Loan Originator Compensation and Steering Prohibitions Branch Originations March 2011
Regulation Z - Loan Originator Compensation Truth in Lending Act, Regulation Z amendments on loan originator compensation become effective with loan applications received by the creditor (lender) on or after April 1, 2011. The new amendments have completely changed the way loan originators can be paid. This communication will provide you guidance on the new compensation rules. Rev 3/29 2
Definition of Loan Originator A loan originator is defined as a person who for compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. Therefore, a loan originator is: A loan officer at a retail lender A producing branch manager A loan officer at a broker company The broker company itself Table-funded brokers Rev 3/24 3
Quick Summary of Regulatory Changes The new amendments provide three prohibitions on loan originator compensation: 1. Prohibits payments to loan originators based on the interest rate or loan terms and conditions, except the amount of credit extended. 2. Prohibits originator from receiving compensation directly from the consumer as well as the lender or anyone else. 3. Prohibits a loan originator from steering a borrower to a specific lender or loan program offering less favorable terms, in order to increase the loan originator s compensation. The regulations provide a safe harbor from steering if the consumer is provided an anti-steering disclosure showing various loan offers for all program types in which the consumer has shown an interest (30-year fixed, 15-year fixed, 30-year ARM, etc.). Rev 3/24 4
Basis of Compensation For A Retail Loan Originator Prohibition #1 - Prohibits payments to loan originators based on the interest rate or loan terms and conditions, except the amount of credit extended. Individual loan originators can no longer be paid on the profitability of a loan. Therefore, compensation cannot be based on Interest rate, APR, LTV, Fees collected, or the existence of a prepayment penalty provision Loan type (Conventional vs. FHA vs. VA) A proxy terms of the loan (Credit score, DTI) Tiered loan amounts ($0-$100,000; $100,001-$200,000; $200,001-$500,000; etc.) Rev 3/24 5
How Will An Individual Loan Originator Be Compensated? Individual loan originators can be paid a salary, hourly wage, or on a percentage of the loan amount. If you are currently compensated on a salary or hourly wage basis, your compensation will not change on April 1 st. If you are currently compensated on a commission basis, you will continue to be paid on a commission basis. However, your commission will be set at a specific percentage of the loan amount. Your branch manager will initially set your commission percentage for loan applications received on or after April 1 st. Commission percentages may vary by loan originator but may not vary by loan amount, loan type or program type. Loan originators may also receive a monthly or quarterly bonus based on overall loan volume. Rev 3/24 6
When Can There Be Adjustments To My Compensation? For loan originators paid by salary and hourly wage, there are no further restrictions. Your compensation is subject to the standard annual review. For loan originators paid on commission based on a percentage of the loan amount, your commission percentage may be adjusted quarterly. Rev 3/24 7
Compensation for Branch Managers Compensation for branch managers is based on whether the branch manager is a Non-Producing Branch Manager or a Producing Branch Manager. Non-Producing Branch Managers Non-producing branch managers are considered managerial employees and are thereby exempt from the definition of loan originator and the related compensation prohibitions. Nonproducing branch managers will be paid based on the overall profitability of the branch. Rule: If a branch manager produces (1) one loan for compensation as a loan originator, the branch manager is deemed to be a loan originator on all loans originated by their respective branch. Rev 3/24 8
Compensation for Producing Branch Managers Producing Branch Managers Producing branch managers are subject to the loan originator compensation rules. Therefore, a producing branch manager cannot be compensated based on the profitability of their respective branch. Compensation may be as follows: Compensation on their own originations on a fixed percentage of the loan amount under the same rules as their employee loan originators. Compensation can be received based on a percentage of the loan amount for all loans originated by the branch. Branch manager can receive a salary for their managerial duties and compensation on their own production on a fixed percentage of the loan amount. Bonus compensation can be based on loan volumes and quality of operations, but not profitability of loans originated by the branch. Rev 3/24 9
Branch Rate Sheets Branch rate sheets will show rates specific to your branch. Based on your branch location, a predetermined margin will be added to the corporate base rate to cover the costs and expenses to operate the branch location. Loan originator compensation is one of the components of this added margin. The predetermined margin may be adjusted on a quarterly basis. Rev 3/24 10
Branch Rate Sheets Above par pricing (premium) goes to the borrower which can then pay for lender or 3 rd party fees and/or escrows A charge is treated as a discount fee which will buy down the rate Rev 3/24 11
