Bodman PLC Detroit, Troy, Ann Arbor, Cheboygan, MI Dallas, TX Affiliate Office Presented By: Howard A. Lax

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1 Bodman PLC Detroit, Troy, Ann Arbor, Cheboygan, MI Dallas, TX Affiliate Office Presented By: Howard A. Lax

2 Mr. Lax, a Member of Bodman PLC, concentrates his practice in financial institutions consumer compliance and regulatory affairs and real property law. Mr. Lax has written numerous articles on residential mortgage lending issues. Mr. Lax participates in numerous seminars for AllRegs, CMPS Institute, MMLA, the Michigan Bar, the American Bankers Association, and various title insurance and real estate trade groups. Mr. Lax s articles are found in RESPA News and DocMagic s Compliance Wizard. Mr. Lax is rated AV by Martindale Hubbell, and he was recognized as a Michigan Super Lawyer and Top Lawyer. HOWARD A. LAX Bodman PLC 201 West Big Beaver Road, Suite 500 Troy, Michigan Tel: (248) Fax: (248) hlax@bodmanlaw.com Bodman PLC 2

3 Why We Are Here Today Compensation rules are changing, and compensation is linked to the QM Safe Harbor through the points and fees test. If you are a loan originator, and you are paid a commission, your compensation plan may change effective January 1, You need time to figure out how you want to be paid. If you run a mortgage origination business, and you want to stay competitive, you must evaluate all of the new options for compensation plans before hiring an attorney to re-write your plan. If you want to do nothing and take your chances, the penalty for violating the loan originator compensation rule increases to three times the finance charges collected during the first three years of the loan Bodman PLC 3

4 Where We Are Now Loan Originator someone who takes an application and negotiates loan terms, for compensation. The definition includes loan officers, producing managers, and mortgage brokers. Creditors were exempt if they use their capital or a bona fide warehouse line to fund loans at closing and LO s are paid according to the rule. Bona fide warehouse line is not defined Bodman PLC 4

5 Where We Are Now Compensation can be based on loan amount or volume, but may not be based upon any other term of the transaction or any proxy for a transaction term. FRB listed 7 other factors that were not transaction terms, or proxies for transaction terms. FRB webinar in March 2010 provided examples of proxies, e.g. point banks, and location where the loan is originated. Borrower paid broker fees can be negotiated, but no LO commissions may be paid in borrower paid broker fee transactions. Mortgage brokers must provide an anti-steering notice if compensation formulas vary from one creditor to another. HELOC s, timeshares, reverse mortgages are exempt. Creditors who use a bona fide warehouse line are exempt, but not broker or LO compensation Bodman PLC 5

6 The World Did Not End NAMB sued and lost (effective date delayed 5 days). Loan officers still received a commission. Commissions were a percentage of loan amount, with a guaranteed draw to satisfy minimum wage laws. Some commission formulas were tiered. Some commissions netted out business expenses. Commissions formulas were reverse engineered based on loans. Few loan officers jumped ship because everyone was in the same boat Bodman PLC 6

7 Effective Date The new loan originator compensation rule and the anti-steering rule are effective for all compensation paid for transactions closing on or after January 1, The new rule was made effective 1/1/2014 for the convenience of payroll services and to allow full year bonuses if so elected by the employer (more on this later). All payments to defined benefit plans after 1/1/2014 subject to rule. Prohibitions in Section 36(h) (arbitration clauses in loan agreements) is effective now (as of June 1, 2013). Section 36(i) (single premium credit insurance) is effective if the application is taken on or after January 10, New points and fees test, and the Ability to Repay rule are effective for all applications received on or after January 10, 2014 (some investors may back this up to 1/1/2014 to make the dates consistent) Bodman PLC 7

8 Exempt Transactions Timeshare and HELOC transactions are exempt under the new loan originator compensation rule. Reverse mortgages with a closed end component are not exempt Second mortgages were never exempt. Prohibitions on arbitration clauses and financing of single premium credit insurance apply to all closed end residential loans. Other exemptions under the high cost loan rule and the ability to repay rule do not carry over into the loan originator compensation rule. There is no abundance of caution rule or similar exception for private banking loans. Compensation paid to creditors who fund loans with capital or a bona fide warehouse line of credit is not subject to the rule, but compensation paid to the creditor s mortgage brokers, loan officers, and other loan originators is subject to the rule Bodman PLC 8

