the Broker s fees provided that it is not prohibited in the sales contract. 3. Will Lender require the Broker to provide a disclosure stating that he will comply with compensation regulations in regard to how a Loan Officer is paid? No. The Broker owner is responsible for ensuring that any compensation paid to its Loan Officers is compliant with regulatory restrictions. New Brokers are required to submit a copy of their Loan Officer Compensation agreement prior to approval. 5
Lender Paid Compensation 1. Does the Lender Paid Compensation Agreement allow for different election percentages for the same Broker for different loan types (e.g. for Jumbo and for Conventional? No. CSL s current policy allows a Broker to select one Lender Paid Compensation tier for all of their business, regardless of loan type, during the term of the applicable Lender Paid Compensation Agreement. The CFPB s rule provides a somewhat clearer framework (called a proxy analysis). If the compensation distinction consistently varies with a loan term, and the loan originator can influence that distinction in originating the loan, then it is prohibited. For certain distinctions, like paying higher basis points for purchase money loans than refinancings, it is very unlikely a loan originator could steer a potential borrower between one or the other, so the new rule would likely permit it. Obviously, the proxy analysis depends on the circumstances of each case and would be difficult to distinguish each loan to justify various terms. 2. Under a Lender Paid Compensation scenario, can the seller pay the Broker s compensation? No. In a Lender Paid Compensation scenario, the seller cannot contribute funds towards the Broker s compensation. The compensation must be paid by lender. 3. Are third party processing fees required to appear on the HUD even though they cannot be charged on a Lender Paid Compensation loan? No. In a Lender Paid Compensation scenario, the Broker Processing Fee (internal or third party) cannot be charged. There is no requirement for the Processing Fee to appear on the HUD. 6
The Pros and Cons The matrix below provides a comparison between borrower-paid and lender-paid compensation: Borrower-Paid Compensation Lender-Paid Compensation PROS Allows compensation flexibility for owner originators to pay for extension and pricing error cost, RESPA cure charges, and to pay bona fide closing costs up to.375% of the loan amount Offers greater probability of no closing cost loan Consistent compensation opportunity CONS Unless salary or hourly employees or sole proprietors, originators cannot earn commission income Potential increased fixed overhead expenses due to salaries Without seller contributions, a no closing cost loan is not an option No pricing flexibility to reduce income in competitive situations 7
Compensation Differences Brokers have full control over which compensation method is chosen and the method can vary from one loan to the next. Below is a breakdown of the affected differences between Borrower and/or Lender Paid Compensation. Compensation Borrower- Paid Lender- Paid Source of Compensation Note: Broker must choose to either receive compensation from (Borrower Paid) or from (Lender Paid), they cannot receive from both. Allowed to be Paid by: Borrower Funds - Broker s compensation is paid directly from the borrower. Loan Proceeds Seller Concessions Note: Seller can pay Brokers Compensation however, it must be paid in its entirety, may not be split between borrower and seller. Paid by Lender Amount of Compensation Negotiated between loan originator and borrower. Must comply with High Cost Calculation. Compensation is based on Plan % (Tier)of the loan amount, overlaid with min/max and/or fixed dollar amounts based on Brokers Tier Elections Variances in Compensation Can vary on each individual loan - Broker can charge different amounts, to different borrowers. Unlike lender paid where all compensation tiers are the same on all loans. Can vary based on brokers chosen Compensation Election Plan Percentage % Tier per our policy (currently every 30 days) Broker also elects a minimum & maximum compensation along with tier selection. Note: Applicable per file Tier pricing is based on application date NOT submission date 8
Compensation Differences (Continued) Concessions Broker can lower and/or offer credits toward thirdparty costs Broker cannot give any credits towards closing costs or 3rd party cost from their compensation. Brokers compensation cannot be lowered Rebate / Premium Pricing Borrower Paid Transactions - Any credit in excess of the Par rate Can be used to cover third party costs Cannot be used to pay any portion of loan originators compensation Lender Paid Transactions - Any credit in excess of the Par Rate, after the loan originators compensation plan % (Tier) has been deducted. Can be used to cover third party cost Cannot be used to pay any portion of loan originators compensation 9
