Compensation. November 16, 2016

Transcription

1 Compensation November 16, 2016 Moderator: Robert Northway, Partner & Head of Consumer Banking and Global RE Practice, McLagan Speaker: Richard Andreano, Jr., Practice Group Leader, Ballard Spahr LLP

2 Compensation November 16, 2016 Presented by Richard Andreano, Jr. Practice Group Leader Ballard Spahr LLP

3 Regulation Z Loan Originator Compensation Rule

4 Basics: Liability General Congress made violations of TILA loan originator compensation provisions (Regulation Z, (d) & (e)) subject to: Full array of damages that also are triggered by HOEPA violations, which include all finance charges and fees paid by the consumer, court costs and attorney s fees Expanded three year statute of limitations Defense to foreclosure. Without regard to the statute of limitations, if the creditor, assignee or other holder of a mortgage loan, or anyone acting on their behalf, initiates a judicial or non-judicial foreclosure or any other action to collect the debt, the consumer can assert a violation of the ability to repay provisions as setoff claim Express authority of State attorneys general to bring claims 4

5 Basics: Liability Loan Originators For mortgage originators who are not creditors, including individual loan originators, there is express liability for violations, with maximum liability up to the greater of: Actual damages, or An amount equal to three times the total amount of direct and indirect compensation or gain accruing to the mortgage originator, plus The costs to the consumer of the action, including reasonable attorney s fees 5

6 Basics: Term of a Transaction Prohibition Term A term of a transaction" is any right or obligation of the parties to a "credit transaction Rights and obligations of parties in loan documents Fees and charges that must be disclosed in the Loan Estimate or Closing Disclosure (or the Good Faith Estimate or HUD-1) Loan amount is not a term of a transaction, provided compensation is based on a fixed percentage of the loan amount, and the percentage does not vary with the amount of credit extended 6

7 Basics: Term of a Transaction Prohibition Scope Prohibition applies to compensation paid by creditor, borrower or any one else Applies to individual loan originators and loan originator organizations (i.e., mortgage brokers) Prohibition generally applies to increases or decreases in compensation. Limited exception permits loan originator to decrease compensation to address unforeseen charge or increase in charge Prohibition applies to not only single transaction of a loan originator, but also multiple transactions of one or more loan originators Pooled compensation also prohibited 7

8 Basics: Proxy for a Term of a Transaction Prohibition Concept Proxy Definition: A factor (that is not itself a term of a transaction) is a proxy for a term of a transaction if (1) the factor consistently varies with a term or terms of the transaction over a significant number of transactions, and (2) the loan originator has the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction. Commentary Examples: Proxy Exists: Creditor pays higher commission for retained loans. Creditor retains 5 year, fixed rate, balloon payment loans and sells all other loans. Sold loans typically are 30 year with higher interest rates. LOs can originate either type of loan Proxy Does Not Exist: Creditor pays higher compensation for loans secured by property in State A than loans secured by property in State B. Significant number of State B transactions have substantially lower interest rates than State A transactions. LOs cannot influence whether a transaction is secured by property in State A or State B 8

9 Basics: Term and Proxy for a Term Prohibitions Always Permitted Bases of Compensation Compensation based on the following factors is not compensation based on a term of a transaction or a proxy for a term of a transaction: 1. The loan originator's overall dollar volume (i.e., total dollar amount of credit extended or total number of transactions originated), delivered to the creditor 2. The long-term performance of the originator's loans 3. An hourly rate of pay to compensate the originator for the actual number of hours worked 4. Whether the consumer is an existing customer of the creditor or a new customer 9

10 Basics: Term and Proxy for a Term Prohibitions Always Permitted Bases of Compensation 5. A payment that is fixed in advance for every loan the originator arranges for the creditor (e.g., $600 for every credit transaction arranged for the creditor, or $1,000 for the first 1,000 credit transactions arranged and $500 for each additional credit transaction arranged) 6. The percentage of applications submitted by the loan originator to the creditor that results in consummated transactions 7. The quality of the loan originator's loan files (e.g., accuracy and completeness of the loan documentation) submitted to the creditor 10

11 Basics: Dual Compensation Prohibition If any loan originator receives compensation directly from a consumer in a covered transaction: No loan originator shall receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction; and No person who knows or has reason to know of the consumer-paid compensation to the loan originator (other than the consumer) shall pay any compensation to a loan originator, directly or indirectly, in connection with the transaction Unlike the Fed rule, the CFPB rule includes an express exception to the dual compensation prohibition that permits a mortgage broker that is a loan originator organization to compensate an employee loan originator in connection with a transaction, even if the mortgage broker receives compensation directly from a consumer. 11