9 New Rule: Will the World End? 2013 Bodman PLC 9

10 New Definition of Loan Originator The CFPB divided loan origination activities into five categories: Referring any oral or written action directed to a consumer that can affirmatively influence the consumer to select a particular loan originator or creditor to obtain an extension of credit when the consumer will pay for such credit. Arranging a credit transaction, including initially contacting and orienting the consumer to a particular loan originator s or creditor s origination process or credit terms, assisting the consumer to apply for credit, taking an application, offering or negotiating credit terms, or otherwise obtaining or making an extension of credit. Assisting a consumer in obtaining or applying for consumer credit (independent of a loan officer) by advising on specific credit terms, filling out an application form, preparing application/preapproval packages, or collecting application and supporting information. Presenting particular credit terms or seeking agreement to credit terms. Advertising or communicating to the public that one can or will perform any loan origination services (this does not include advertising services of others) Bodman PLC 10

11 New Definition of Loan Originator Expanded list of duties triggers the rule when performed for direct or indirect compensation: Take an application, e.g. filling out an application form in a meeting with the consumer, over the phone, or online; Offer, arrange, or assist a consumer in obtaining or applying to obtain a loan; Recommend a loan originator or loan terms, or make a referral to use a loan originator, or steering to specific loan terms; Negotiate loan terms; Communicate a credit decision and terms offered; Obtain or make a loan; Any task that is part of the process of originating a credit transaction; or Advertise, communicate, or represent to the public that the advertiser can or will perform any of these activities Bodman PLC 11

12 Getting Down to Tacks If a person receives some direct or indirect compensation for taking an application, assisting a consumer in obtaining or applying to obtain, arranging, offering, negotiating, or otherwise obtaining or making an extension of consumer credit for another person, the person is a loan originator. A manufactured housing salesperson who completes a loan application is a loan originator, but collecting information for processing after the application is taken is not an origination activity. A manufactured housing salesperson who is paid to make a referral to a creditor is a loan originator. Explaining general credit terminology or the interactions of various credit terms not specific to a transaction is not loan origination. Persons who collect information on behalf of the consumer, and not at the behest of loan officer, are loan originators Bodman PLC 12

13 Advisors: Loan Originators or Not? Licensed advisors (other than housing counselors) are suspected of being loan originators if paid by a loan originator organization. Receiving rent payment from a broker or lender does not make an attorney, real estate broker or title agent into a loan originator. Receiving a commission for arranging a short sale or selling a foreclosed home does not make the real estate broker a loan originator. Helping the buyer obtain financing and being paid for this, or receiving compensation for one of the core origination activities makes an advisor a loan originator Bodman PLC 13

14 Potential Loan Originators Lead Generation Companies and their employees, if they represent that they can help obtain a loan. Will disclaimers work? Not likely. Scripts must be carefully evaluated before buying leads. Property owners (e.g. investors) who utilize seller financing. 1 loan transaction/year by an individual, estate, or trust is exempt. 3 loan transactions/year are exempt if the borrower has the ability to repay, the rate is fixed for at least 5 years, rate increases thereafter are reasonable (2% annual and 6% lifetime caps), the rate index is widely available, and negative amortization is prohibited. The general creditor exception to TILA (5 mortgage loans that are not high cost loans) does not apply the rule applies to all loan originators. Persons appearing in ads if they make a personal referral. Advertising does not have to be directed to a single person to be an origination activity in a small audience, a personal appearance may be a referral (origination activity) rather than an advertisement Bodman PLC 14

15 Referral Not Subject to This Rule A teller or receptionist at a bank, or at a mortgage company, who provides a loan originator s or creditor s contact information, or a blank application form, to a consumer in response to the consumer s request does not become a loan originator, provided that the teller or receptionist does not discuss particular credit terms and does not refer the consumer, based on the teller s or receptionist s assessment of the consumer s financial characteristics, to a certain loan originator or creditor seeking to originate particular transactions to consumers with those financial characteristics. A teller or receptionist may also describe other product-related services, or describe the application process in general, without becoming a loan originator. This exception only applies to referrals to an employee at the same company; referrals to an affiliate are originations Bodman PLC 15

16 Referrals Subject to This Rule A bank teller asks a consumer if the consumer is interested in refinance loans with low introductory rates and provides contact information for a loan originator based on the teller s assessment of information provided by the consumer or available to the teller regarding the consumer s financial characteristics. Anyone making a referral to an affiliated mortgage company, if they may be compensated for the referral. This adds extra teeth to Section 8 of RESPA not only is the referral fee a kickback, it also violates the loan originator compensation rule and poisons the loan. Things that might be compensation a thank you lunch, or a box of chocolates and flowers. Lenders must police the whole transaction, including lead sources Bodman PLC 16

