Loan Originator Compensation

Jeffrey J. Andersenjandersen@dickinsonlaw.com

(515) 246-4515

Compliance Counsel on Command:Webinar Series

ScopeReg Z – Amends 1026.36Rule is broken into 5 parts:◦Loan originator compensation

Clarifies MLO provisions of D-F that codify existing regulations

No compensation based on term of loan No dual compensation

◦MLO Qualifications and unique identifier◦Financing Single Premium Insurance◦Arbitration clauses◦Recordkeeping Requirements

Coverage

Most of the rule applies to closed-end consumer loans secured by a dwelling except:◦Timeshares

Definition: Loan Originator

A person who, in expectation of direct or indirect compensation or other monetary gain, performs any of the following activities: ◦takes an application◦offers, arranges, assists a consumer in obtaining

or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person

◦through advertising or other means of communication represents to the public that such person can or will perform any of these activities

Includes an employee, agent, or contractor of a creditor

Includes a creditor that engages in loan origination activities if the creditor does not finance the transaction at consummation out of the creditor's own resources

Includes collecting info on behalf of the consumer to submit to a loan originator or creditor

Initially contacting and ‘orienting’ the consumer to a particular MLO or creditor

Assisting a consumer by filling out an application form, preparing application packages

Definition: Loan Originator (cont’d)

Definition: Loan Originator (cont’d)

Does NOT include:

◦ A person who performs purely administrative or clerical tasks on behalf of an MLO

◦ A person who engages only in certain management, administrative and clerical tasks, such as loan processors

◦ A servicer or servicer's employees, agents, and contractors who offer or negotiate terms for purposes of renegotiating, modifying, replacing, or subordinating principal of existing mortgages where consumers are behind in their payments, in default, or have a reasonable likelihood of defaulting or falling behind.

◦ Certain seller financers

Admin & Clerical Staff Exception to LO Definition

Providing application at consumer’s request and/or accepting completed application◦Without assisting the consumer in completing

Deliver the app to the LO or creditor if:◦Don’t assist in completing the app, process or

analyze, or discuss specific terms or products

Responding to consumer inquiries and providing general info

Admin & Clerical Staff Exception (cont’d)

Certain loan processing functions◦Compiling application packages and documentation◦Verifying information◦Arranging for consummation, providing that any

discussion of credit terms only confirms agreed to terms

Underwriting, credit approval, credit pricing◦Receive and evaluate consumer info to make

underwriting decisions and communicating decision to MLO

◦Approve or set credit terms, establish credit pricing offered to public

◦No communication with consumer

Compare with SAFE Act Definition

Mortgage loan originator means(1) An individual who:(i) Takes a residential mortgage loan

application; and(ii) Offers or negotiates terms of a

residential mortgage loan for compensation or gain.

Differences b/w SAFE Act & TILA DefinitionAny vs. And

TILA definition separately triggered by assisting a consumer in obtaining or applying to obtain a loan◦advising on terms, preparing loan packages, or

collecting information on behalf of the consumer

TILA includes “any person who represents to the public through advertising or other means of communicating or providing information . . . that such person can or will provide any of the services or perform any of the activities”

Definition of Loan Originator Organization

Any loan originator that is not an individual loan originator

‘Loan Originator’ includes creditors that make use of table funding by a 3rd party◦When the creditor does not provide the

funds at consummation◦ If close in own name but don’t fund and

assign after consummation, you are still both a creditor and a LO

Definition of Compensation

Includes:◦Salaries◦Commissions◦Annual or periodic bonuses◦Merchandise, trips, services◦Amounts the MLO retains independent of the label or the name of the fee

◦Any incentive regardless of whether labeled as payment for non-MLO services – ‘processing fee’

Definition of Compensation

Does not include:◦amounts the LO or LO organization receives as payment for bona fide and reasonable charges, such as credit reports, where those amounts are passed on to a third party that is not the creditor, its affiliate, or the affiliate of the loan originator

◦Payment to the bank or an affiliate for non-loan originator activities

Prohibition Against Dual Compensation

Reg Z already stated that if a LO receives comp directly from a consumer the LO can’t receive comp from anyone else in connection with that transaction

Payment by consumer to LO from loan proceeds is comp directly from consumer, payment derived from an increased rate is not

Dual Compensation (cont’d)

Payment from consumer to creditor: If the creditor receives comp from a consumer, may pay an employee LO, if not based on the terms of the transaction

All Creditor Provided Funds not Dual Comp: If the LO receives comp directly from a consumer, creditor may still provide funds for the benefit of the consumer if applies solely to costs of the transaction other than LO comp

Dual Compensation (cont’d)

Creditor provided Funds Cont’d:◦Funds from the creditor applied to reduce settlement charges, including origination fees paid by creditor to the LO, are not dual compensation if disclosed as a credit on the GFE

Dual Compensation (cont’d)

Funds from 3rd Party: Comp qualifies as ‘directly from a consumer’ if paid to a LO on a consumer’s behalf pursuant to agreement b/w consumer and 3rd party◦ Includes payments from seller, home builder,

contractor, and RE broker or agentFunds from 3rd Party example:

◦Seller agrees to pay consumer $1,000 of closing costs

◦Any of that $1,000 paid to the LO is comp directly from the consumer, even if the agreement does not specify that any must by used to compensate the LO

No Prohibition on Upfront Points & Fees

Dodd-Frank would have prohibited upfront points or fees if the LO comp is paid by a person other than the consumer

CFPB proposed to waive the ban if the consumer offered an alternative with no upfront points and fees

In final rule CFPB issued complete exemption◦Further consumer testing

Compensation Based on Term

Determination based on the objective facts and circumstances indicating that compensation would have been different if a transaction term were different◦Matter of policy

Rule applies to comp from single or multiple transactions

Definition: Term of Transaction

Any right or obligation of any of the parties to a credit transaction

Includes:◦Any right or obligation in the credit contract, mortgage, deed of trust, security instrument, or other document incorporated by reference

◦Payment of any fees to the LO or creditor for the credit or for a product or service related to the credit, including fees financed through the rate If required to be disclosed on either the GFE or HUD-1/HUD1A

Term of Transaction Examples

Interest rate, APR

Collateral type (condo v. detached home v. mfg house)

Existence of a pre-payment penalty or any other fee or charge

Compensation Based on a Proxy of a Term Prohibited

A factor that is not itself a term of a transaction is a proxy for a term of the transaction if:◦the factor consistently varies with that term over a significant number of transactions, and

◦the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction

Proxy Examples

Creditor pays LO higher commission for loans held in portfolio than those sold◦Creditor only holds fixed rate loans with a 5 year term and a balloon payment

◦Sells all 30 year mortgages◦This is a proxy – terms consistently vary with factor and LO can advise consumer to choose 5 year term

Proxy Examples (cont’d)

Creditor pays LOs higher commissions for transactions secured by Iowa property than those secured by Nebraska property◦Creditor charges lower rate for Nebraska loans

◦NOT a proxy –LO cannot influence where the property is located

What is NOT a Term of Proxy of the Transaction?LO’s overall volume (dollar volume or

number of transactions)Long-term performance of LO’s loansHourly RateWhether consumer is an existing member or

notPayment fixed in advance for every loan% of application submitted that result in

loansQuality of the LO’s file

(accuracy/completeness)

What is NOT a Term of the Transaction? (cont’d)The amount of credit extended, if:

◦compensation received by or paid to a loan originator, directly or indirectly, is based on a fixed percentage of the amount of credit extended

Such compensation may be subject to a minimum or maximum dollar amount

LO comp that pays $100 for loans under $100k and $150 for over $150k is not compliant – not based on a fixed percentage

Retirement & Pooled Compensation Plans

Creditors may pay LO’s comp in the form of a defined contribution/benefit plan if it is a designated tax-advantaged plan◦ Individual contribution can’t be based on terms or proxy

What’s a designated tax-advantaged plan?◦ IRC section 401(a)◦ employee annuity plan under 403(a),◦ simple retirement account under 408(p),◦ simplified employee pension under 408(k)◦ annuity contract under 403(b)◦ or eligible deferred compensation plan, as defined in

Internal Revenue Code section 457(b), 26 U.S.C. 457(b)Ask tax advisor

Retirement & Pooled Compensation Plans

May pay LO comp under a non-deferred profits-based compensation plan, if:◦ Individual contribution is not based on the terms,

and◦At least one of the following are met:

The pooled compensation does not exceed 10% of the LO’s total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid, or

The LO was a loan originator for ten or fewer transactions consummated during the 12-month period preceding the date of the compensation determination.

Total Compensation: wages & tips; contributions to defined contribution plans

Modification of Transaction Terms

No pricing concessions - may not agree to set the loan originator's compensation at a certain level and then subsequently lower it in selective cases (such as where the consumer is able to obtain a lower rate from another creditor)

Bank may change terms to match a competitor or to avoid the high cost mortgage rules, but change cannot be accompanied by a change in the LO compensation

Modification of Transaction Terms (cont’d) If transaction terms are modified:

◦ A LO may not agree to reduce its compensation or provide a credit to the consumer to pay a portion of the consumer's closing costs

◦ The bank may not reduce its own compensation in a transaction where the bank receives compensation directly from the consumer, with or without a corresponding reduction in compensation paid to an individual loan originator

Permitted decrease in LO comp: unforeseen increase in an actual settlement cost over an estimated settlement cost disclosed on GFE or an unforeseen actual settlement cost not disclosed to the consumer pursuant to section 5(c) of RESPA

Modification of Transaction Terms (cont’d)

Bank can make periodic changes to LO comp and the terms of transactions, as long as revised comp not based on the terms of a transaction

Example: could review an LO’s volume and file quality and increase comp from a flat $3,000 to a flat $3,500. ◦Could then charge a higher rate to reflect the higher compensation

Flexibility in Setting Loan Terms

Bank may recover the costs of the LO’s comp and other costs of the transaction by charging points, fees, or higher rate

Example: may charge 6% if consumer pays ½ of transaction costs at closing but 6.5% if not

Example: May add .25 point to the rate on transactions where LO is compensated based on a % of the amount of credit extended

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This material is designed and intended for general informational purposes only,

and is not intended, nor should it be construed or relied upon, as legal advice. Please consult with your

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