Borrower Rebate Credits (Premium Rebate Credit) Allowable Closing Costs, Can Be Paid by Premium Pricing Credits: Third Party Fees (i.e. Title, Appraisal, Brokers credit report IF paid directly to vendor and Invoice is required) Recording Fees Lender Fee s (Our Lender Fee) Prepaid Items (Taxes/Insurance Escrows, Per Diem Interest) POC d Items (Appraisal, Homeowners Insurance on a Purchase Transaction, Pest Inspection) Non- Allowable Closing Costs, Cannot be Paid by Premium Credits: Any compensation that is paid to the Broker (Points, Fees, Lender Paid Comp/Rebate) Excess Rebate / Premium Pricing Credits: (Any amount of Rebate Credit that exceeds the closing cost and/or prepaid items) Excess Premium Pricing Credits may NOT go to the borrower as cash. Lender option available to rectify: Interest Rate Reduction: The rate can be reduced in order to reduce the credit to the borrower Does a Borrower Premium Rate Credit (BPRC) Borrower Rebate affect the maximum allowed seller concessions? No. The BPRC is a rebate credit from Lender to the borrower to pay third party closing costs. It is not considered a seller concession. What types of fees can be paid with Borrower Premium Rate Credits (Rebate Credit)? BPRCs can be used to pay any third party closing costs (nrcc s), including Lender s underwriting fee, escrow reserves, or prepaid interest. BPRC can never be used to pay Broker Compensation under any circumstance. 10
Changing Compensation Types When can a loan switch from one compensation type to another (e.g. from Borrower Paid to Lender Paid Compensation, or vice versa)? The compensation type may be switched provided the requirements below are met: Note: All GFEs must be contained in the file. LOAN STATUS Loans submitted to Lender where a GFE has not been sent to the borrower (prequal application) REQUIREMENT The compensation type may be switched with no additional requirements. Loans submitted where a GFE has been sent to the borrower The submission file must contain a signed, written request from the borrower that includes the reason for the change. (E.g. to bring less money to closing in exchange for a higher rate) In addition, the Broker must provide a revised GFE reflecting the new compensation terms within 3 days of the borrower s request. How is the GFE affected when the compensation type is switched? Blocks 1 and 2 could be affected. In addition, the interest rate on page 1 may change. The compensation type can only be switched after initial disclosure at the borrower s request. This is considered a changed circumstance requiring re disclosure. 11 Changing from Lender Paid to Borrower Paid OR Borrower Paid to Lender Paid: Broker may change the chosen election from Lender Paid to Borrower Paid compensation as long as the Origination charge in Block 1 does not increase.
Important Information Application Date: We define the application date as the Interview Date as shown on the government monitoring tab of the 1003 shown below. Initial disclosure date is the printed date of the document not the date the borrower signed the document. High Cost Loans: On Lender Paid Compensation, if the loan is a high cost loan (fee & points that exceed the greater of 5% of the loan amount or a maximum dollar amount of $1000), the loan can be restructured as a Borrower Paid Compensation loan, with the fees lowered enough to no longer be high cost. Third Party Processing Fees: On Lender Paid elections no fees can be paid by the borrower to the broker. Third Party Processing Fees are not allowed. MDIA Compliance- Fee Collection RESPA and MDIA Compliance We must confirm that no fees, other than a reasonable credit report fee, have been collected prior to the following: Borrower s receipt of the initial GFE and Borrower s Intent to Proceed Borrower s receipt of the early TIL. Use the following to determine compliance: a. Early TIL signed fees can be collected same day as signature date b. Early TIL mailed fees can be collected on the 4th business day after the Early TIL is generated 12
Definitions: Loan Originator--a person who for compensation or other monetary gain arranges, negotiates or otherwise obtains an extension of consumer credit for another person. Includes: o An employee of the creditor if that employee meets the definition o An employee of the broker if that employee meets the definition o An employee of a correspondent lender if that employee meets the definition o A mortgage broker company, unless acting as the creditor (e.g. closing loans in broker s name using broker s funds, including bona fide warehouse facility) Does not include: o A creditor closing loans in its own name and funds the loan using its own resources or deposits. Capstone is not a Loan Originator under this definition Compensation --salaries, commissions, bonuses, or other financial or similar incentive including awards of merchandise, services, trips, or similar prizes. Compensation does NOT include third-party charges, such as title insurance or appraisals 13