17 Things You Never Want to Say Don t worry about your loan application I am sure everything will be fine. Of course you can afford a home! We made loans to people in worse shape than you. Everyone gets a prequalification letter. Go see Joe in that cubical. He works for our (mortgage affiliate, preferred lender). We are (buying, selling) leads with a 720 FICO score Bodman PLC 17

18 Who is Not a Loan Originator? Persons who refer consumers to a loan originator without any triage of the consumer s credit needs or qualifications for credit. Non-originators may: Quote today s rates without evaluating qualifications; Provide contact information for fellow employees; Describe non-mortgage products; Describe the loan application process; Describe optional monthly payment methods via telephone or via automatic account withdrawals; and Describe the availability and features of online account access, the availability of 24-hour customer support, or free mobile applications to access account information Bodman PLC 18

19 Who is Not a Loan Originator? True loan processors and underwriters (no loan originator functions) are not originators. They may perform the following functions: Provide general explanations or descriptions in response to consumer queries. Explaining credit terminology or policies, or describing product-related services. Verify information provided by the consumer in the credit application. Asking the applicants for supporting documentation or the consumer s authorization to obtain supporting documentation Compile and assemble credit application packages and supporting documentation to submit to the creditor (or underwriter) while acting on behalf of a loan originator or creditor. Arrange a closing time and place Bodman PLC 19

20 Who is Not a Loan Originator? Loan servicers The servicer begins interacting with the consumer after consummation. The servicer only collect payments and disburses funds received. Loan modifications by a servicer are not loan originations. Refinancing a loan (replacing the note and satisfying the prior obligation) is loan origination. Employees, agents, and contractors of the servicer performing servicing and modification activities after consummation are not loan originators. Publishers that advertise loans offered by loan originators. Attorneys, accountants, real estate brokers, counselors, and other professionals providing advisory services without receiving compensation from the loan originator or creditor, or not engaging in origination activities Bodman PLC 20

21 The Manager Behind the Screen A manager who sets rates and fees, or who micromanages the loan origination process, is not a loan originator if the manager only communicates and negotiates terms with the consumer through a loan originator (i.e. a loan officer). It is irrelevant whether the Manager is compensated for this activity or not. A person, including a manager, who is employed by a loan originator or creditor (and thus receives compensation from the employer), and who engages in loan origination activities (arranges, negotiates, or otherwise obtains an extension of consumer credit for another person) is a loan originator. There is no de minimis exception that permits a manager to originate a few loans while remaining exempt from the rule. Recommendation to Managers: Do not blow your cool and grab the phone to yell at a consumer Bodman PLC 21

22 Putting Teeth into the SAFE Act 2013 Bodman PLC 22

23 Licensing and Background Checks Loan originators must be registered and licensed pursuant to state or federal law, as applicable. Loan originators who are not licensed under state law (e.g. LO s working for banks and non-profits, and land contract originators) must be background checked. Criminal background checks look for any felony in a domestic or military court during the preceding seven year period or, in the case of a felony involving an act of fraud, dishonesty, a breach of trust, or money laundering, at any time. Expunged and pardoned crimes are do not disqualify the individual. Crimes must be felonies at the time of conviction or plea. A person with a conviction may work as a loan originator with the consent of the depository institution s regulator (the CFPB cannot waive a conviction) Bodman PLC 23

24 Responsibility, Character, and Fitness Employers must obtain credit reports in compliance with section 604(b) of the FCRA, and evaluate credit as a state licensing regulator would for new loan officers. Employers may establish policies and procedures to consider bankruptcies and foreclosures only within a specified time frame. Credit scores do not substitute for evaluation of financial responsibility. Employers must also evaluate character and general fitness. Check NMLS for citations; ask the loan originator for their history if the individual is not registered in NMLS. Banks may use the same standards as used under Reg. G or under FDIC guidance Bodman PLC 24

25 Updating Background Checks Acquiring information of a conviction, financial irresponsibility, regulatory citations, or other evidence of non-qualification triggers a mandatory re-check. Re-evaluation is required when there is information indicating that the individual loan originator likely no longer meets any of the required standards. Individual loan originators whose backgrounds were reviewed according to procedures in place prior to January 1, 2014 are grandfathered. If the grandfathered individual changes employer, or leaves employment and returns, a background check is required Bodman PLC 25