12 Basics: Dual Compensation Prohibition Compensation Source Financed Compensation Payment. Compensation paid to a loan originator out of the proceeds of a covered transaction is considered compensation received directly from the consumer Compensation Built Into Interest Rate. Compensation paid to a loan originator that is derived from an increased interest rate on a covered transaction is not considered compensation received directly from the consumer Points Paid to Creditor. Points paid on a covered transaction by a consumer to the creditor, whether in cash or out of the transaction s proceeds, are not considered compensation received directly from the consumer, even if the creditor may use the points to pay a loan originator 12

13 Basics: Anti-Steering Prohibition The CFPB Rule prohibits a loan originator from directing or "steering" a consumer to consummate a covered transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer, unless the consummated transaction is in the consumer's interest If a loan originator is an employee of a company that acts as a creditor in a covered transaction and the loan originator complies with the prohibitions against compensation based on the transaction's terms, or a factor that is a proxy for the transaction's terms, the originator also satisfies the anti-steering prohibition As a practical matter, the anti-steering prohibition applies only to covered transactions in which a loan originator acts a mortgage broker 13

14 Basics: Anti-Steering Prohibition Consumer s Interest Even if a loan originator steers a consumer to consummate a covered transaction in which the loan originator will receive greater compensation from the creditor than in other transactions that the originator offered or could have offered, the anti-steering prohibition is not violated if the consummated transaction is in the consumer s interest To determine whether a consummated transaction is in the consumer s interest, the transaction must be compared to other possible loan offers that: Were available through the loan originator, if there were any, and For which the consumer was likely to qualify at the time the consummated transaction was offered to the consumer An example in the Commentary provides that a loan with a higher rate might be in the consumer s interest if the lower-rate loan has a prepayment penalty, or the loan requires the consumer to pay more in up-front charges than the consumer is willing or able to pay or to finance as part of the loan amount 14

15 Basics: Anti-Steering Prohibition Optional Safe Harbor There is an optional safe harbor that can be followed to demonstrate compliance with the anti-steering prohibition. In practice, as a matter of policy creditors and investors require following the safe harbor To follow the safe harbor, a loan originator must: Obtain specific loan options from a significant number of creditors with which the originator regularly does business Present to the consumer loan options for which the loan originator has a good faith belief are loans for which the consumer likely qualifies The options must be for each type of transaction in which the consumer expresses an interest. For purposes of the safe harbor, there are three types of transactions: APR may not increase APR may increase Reverse mortgage 15

16 Basics: Anti-Steering Prohibition Optional Safe Harbor, The Options The specific loan options for each applicable transaction are: The loan with the lowest interest rate The loan with the lowest interest rate and that does not have: For a forward mortgage loan, a prepayment penalty, a balloon payment within the first seven years of the loan term, or a negative amortization, interest-only, demand, shared equity or shared appreciation feature or For a reverse mortgage loan, a prepayment penalty or a shared equity or shared appreciation feature The loan with the lowest total dollar amount for origination points or fees and discount points The loan with the lowest interest rate for which the consumer likely qualifies is the loan with the lowest rate the consumer can likely obtain regardless of how many origination points or fees or discount points the consumer must pay to obtain the rate 16

17 Basics: Record Retention Three year requirement for creditor to retain records sufficient to evidence all compensation it pays to a loan originator, and the compensation agreement that governs each such receipt or payment Records are sufficient to evidence payment and receipt of compensation if they demonstrate the following facts: The nature and amount of the compensation That the compensation was paid and by whom That the compensation was received and by whom When the payment and receipt of compensation occurred 17

18 Issues That Will Not Go Away Loans made versus loans brokered Bond program loans Point banks The LO screwed up. I can t dock them but I can throw them off a dock! Not just LO compensation rule Well, it s okay under the LO compensation rule, but... Pick-a-pay Borrower-paid versus lender-paid broker compensation 18

19 Enforcement: RPM Mortgage, June 2015 CFPB alleged that RPM Mortgage established expense accounts for loan originators, and that the company made deposits into the expense account of a loan originator based on the profits from that loan originator s loans CFPB also alleged that loan originators received bonuses from their accounts, and also could apply funds in the accounts to pay for pricing concessions on future loans Finally CFPB alleged loan originator commission rates are increased for future loans, with funds in the expense accounts covering the increased commissions Pre-January 2014 conduct, so original rule CFPB considered the bonuses to violate the loan originator compensation rule as payments based on loan terms, particularly the interest rates on loans 19