Example of Borrower Credit The following example shows a rate sheet and the proper disclosure of a borrower credit on the GFE. For this example, the loan amount is $100,000. The rate selected is 4.875% for a 30 day lock and the above par pricing to the consumer is 1.806% or $1,806. The Lender Fee is $895, Title and Settlement Services $1,500. Note: The borrower credit can be used to pay closing costs, lender fees and escrows. Rev 3/24 12
Example of Discount Fee The following example shows a rate sheet and the proper disclosure of a rate buy down (discount) on the GFE. For this example, the loan amount is $100,000. The rate selected is 4.625% for a 30 day lock and the cost to the consumer for that rate is.204% or $204. The Lender Fee is $895, Title and Settlement Services $1,500. Rev 3/24 13
Sales Portal The Sales Portal will calculate the above par pricing (credit) or the charge (discount) for the interest rate based on the rate for either a floating or locked loan. The credit will be listed as Over Par Pricing The discount fee will be listed as Discount Fee Rev 3/24 14
Loans in your Pipeline on April 1st The new compensation rules take effect with all new loan applications received by Freedom on or after April 1, 2011. For loan applications received prior to April 1 st, you will be compensated under your current compensation plan. Rev 3/24 15
Loan Originator Individual Compensation Agreements If you are currently compensated on a commission basis, you will be required to execute an addendum to your current Compensation Agreement which will address the new compensation rules and your predetermined percentage of loan amount compensation. Rev 3/24 16
What About Brokering Out Loans? If Freedom does not offer the specific loan program the consumer requests, you will be permitted to broker out the loan application to another lender. A mortgage broker is a loan originator under the new loan originator compensation rules. Therefore, when Freedom acts as a mortgage broker, your compensation as well as Freedom s compensation are subject to Prohibition #2 and Prohibition #3. 17
How Will I Be Compensated on Brokered Out Loans? Prohibition #2- Prohibits originator from receiving compensation directly from the consumer as well as the lender or anyone else. Mortgage brokers can be compensated directly by the consumer in the form of a broker fee or be compensated through a Lender-Paid compensation program. At this point, Freedom has elected to be compensated through the Lender-Paid compensation method. Freedom will preset it s compensation margin with our respective lenders to whom we broker loans. Individual loan originators will be compensated on the same percentage of the loan amount established for non-brokered out loans. 18
Example of Brokered Out Rate Sheet and GFE The following example shows a price sheet for lender-paid compensation and the proper disclosure of lender-paid compensation on the GFE. For this example, the loan amount is $100,000. The rate selected is 5.375% for a 30 day lock and the above par pricing to the consumer is.562% or $562. Lender-Paid Broker Compensation is at a 2% pre-established margin, Lender Underwriting Fee $450, Title and Settlement Services $1,500. 30-Year Fixed Rate Loan Rate 15 Day 30 Day 45 Day 60 Day 5.625-1.613-1.433-1.254-1.076 5.500-1.196-1.017-0.084-0.660 5.375-0.742-0.562-0.038-0.021 5.250 0.220 0.399 0.578 0.756 5.125 1.496 1.661 1.827 1.997 Note: The borrower credit can only be used to pay closing costs and lender fees, but can not be used to pay any broker compensation. GFE Section Amount Calculation Block 1 $2,450 Block 2 ($2,562) Block A ($112) Block 1 + Block 2 Lender-Paid 2% Broker Compensation + Lender Underwriting Fee Credit to Borrower of.562% for an interest rate of 5.375% + 2% Lender Paid Broker Compensation Block B $1,500 Title and Settlement Services Total Fees Paid By Borrower $1,388 Block A + Block B Total Broker Compensation $2,000 2% Lender-Paid Compensation 19
Anti-Steering Prohibition on Brokered Out Loans Prohibition #3 Prohibits a loan originator from steering a borrower to a specific lender or loan program offering less favorable terms, in order to increase the loan originator s compensation. When brokering out a loan, Freedom can not broker to a specific lender based on the compensation received through their Lender-Paid program. The regulations provide a safe harbor from steering if the consumer is provided an anti-steering disclosure showing various loan offers for all program types in which the consumer has shown an interest (30- year fixed, 15-year fixed, 30-year ARM, etc.). Most lenders will require an anti-steering disclosure on all brokered loans in which the loan originator is compensated under the Lender- Paid program. The anti-steering disclosure must provide the above information for products offered by the lender at the time of disclosure. 20
Anti-Steering Disclosure for Brokered Out Loans The anti-steering disclosure must include: The lowest interest rate for which the consumer qualifies which could include discount points and risky features as listed below. The lowest total dollar amount for discount points and originations fees, and The lowest rate for which the consumer qualifies for a loan with no risky features (prepayment penalty, negative amortization, balloon payment, etc.) If any of the above examples are not applicable to the consumer, they need not be shown in the disclosure. For example, if there are no programs available to the consumer with a prepayment penalty, a loan offer with a prepayment penalty would not be required to be provided. 21
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