26 Organization Background Checks Legal entities must register and qualify to do business, have a registered agent, and trade names must be properly registered (and renewed). Annual reports must be filed. Licenses must be current where required. SAFE Act requirements are not impacted by the rule. individual loan originators who work for the organization must be licensed or registered in compliance with the SAFE Act and other applicable law. Franchise taxes must be paid because these taxes are required to maintain state registration. Failure to pay income and property taxes does not automatically disqualify the organization as a mortgage broker. 26

27 Fingering the Responsible Person NMLS ID s must be on each application, note/loan agreement, and mortgage beginning 1/14/2014. For a retail loan, the LO s ID must be printed. For a brokered loan, the LO and loan originator organization ID s must be printed. ID s must be printed on one page of each document. Only the primary loan originators (individual and organization) ID s are printed. In an online application, there may not be a primary loan originator. Only the final application at closing will identify the loan officer if the initial application was completed without human assistance. The NMLS ID will be printed on combined TILA/RESPA disclosures, when these forms are finalized and implemented Bodman PLC 27

28 Training is Mandatory The creditor is responsible for providing training for brokers, and the employer is responsible for providing training for individual loan originators. Training for unlicensed loan originators must be appropriate to the loan products offered by the loan originator. FHA training (in development) should satisfy this requirement for FHA loans. The rule is silent on whether the loan originator must successfully complete training, whether training must occur before or after 1/1/2014, and whether someone can perform loan originator functions before completing training Bodman PLC 28

29 Oversight is Mandatory Broker/correspondent oversight is mandatory. Is the broker licensed, are all of its LO s licensed, and is anyone who is performing loan origination activities subject to a background check and training? Is the loan originator entity properly licensed, has it registered under state law, are all assumed names properly registered, and have all franchise taxes been paid? Banks, savings associations, and credit unions must establish and maintain written policies and procedures reasonably designed to ensure and monitor the compliance of the depository institution, its employees, its subsidiaries, and its subsidiaries employees Bodman PLC 29

30 Oversight of Vendors Oversight is also necessary because vendors and others might perform loan origination functions with the expectation of financial gain from another loan originator, making then a loan originator. The real estate broker who expects a lunch as a reward for steering a buyer to a loan officer. The financial advisor who expects to be paid for sending clients to a particular lender for specific loan terms. Remember that: Payment is not necessary a person is a loan originator if there is an expectation of compensation. Creditors and brokers make representations and warranties that there is no TILA violation in Mortgage Loan Purchase Agreements and in Broker Agreements Bodman PLC 30

31 Oversight: Nightmare on Elm Street? Implementing mortgage broker oversight for compliance with the LO compensation rule will be a nightmare. How do you identify who may be a loan originator when not all originators are licensed? For non-licensed originators, how do you make sure that background checks were performed and properly evaluated? How do you make sure that each loan originator is trained according to their job functions? How do you determine that non-producing managers only participated as originators in 10 loans in any 12 month period? Implementing oversight for employees is also hard. Teach officers and directors how NOT to refer Bodman PLC 31

32 Compensation Options 2013 Bodman PLC 32

33 Definition of Compensation Compensation includes salaries, commissions, bonuses, and other financial incentives received directly or indirectly: Cash (salaries and commissions, bonuses, prizes); Goods and services; and Stock awards and options. Exempt from compensation: Bona fide distributions and dividends based on ownership (which must be based on actual capital contributions); Fees paid for actual services performed by others; Fees for non-origination activities; and Excess amounts collected due to fee averaging Bodman PLC 33

34 Terms as Factors in Compensation A term of a transaction cannot be a factor in a compensation plan or formula. A term of a transaction is any right or obligation of the parties to a credit transaction. This is limited to terms of the loan or creditor required services, i.e. any fee that must be disclosed in a GFE or HUD-1. Transaction costs not required by the lender are not terms of the transaction (e.g. the buyer s home inspection, owners title policy premium, or seller s attorney fee). If the objective facts and circumstances of a credit transaction indicate that compensation would have been different if a transaction term had been different, then compensation plans cannot take that term into consideration in calculating compensation for loan officers or mortgage brokers Bodman PLC 34