20 Enforcement: RPM Mortgage, June 2015 CFPB considered the use of funds to pay for pricing concessions to violate the rule CFPB point bank position Finally CFPB considered the use of expense account funds to cover future commission increases to violate the loan originator compensation rule on the grounds that profits based on payments tied to loan terms on prior loans were converted to commission income on future loans $18 million in redress to consumers, assessed jointly against company and its CEO, who was also a shareholder and director $1.0 million civil money penalty payable by the company $1.0 million civil money penalty payable by the CEO 20

21 Enforcement: Franklin Loan, November 2014 CFPB alleged that Franklin Loan had a loan originator compensation plan with two components: (1) a commission based on a set percentage of the loan amount, and (2) a quarterly bonus paid from each loan originator s expense account CFPB also alleged that the company retains part of the rebate on loans that are generated from a premium interest rate, and a portion of the rebate is credited to the applicable loan originator s expense account Pre-January 2014 conduct, so original rule CFPB considered this arrangement to violate the loan originator compensation rule as payments tied to loan terms on prior loans were used to pay the quarterly bonus compensation Company paid $730,000, the total amount of the quarterly bonuses. No civil money penalty because of financial condition 21

22 Enforcement: Castle & Cooke, November 2013 CFPB alleged that Castle & Cooke had a quarterly bonus plan with payments under the plan based on the interest rates charged on loans The CFPB also alleged that the plan was not reflected in written compensation agreements with loan originators or in company written policies The CFPB considered this arrangement to violate the loan originator compensation rule as payments tied to loan terms on prior loans were used to pay the quarterly bonus compensation The CFPB also asserted that the recordkeeping requirements of the rule were violated The Company, its president and an SVP were jointly and severally liable equitable monetary redress of over $9.2 million and for a $4 million civil money penalty 22

23 Enforcement: LOs Liable Genuine Title, April 2015 RESPA Matter: CFPB/State of Maryland settlement with Genuine Title and individuals with the title company and lenders Related to January 2015 settlements with Wells Fargo/JP Morgan Chase CFPB asserted that Genuine Title paid for and provided loan officers with mortgage leads and related marketing collateral in order to receive title business referrals The actions against individuals in the matter are significant: Genuine President: $30,000 monetary relief, $100,000 civil money penalty, and 5-year ban from mortgage/settlement service business Genuine Marketing Director: $400,000 monetary relief and 5-year ban from mortgage/settlement service business 23

24 Enforcement: LOs Liable Genuine Title, April 2015 The following actions were taken against loan originators: Loan Originator: $65,000 monetary relief, 2-year ban from mortgage/settlement service business and must report action to NMLSR Loan Originator: $37,500 monetary relief, 2-year ban from mortgage/settlement service business and must report action to NMLSR Loan Originator: $30,000 monetary relief, 2-year ban from mortgage/settlement service business and must report action to NMLSR 24

25 Enforcement: LOs Liable Eghbali, May 2016 RESPA Matter: CFPB asserts that loan originator had arrangement with an escrow company to provide for fee shifting with loan transactions Specific CFPB allegation is that for no-cost mortgage loan transactions referred by loan originator to escrow company, the escrow company would lower fees, and that escrow company increased fees on other transactions referred by the loan officer CFPB refers to this as a Fee-Shifting Scheme CFPB asserts that loan originator advised escrow company the loan transactions for which fees should be increased or decreased CFPB asserts that agreement of escrow company to Fee-Shifting Scheme was a thing of value for the referral of business Sanctions against loan originator: $85,000 civil money penalty, limited participation in mortgage industry for one year, report to NMLSR 25

26 Fair Lending Aspect: Sage Bank, November 2015 DOJ asserts that bank set target prices for each loan originator, that target prices varied by originator, and that African American and Hispanic borrowers were served disproportionately by originators with higher target prices DOJ asserts that loan originators had discretion to set loan price above target price without management authorization and without documenting reasons DOJ asserts this resulted in African American and Hispanic borrowers paying more for loans than non-hispanic White borrowers not based on credit creditworthiness or other objective criteria related to risk Remedies include: New loan pricing policy; compensation policy for loan originators, branch managers and other employees involved in loan pricing, with compensation not being based on loan terms; training; loan price monitoring; $1,175,000 to compensate borrowers 26

