Loan Originator Compensation Rules for Reverse Mortgages NRMLA Western Regional May 11, Jim Milano

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1 Loan Originator Compensation Rules for Reverse Mortgages NRMLA Western Regional May 11, 2016 Jim Milano 1

2 Today s Agenda Loan Originator Compensation Rule (LO Comp) UDAAP RESPA FHA Guidance Changes Fair Lending 2

3 LO Compensation Rule CFPB Rule Went into Effect January 2014 Core of Current CFPB LO Comp Rule Carried Forward from 2011 Federal Reserve Board Rule Cannot Compensate Based on Terms (or a Proxy for a Term) No Dual Compensation Cannot Steer Rule Still Applies to Loan Originators (which Excludes Creditors) and applies only Closed-End Credit 3

4 LO Compensation Rule Loan Originator Standards/Compensation under TILA Effective January 2014 Generally keeps 3 basic principles of prior Federal Reverse Board rule provisions No compensation based on a transaction s terms or a proxy (fixed percentage of amount of credit extended is allowed) No dual compensation No steering Applies to Closed End Credit Only Loan Originator definition expanded A person is a Loan Originator under the new rule if the person engages in any one of the following activities for, or in expectation of, direct or indirect compensation or gain: (1) takes a loan application, (2) assists a consumer in obtaining or applying to obtain a loan, or (3) offers or negotiates terms of a loan Also, if a person holds him or herself out (advertises) that he or she can do any of the above, he or she is a Loan Originator Under the SAFE Act, a person is a loan originator only if the person engages in both of the following activities: (1) takes a residential mortgage loan application; and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain 4

5 LO Compensation Rule Loan Originator Standards/Compensation under TILA Loan Originator definition is expanded to include referring a consumer to a loan originator through directed actions that can affirmatively influence the consumer Removes the words in connection with a particular transaction from the definition of Loan Originator Definition applies to persons engaged in the activities described regardless of whether a loan is closed The term does not include: a person that performs purely administrative or clerical tasks, real estate brokers unless compensated by a creditor or loan originator, servicer employees or contractors for loan modifications, or seller financers that meet certain criteria (no more than 3 properties per year, not a contractor, etc.) Violations are subject to same TILA penalties as Ability to Repay Enhanced HOEPA Damages Borrower Defense to Collection of the Loan for the Life of the Loan 5

6 LO Compensation Rule Payments Based on Loan Terms or a Proxy for Loan Terms Maintains existing prohibition on compensation based on a term of a transaction or a proxy for a term Defines Terms Preamble Discussion on Loan Product or Loan Type as a Term of a Transaction Clarifies the definition of a proxy to focus on whether: The factor consistently varies with a transaction term over a significant number of transactions, and The loan officer has ability, directly or indirectly, to add, drop or change the factor in originating the transaction Defined Contribution Plans Allows for profit-sharing and bonus plans if it is not based on the terms of the individual originator s transactions AND Compensation paid in the aggregate does not exceed 10% of the originator s total compensation during the time period the non-deferred profits based compensation is paid OR Originated 10 or fewer transactions during the previous 12 months Allows for contributions to designated tax-advantaged plans if it is not based on the terms of the individual originator s transactions AND it is one of the enumerated plans in the rule that meets IRS requirements (annuity plans, simple retirement accounts, etc.) 6

7 LO Compensation Rule Pricing Concessions Permits decrease in originator compensation to defray the cost of an unforeseen increase in an actual settlement cost over an estimated settlement cost disclosed to the consumer or an unforeseen actual settlement cost not disclosed to the consumer Dual Compensation LO cannot receive compensation from both the consumer & the creditor Allows mortgage brokerage firms paid by the consumer to pay commissions to their individual brokers, so long as commission is not based on transaction terms Requires that parties closely track & document each payment Payments from the consumer to the LO include: Payments to the LO from loan proceeds Payments to the LO pursuant to an agreement by a person other than creditor or its affiliates (i.e., non-affiliated seller or homebuilder) Payments from the consumer to the LO do not include: Payments derived from an increased interest rate Funds from the creditor to reduce the consumer s settlement charges, including origination fees paid by a creditor to the LO Payments to the creditor, whether paid directly by the consumer or out of loan proceeds 7

8 LO Compensation Rule Issues for Mortgage Brokers Doing Business with Multiple Lenders A loan originator shall not direct or steer a consumer to consummate a 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 Anti-Steering If LO presents consumer with options for each loan program requested, and information includes items below, the LO is presumed not to have steered LO must obtain loan options from a significant number of creditors that the LO regularly does business and, for each type of transaction that consumer expressed an interest, must present consumer with loan options that include: The loan with the lowest interest rate; 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 The loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees). LO must have a good faith belief that options presented to consumer are loans that consumer likely qualifies. If LO presents consumer with more than three loans, the originator must highlight the loans that satisfy the criteria specified above 8

9 LO Compensation Rule No Point Banks CFPB briefly indicated that it believes there are no circumstances under which point banks are permissible Record Keeping Requirements Creditors are required to maintain records sufficient to evidence all compensation paid to an originator & the compensation agreement that governs those payments for 3 years after the date of payment LO organizations have the same requirements plus records of all compensation received from creditors, consumers or another party Personal Liability for Loan Originators for Violations Limited to the greater of actual damages or 3 times the total amount of direct or indirect compensation received, plus costs of the action & reasonable attorney s fees 9