35 Defining Proxies for Transaction Terms A factor that is not a term of a transaction is a proxy if: The factor consistently varies with a term over a significant number of transactions; and The loan originator has the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction. This definition of a proxy significantly simplifies the proxy analysis. Some factors that were considered proxies now can be used if decision making is limited to non-producers Bodman PLC 35

36 Factors That Are Proxies Point Banks (LO has control and terms of the transaction vary depending on whether the point bank is used). Referral to another branch, maybe (LO s can shift origination to another branch, and thereby change loan terms). Profits and revenues (both vary with loan terms, and the loan officer has the ability to steer the consumer) Bodman PLC 36

37 Factors That Are Not Proxies The loan originator cannot influence these factors: The State in which the loan is originated (be careful of disparate impact). Refinance vs. purchase money loan. Borrower income level (be careful of disparate impact). Judgments against the company for compliance errors? Some LO compensation agreements take judgments out of future LO commissions. Some business expenses (e.g. expenses that are a flat monthly amount, such as rent) Bodman PLC 37

38 Factors That Are Proxies Point Banks (LO has control and terms of the transaction vary depending on whether the point bank is used). Referral to another branch, maybe (LO s can shift origination to another branch, and thereby change loan terms). Profits and revenues (both vary with loan terms, and the loan officer has the ability to steer the consumer) Bodman PLC 38

39 Now You See It, Jan. 1 You Don t Old Permitted Factors $$$ or ### of loans Long term loan performance Hourly rate for hours worked Existing or new customer Fixed amount per loan Pull through ratio Accuracy and completeness Legitimate business expenses, such as fixed overhead costs Amount of credit extended New Permitted Factors $$$ or ### of loans Long term loan performance Hourly rate for hours worked Existing or new customer Fixed amount per loan Pull through ratio Accuracy and completeness Amount of credit extended is subsumed into loan amount 2013 Bodman PLC 39

40 Amount of Credit Extended The loan amount will remain the basic building block for loan originator commissions. For closed end loans, this is the face amount of the note, regardless of whether the borrower finances closing costs. For reverse mortgage loans, this is the maximum claim amount for HECM loans, or the appraised value for other reverse mortgage loans Bodman PLC 40

41 Outlawed Compensation Practices The rule outlaws compensation plans based on the terms of aggregate loans originated by a group or team of individual loan originators. CFPB believes that this is tantamount to paying compensation based on profits or revenue. The rule does not specify whether compensation can be shared when one LO takes on responsibilities of an absent LO use a proxy analysis. The prohibition does not apply to safe harbors for certain bonuses and ERISA profit sharing plans. Point banks are expressly prohibited. Compensation may not vary based on pricing concessions unless the circumstance requiring the concession was entirely unanticipated (e.g. LO s cannot create their own crises to absorb borrower costs) Bodman PLC 41

42 Business Expenses: Proxy or Not? Branch manager or loan officer contracts may need to change if business expenses are a proxy for loan terms. CFPB intended proxy analysis to prevent steering, but the rule was not written to only outlaw terms causing steering. Proxy analysis does not require a cause and effect the question is whether changes in loan terms correlate to changes in the non-loan term. Example: May the cost of leads be absorbed by a loan officer when the use of leads correlates to changes in interest rate (higher rates = less volume and more use of leads; lower rates = higher volume and lower use of leads)? CFPB oral advice: No potential for steering = not usually a proxy. What would a court say? 2013 Bodman PLC 42

43 Business Expenses: Proxy or Not? Difficulties in proxy analysis may mean: Limited offsets for marketing expenses. Limited offsets for dedicated processor pay. Branch Manager contracts: Plans using a formula of basis points per loan less actual costs of running the branch require a proxy analysis of each business expense. Overrides will still be permitted because they are paid regardless of the terms of transactions originated by others. For non-producing managers, add a standby compensation plan that kicks in if they accidentally become an originator Bodman PLC 43

44 Are Pick-a-Pay Plans Legal? Pick-a-Pay plans are dead if loan originators are permitted to change the compensation formula from time to time based on profits or revenue. Pick-a-pay plans are not per se illegal compensation can vary from loan originator to loan originator. Changing compensation formulas every few months means: The interest rate and discount points vary consistently over a number of transactions with the number of basis points used to calculate the loan originator s commission; and The loan originator is given the opportunity to increase or decrease the number of basis points used to calculate commissions. HENCE, the number of basis points used to calculate commissions, while not a term of the transaction, is a PROXY for the interest rate and discount points. Compensation may be adjusted based on volume of originations. Changing compensation levels for a reason not related to loan terms (other than loan amount) and not related to a proxy is permitted even when the change is accompanied by a change in rate sheets (margin) Bodman PLC 44