27 Fair Lending Aspect: Provident Funding, May 2015 CFPB/DOJ assert that company was predominantly a wholesale lender, that it set a base par rate for loans and would share with brokers interest rates set above the par rate, and brokers had subjective, unguided discretion to set rates above par CFPB/DOJ assert that company allowed brokers subjective, unguided discretion to set the amount of broker fees charged CFPB/DOJ assert this resulted in African American and Hispanic borrowers paying higher broker fees than non-hispanic White borrowers not based on credit creditworthiness or other objective criteria related to risk Remedies include: New loan broker compensation policy that does not allow discretion in borrower- or lender-paid compensation fixed compensation amount; monitoring program; training program for employees dealing with brokers; $9 million to compensate borrowers 27

28 BancorpSouth Bank, June 2016 CFPB/DOJ assert that bank engaged in discriminatory redlining, underwriting, and pricing and had a race-based assistance and denial policy Allegations of race-based assistance and denial policy based on an audio recording of an internal meeting, and also mystery shopping Raises issue of policies regarding recording of meetings by staff 28

29 Department of Labor Actions

30 DOL Change in Position on Loan Officers DOL 2006 opinion that loan officers as described in opinion qualify for administrative exemption from minimum wage and overtime requirements under Fair Labor Standards Act (FLSA) DOL 2010 first ever Administrator s Interpretation (2010-1) reverses position loan officers do not qualify for administrative exemption MBA files suit seeking to have Administrator s Interpretation set aside July 2013, US Court of Appeals for DC Circuit vacates Interpretation, finding DOL had to act by way of rulemaking March 2015, US Supreme Court upholds Interpretation 30

31 DOL Rulemaking Background March 2014, the President signs a Presidential Memorandum directing DOL to update rules defining which white collar workers are protected by FLSA s minimum wage and overtime standards Last DOL rule on topic adopted in 2004 DOL publishes proposed rule in July 6, 2015 Federal Register addressing exemptions from minimum wage and overtime requirements under FLSA Over 270,000 comments received DOL publishes final rule in May 23, 2016 Federal Register, with effective date of December 1,

32 DOL Rulemaking Summary of Final Rule Changes Addresses executive, administrative and professional exemptions to FLSA s minimum wage and overtime standards Increases minimum salaries for exemptions Permits use of nondiscretionary bonuses and incentive payments to satisfy part of required minimum salary Establishes automatic updating for minimum salary levels No change to job duty requirements of exemptions 32

33 DOL Rulemaking Salary Changes Standard salary level increases from $455 per week ($23,660 annually) to $913 per week ($47,476 annually) Set at 40 th percentile of earnings of full-time salaried workers in lowest-wage Census Region (currently the South) Continues ability to pay exempt computer employees $27.63/hour Highly-compensated employee salary level increases from $100,000 annually to $134,004 annually 33

34 DOL Rulemaking Certain Bonus and Incentive Payments Up to 10% of salary level may be satisfied with nondiscretionary bonuses, incentives or commissions that are paid at least quarterly Highly-compensated employees must receive full standard salary amount each pay period without regard to such payments Catch-up payments are permitted: If by the end of last pay period of a quarter the sum of the employee s weekly salary plus nondiscretionary bonus, incentive and commission payments does not equal 13 times required weekly salary amount, one final payment may be made no later than the next pay period after the quarter end Catch-up payment applies to salary level for prior quarter and not quarter in which paid 34

35 DOL Rulemaking Automatic Updating Automatic updating of salary levels every three years will commence on January 1, 2020 Updates to be based on 40 th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region in the second quarter of the year preceding the update, as published by the Bureau of Labor Standards DOL will publish new levels at least 150 days before effective date Based on historical wage growth, DOL estimates that in 2020: Standard salary level will be $51,168 Highly-compensated employee salary level will be $147,524 35

36 DOL Rulemaking Job Duties DOL decided not to change the job duties associated with the exemptions Existing outside sales employee general rule: An employee whose primary duty is (1) making sales or (2) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer, and Who is customarily and regularly engaged away from the employer s place of business in performing such primary duty 36

37 Thoughts and Considerations

38 LO Compensation Rule and FLSA Don t forget state laws Approach with multi-state operations Records, records, records LO compensation rule burdens Tracking for minimum wage and overtime considerations Assess actual staff duties and job descriptions Assess potential implications of compensation arrangements Government focusing more on how compensation arrangements may promote undesirable employee behavior LO compensation rule can inhibit actions 38

39 Questions