10 LO Compensation Rule Originator Qualification & Screening Standards Individual loan originators & their employers must be qualified Employers must ensure their loan originator employees are licensed or registered under the SAFE Act where applicable Employers of loan originators not required to be licensed under the SAFE Act must ensure that loan originators meet character, fitness and criminal background check standards equivalent to those in the SAFE Act Requires the loan originator receive appropriate training Requires individual loan originators & their employers names & license or registration numbers to be included on the following mortgage loan documents: Credit application Note or loan contract Security instrument 10

11 LO Compensation Enforcement On July 23, 2013, the CFPB filed a complaint in federal district court in Utah against Castle & Cooke Mortgage, LLC, a mortgage lender, and two of its principals, alleging violations of the LO Comp rule Allegedly, the mortgage company paid its loan officers quarterly bonuses that varied based on the interest rates of the loan officers transactions. Allegedly, the quarterly bonus program was not mentioned in the loan officers written compensation agreements or in any company policies, according to the complaint The complaint alleged violations of the prohibition on paying loan originator compensation based on the terms or conditions of a loan, as well as violations of the record retention requirements under the LO Comp rule (a creditor must retain records of the compensation paid to a loan originator, as well as the compensation agreement in effect on the date the interest was set for the transaction) The complaint sought injunctive relief, restitution to harmed borrowers, civil money penalties, and reimbursement of the CFPB s costs in prosecuting the case The case settled in Nov for $9.2 million in consumer redress, a fine of $4 million to the company and President and EVP, and an agreement to abide by the law and keep records of same. 11

12 LO Compensation Enforcement Franklin Loan Corporation (Nov. 2014) The CFPB alleged that, from June 2011 to October 2013, Franklin paid at least $730,000 in quarterly bonuses to 32 loan officers based in part on the interest rates on the loans they provided to borrowers The CFPB alleged that the higher the interest rate of the loans closed during the quarter, the higher the loan officer s quarterly bonus Settled for a $730,000 payment to the CFPB, along with compliance programs and monitoring, and record keeping and reporting programs for five years 12

13 LO Compensation Enforcement Guaranteed Rate Mortgage (June 2015) CFPB alleged Guarantee made payments to marketing services entities owned in part by the company s branch managers and other Guarantee loan originators Alleged that that such payments constituted additional income to the branch managers and loan originators CFPB alleged that extra income based, in part, on the interest rates of the loans branch managers and loan originators closed CFPB ordered Guarantee to pay a civil penalty of $228,000 13

14 LO Compensation Enforcement RPM Mortgage (June 2015) CFPB Alleged RPM paid bonuses and higher commissions to loan originators to incentivize them to steer consumers into costlier mortgages. Settled for $18 million in consumer redress, and $2 million fine - $1 million by company, and $1 million personally by President Company 14

15 LO Compensation Rule Issues for Reverse Mortgages The Loan Amount (Max. Claim Amount or Maximum proceeds available to the consumer under the loan ) LO Comp Rule Only Applies to Closed-End Credit, but RESPA continues to apply to all Federally Related Mortgage Loans and the CFPB has been using it s UDAAP Authority often in Mortgage related Enforcement Actions In the Preamble, Loan Product is a Term Definition of Loan Originator Broader than SAFE (4 potential disjunctive triggers, instead of two) If Triggered, Qualification standards will apply, not the same as SAFE, and so you are Not SAFE The Cost of Compliance is Going Up; The Price of Non-Compliance has Gone Up Exponentially Too Small to Comply, but Not Too Small to Fly Under the Radar 15

16 Other Laws, Besides LO Comp, to Consider in LO Comp Structures UDAAP RESPA FHA Guidance Changes Fair Lending 16

17 UDAAP A representation, omission, act, or practice is deceptive when: (1) the representation, omission, act, or practice misleads or is likely to mislead the consumer; (2) the consumer s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and (3) the misleading representation, omission, act, or practice is material. An act or practice is unfair when: (1) it causes or is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable by consumers; and (3) the injury is not outweighed by countervailing benefits to consumers or to competition. 17

18 UDAAP An abusive act or practice: (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or (2) takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; the inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. 18

19 RESPA Impermissible referral fees are prohibited HUD Statements of Policy and RESPA does not place a dollar or percentage limit on lender-paid mortgage broker fees RESPA allows a payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed On-going confusion from Revised RESPA HUD 2010 Lender Paid Broker Fees are Disclosed as a Credit on the HUD-1 (TRID does not apply to Reverse Mortgages) RESPA does not limit Dual Compensation to Mortgage Brokers 19

20 FHA Guidance Mortgagee Letter Addressed Mortgagee Compensation to FHA-Approved Loan Correspondents on HECM Loans (Mortgage Brokers not Mentioned) Mortgagee Letter The figure on line 801 of the HUD-1 representing all compensation to the lender/broker for loan origination may exceed the origination fee cap set for government programs In other words, the HECM Origination Fee does not equal or equate to the Revised RESPA Math figure of the Origination Charge Mortgagee Letter FHA did away with FHA-approved Loan Correspondents 20

21 Fair Lending Disparate Impact Allowing the Point of Sale to Pick the Price Discretion is Not Your Friend 21

22 LO Compensation James ( Jim ) M. Milano WEINER BRODSKY KIDER PC th Street, NW, 5 th Floor Washington, DC Phone: milano@thewbkfirm.com Washington, DC Dallas, TX Newport Beach, CA 22