45 Borrower Paid Compensation The current rule permits the borrower and broker to negotiate the broker s compensation when nobody else pays compensation to the broker. Loan officer commissions are outlawed in current borrower paid compensation transactions. The new rule turns the old rule on its head: Broker fees and LO commissions cannot be based on loan terms in borrower paid as well as lender paid compensation transactions (in effect, negotiated fees are out will broker paid deals survive?). Loan officers may receive commissions in borrower paid transactions under the new rule. Do not structure transactions to hide dual compensation Bodman PLC 45

46 Borrower Paid Compensation A loan originator cannot be paid by the borrower and another person at any time for the borrower s transaction. Any compensation paid to a loan originator by a third party under an agreement with the borrower is considered borrower paid and subject to restrictions, unless the compensation is bona fide and reasonable, and is passed through to a non-affiliated third party for services. Salaries, hourly wages, dividends, and other forms of compensation that are not tied to the borrower s transaction are not restricted in borrower paid compensation loans. Payments by the consumer to the creditor are not considered payments to the loan originator. The creditor may provide credits for the benefit of the consumer, provided that credits are applied solely toward costs of the transaction other than loan originator compensation. The Dodd-Frank Act prohibition on points and fees when a loan originator is paid by the lender, and the zero-zero option, are eliminated per CFPB exemptions Bodman PLC 46

47 Who Will Buy This Wonderful Mortgage? 2013 Bodman PLC 47

48 Why Compensation is an Issue Most lenders will offer only Qualified Mortgages because they provide a safe harbor or presumption of compliance with the rule. A qualified mortgage must have certain loan terms: Regular periodic payments over a term not to exceed 30 years. No negative amortization, prepayment fees, balloon payments Points and fees do not exceed: Loans of $100,000 or more: 3% of the Total Loan Amount. Loans of $60,000 but less than $100,000: $3000. Loans of $20,000 but less than $60,000: 5% of the Total Loan Amount. Loans of $12,500 but less than $20,000: $1000. Loans of less than $12,500: 8% of the Total Loan Amount. The borrower must meet additional underwriting requirements, including 43% DTI limits Bodman PLC 48

49 Points and Fees The definition of points and fees will be roughly the same standard used to determine the threshold for high cost loans. Points and fees includes all finance charges except: Government mortgage insurance premiums and guarantee fees. Mortgage insurance premiums paid during the life of the loan. Up-front mortgage insurance premiums that do not exceed FHA premiums, if they are pro-rata refundable when the loan prepays. Bona fide and reasonable third party charges (not paid to affiliates). Interest. Points and fees include some non-finance charges. LO compensation. The maximum potential prepayment fee. Fees retained by affiliates of the lender or mortgage broker Bodman PLC 49

50 Points and Fees Mortgage broker compensation counts as points and fees if the compensation can be determined at the time that the interest rate is locked with the borrower. Credit insurance premiums of any type are excluded from points and fees. Escrow account charges are excluded from points and fees. Section 4(c)(7) real estate related charges are excluded from points and fees if the charge is reasonable, and neither the creditor or its affiliates receive any of the fee. Prepayment fees paid to the old lender or that may be paid to the new lender are points and fees Bodman PLC 50

51 Calculating the Points and Fees in a Brokered Loan Example $100,000 loan: $1500 lender paid broker fee $750 loan officer commission $400 independent appraiser fee $25 credit report $400 independent closing fee $300 lenders title policy 1% prepayment fee for three years (Max. $1000) $3000 to establish the escrow account ($500 cushion) $1250 up-front FHA fee $200 odd-days interest The points and fees are $3000. The Total Loan Amount is the Amount Financed in this case ($100,000 less $400 closing fee and less $200 odd days interest) = $99,400. The percentage points and fees is $3000 $99,400 = 3.018%. This loan exceeds the 3% threshold for a QM loan. NOTE: Half of the points and fees are lender paid broker compensation Bodman PLC 51

52 How to Reduce Points and Fees LO Compensation that can be determined at the time the interest rate is set counts toward points and fees. Points and fees excludes compensation that cannot be attributed to a particular transaction: Compensation based on the long term performance of the loan originator s loans. Do not pay commissions until and unless the borrower makes payments for X months. Compensation based on the overall quality of a loan originator s loan files. Determine the basis points by comparing the LO s default ratio to the FHA national average at year end. Let the borrower spin a wheel after closing to determine the loan officer s basis points. Only the lowest number on the wheel is used to determine compensation included in points and fees. LO compensation over a year period is not appreciably affected. Pay a salary with minimal commission and a bonus Bodman PLC 52

53 Bonuses and Deferred Compensation Contributions to a ERISA qualified tax advantaged plans are exempt from the rule. Contribution to a defined contribution plan cannot be based on the terms of a loan officer s originations. Contributions to a defined benefit plan are not restricted. Institution wide bonuses based on profits derived from non-mortgage origination operations are permitted for all employees (loan originators and non-originators) if the amount of the bonus is not based on loan terms or personal production. Reasonable accounting methods must be used to calculate bonuses Bodman PLC 53

54 Bonuses: The Grand Compromise Non-deferred bonus compensation for individuals based on company profits is permitted if the bonus is not based on terms of the individual s production, and one the following is true: The bonus is no more than 10% of regular compensation; or The individual originates 10 or fewer loans in the 12 month period prior to the bonus (rescinded loans count toward the 10 loan limit). Bonus pools established at the beginning of the year that are not based on profits are not restricted to 10% of compensation, but distributions must not be based on terms of the loans originated by the employee. There is no exception for non-qualified deferred compensation plans these are subject to restrictions on LO compensation Bodman PLC 54

55 Calculating the Maximum Bonus The maximum loan officer (LO) bonus that can be paid is based on the LO s Medicare wages (Box 5 of the W-2 Form) for loans subject to the new rule earned during the bonus period, plus all contributions under a tax advantaged defined contribution plan, plus the bonus. Assume the LO earns $100,000 attributable to lending activities in 2014, and the company pays a bonus at the end of Assume that the company matches 401(k) contributions, up to $3000 per year, and the LO is saving 10% of income in a 401(k) plan. The employee s income from 2014 loans is $95,000 ($5000 is commission for 2013 loans). Employer wants to pay $10,800 as a bonus. Max bonus is $95,000 + $3,000 + $10,800= $108,800 X 10% = $10, Bodman PLC 55

56 Evading the Rule is a No-No The various bonus options leave room for evasive tactics these will be viewed as illegal: Attempts to restructure businesses to increase profits in non-mortgage origination areas will be viewed as illegal circumventions of the law. Cherry picking profitable periods to pay bonuses that mimic paying compensation on a profit basis is an illegal circumvention of law. Payment of quarterly bonuses is subject to the 10-percent limit measured with respect to each quarter. Quarterly and annual bonuses can be paid to an employee, but the aggregate bonus is subject to the 10% rule. Restructuring compensation retroactively at the end of the year to mimic payment of profits is an illegal circumvention of law Buying and selling shares, and adjusting distributions, to pay out profits to loan originators is an illegal circumvention of law Bodman PLC 56

57 Potpourri 2013 Bodman PLC 57

58 Holding Loan Originators Accountable A variety of factors are permitted under the new rule to hold a loan originator accountable for errors. Unforeseen errors, such as a blown lock date or a GFE tolerance violation, and that lead to higher consumer costs, can be factors in loan origination compensation (covering the cost). Loan file quality (stacking order, completion of all forms, providing disclosures in a timely manner) can be used as a factor in loan originator compensation. Pull through percentage and/or default rate can be factors in loan originator compensation. Loan originators cannot be punished for a mistake that does not lead to an unforeseen consumer cost. An employer or creditor can lower compensation formulas for poor quality or service, but the broker or loan officer cannot volunteer to lower compensation in a loan to make up for bad service Bodman PLC 58

59 Changing Compensation Plans Compensation plans cannot be changed for reasons of revenue or profitability. Compensation may be adjusted based on volume of originations. Changing compensation levels for a reason not related to loan terms (other than loan amount) is permitted even when the change is accompanied by a change in rate sheets (margin) Bodman PLC 59

60 Anti-Steering Notice A mortgage broker must provide the same anti-steering notice to consumers if the broker is paid according to varying compensation formulas from varying creditors. One clarification in the three loan options shown to the consumer (for each loan type), if two loans available through the mortgage broker charge the same low points and origination fees to the borrower, include the loan with the lower interest rate in the anti-steering notice. A broker that is compensated according to the same compensation formula for all loans brokered to all creditors need not provide the anti-steering notice Bodman PLC 60

61 Record Retention Records to prove compliance must be maintained for 3 years after the date of payment. The creditor must keep evidence of all compensation it pays to a loan originator (broker or loan officer), as well as the compensation agreements that govern those payments. A broker must keep evidence of all compensation it receives from a creditor, and pays to a loan officer, as well as the compensation agreements that govern those payments. Evidence must show who paid the compensation, who received the compensation, and when compensation was paid. Any decrease in compensation for unanticipated costs (and the reason), any bonus (and the calculations), and any ERISA plan payment must also be documented. The terms of oral agreements must be written down contemporaneously by each party to document the agreement Bodman PLC 61

62 Issues That Bedevil Us 2013 Bodman PLC 62

63 What is Missing from the Rule? We still do not have a definition of bona fide warehouse line of credit to distinguish creditors from brokers (loan originators). A clear demarcation between advertising and referring. A better definition of bona fide and reasonable fees. The fact that a transaction for third-party services is conducted at arms-length ordinarily should be sufficient to make the charge reasonable. What is arms-length? 2013 Bodman PLC 63

64 RESPA vs. TILA The overlapping definitions of "referral" under RESPA and TILA, and the different treatment of compensation under each law, will cause confusion. RESPA defines "referral" broadly, more broadly than under TILA. Any act that influences a consumer to utilize the services of a settlement service provider is a referral under RESPA. Under TILA, simply making a referral to a loan officer does not make that person a loan originator subject to the LO compensation rule. There has to be a referral and something more - some analysis of the consumer's credit needs, or some endorsement of a loan originator or loan products, to make the referrer a loan originator Bodman PLC 64

65 RESPA vs. TILA Section 14(g) of Regulation X provides an exception from the antikickback rule for compensation earned through referrals by a bona fide employee to an employer. Section 36(d) - compensation is subject to the restrictions of the rule if the employee evaluates the consumer or makes an endorsement. Both rules allow uncompensated referrals. RESPA more or less presumes that all compensation is for referrals unless it can be shown that the compensation is a valid market rate for commercially reasonable services. TILA expressly exempts compensation earned for professional services, regardless of the amount of the compensation. There is no need to validate fees so that none of the fees for brokering a home, financial advice, or legal advice are for referral of loan origination Bodman PLC 65

66 RESPA vs. TILA An agreement to make a referral for a referral is a kickback under RESPA. It does not make the parties loan originators because there is no financial related compensation. RESPA applies to all settlement services. Section 36(d) only applies to origination of residential mortgage loans. The penalties are similar: 12 USC 2607(d) settlement service providers are subject to civil liability of three times the amount of their fee, and a $10,000 fine and/or a year in jail for each violation. 15 USC Whoever willfully and knowingly fails to comply with any requirement of TILA is subject to, and a $5,000 fine and/or a year in jail for each violation Bodman PLC 66

67 RESPA vs. TILA Civil liability is similar: RESPA three times the amount of the settlement service fee, and a one year limitations period for a kickback. TILA originators are liable for the greater of actual damages or three times direct and indirect compensation/gain for loan (there is liability even if there are no damages), and a three year limitations period. TILA A violation of the ban on steering may be raised as a recoupment or set-off defense in any action to collect a debt on a residential mortgage loan. Creditors must refund all finance charges and fees paid by the consumer in the first 3 years of the loan, unless the creditor demonstrates that the failure to comply is not material. Both laws permit state attorneys generals to enforce the law. Both laws provide for costs and attorneys fees when the borrower wins Bodman PLC 67

68 Manufactured Housing Dealers A dealer is per se a broker under Regulation X, regardless of the source of funding. A dealer is a loan originator when originating a retail installment transaction this is considered table funding. In theory, a dealer using a warehouse line of credit to originate consumer loans rather than retail installment contracts is a broker for purposes of RESPA, but a creditor for purposes of TILA. A dealer must treat its affiliated finance entity as a loan originator. Rules recognize that dealer employees are not loan originators Bodman PLC 68

69 Disclaimer This presentation provides general information and is not legal advice and should not be used or taken as legal advice for specific situations. You should consult legal counsel before taking any action or making any decisions concerning the matters in this presentation. This communication does not create an attorney-client relationship between Bodman PLC and the recipient Bodman PLC 69

70 Questions?

71 For More Information Contact: Howard A. Lax Bodman PLC