Transcript CMLA Webinar-LO comp PPT

Experienced
Specialized
Loan Originator Compensation &
the New Underwriting Rules
Accomplished
Cost-Effective
Clinton R. Rockwell &
Jonathan W. Cannon
Collaborative
BuckleySandler LLP
Overview
 Mortgage Originator Compensation
Restrictions under Dodd-Frank and the
Federal Reserve Board’s Final Rule
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Mortgage Originator Compensation - Overview
 Dodd-Frank provisions (Section 1403 of Title XIV,
creating new Section 129B(c) of TILA) are illuminated
by recent Federal Reserve Board (“FRB”) final rule
 FRB rule is effective for all applications received by
the creditor after April 1, 2011
 FRB intends to implement Dodd-Frank provisions in
future rulemaking, but acknowledges similarity of
provisions
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Mortgage Originator Compensation - Overview
 Both Dodd-Frank and FRB rule prohibit payments to a
loan originator that vary based on the terms of the
loan, other than loan amount
 Both Dodd-Frank and FRB rule allow loan originators
to receive payment from a person other than the
consumer only if the originator does not receive
compensation directly from the consumer
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Mortgage Originator Compensation - Overview
 Dodd-Frank has an additional restriction not in FRB
rule: If loan originator receives compensation from
someone other than the consumer, the consumer
must not make any upfront payment to the lender for
points or fees other than bona fide third-party
charges.
 FRB (or CFPB) will address this restriction in a
subsequent rulemaking.
 Therefore, this provision is not effective April 1, 2011.
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Mortgage Originator Compensation - Overview
 FRB rule prohibits loan originator from steering
consumers to loans not in their interest because it will
result in greater compensation for the loan originator,
but FRB rule adopts a safe harbor.
 Dodd-Frank requires further regulations on “anti-
steering.”
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Mortgage Originator Compensation
 Under Dodd-Frank - “Mortgage originator” is defined as:
 Any person who, for direct or indirect compensation or gain, or in
the expectation of direct or indirect compensation or gain–
 Takes a residential loan application (residential loan
excludes HELOCs);
 Assists a consumer in obtaining or applying to obtain a
residential mortgage loan
Includes, among other things, advising on loan terms
(including rates, fees, and other costs), preparing loan
packages, or collecting info on behalf of borrower; or
 Offers or negotiates terms of a residential mortgage loan.
 Includes persons who represent to the public that they
can do the foregoing.
 Does not include servicers (as defined in RESPA),
including those offering modifications to borrowers in
default.
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Mortgage Originator Compensation
 Under FRB rule – “Loan Originator” defined as:
 A person who, for compensation or other monetary gain, or in expectation
of compensation or other monetary gain –
 arranges, negotiates, or otherwise obtains an extension of
consumer credit for another person.
 Includes the employee of the creditor as well as employee of a
mortgage broker.
 Does not include the creditor, unless table funding occurs
(where creditor does not provide the funds for the transaction).
 Does not include managers, administrative staff, and similar
individuals who are employed by a creditor or loan originator
who do not arrange, negotiate, or otherwise obtain an
extension of credit for a consumer AND whose compensation is
not based on whether any particular loan is originated.
 Under FRB rule – “Mortgage Broker” defined as Loan Originator who is not
an employee of the creditor.
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Mortgage Originator Compensation
Restrictions on Loan Originator Comp in Dodd-Frank
 Dodd-Frank prohibits any mortgage originator from
receiving (and prohibits any person from paying to a
mortgage originator, directly or indirectly)
compensation that varies based on the loan terms,
other than loan amount.
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Mortgage Originator Compensation
Restrictions on Loan Originator Comp in Dodd-Frank
 Dodd-Frank further prohibits a mortgage originator
from receiving from any person other than the
consumer (and prohibits any person who knows or
has reason to know that the consumer has or will
directly compensate the loan originator from paying to
the loan originator) any origination fee or charge,
except bona fide third party charges not retained by
the creditor, mortgage originator, or an affiliate of the
creditor or mortgage originator (but see the
exception).
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Mortgage Originator Compensation
Restrictions on Loan Originator Comp in Dodd-Frank
 EXCEPTION: A mortgage originator may receive from a person other
the consumer (and a person other than the consumer may pay a
mortgage originator) an origination fee or charge IF:
 The mortgage originator does not receive any compensation
directly from the consumer; and
 The consumer does not make an upfront payment of discount
points, origination points, or fees, however denominated (other
than bona fide third party charges not retained by the mortgage
originator, creditor, or an affiliate of the creditor or originator).
 The FRB may by rule waive or provide exemptions to this
limitation if such is in consumers’ or the public’s interest.
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Mortgage Originator Compensation
 Finally, Dodd-Frank provides a “Rule of Construction”
that the foregoing language shall not be construed as:
 Permitting any yield spread premium or other comp that
would permit the total amount of direct or indirect comp
from all sources permitted to a mortgage originator to
vary based on the loan terms, other than loan amount;
 Limiting or affecting the amount of comp received by a
creditor upon the sale of a consummated loan to a
subsequent purchaser;
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Mortgage Originator Compensation
 Finally, Dodd-Frank provides a “Rule of Construction” that the
foregoing language shall not be construed as (continued):
 Restricting a consumer’s ability to finance, at the option of the consumer,
including through principal or rate, any origination fees or costs permitted
under this provision, or the mortgage originator’s right to receive such fees
or costs (including compensation) from any person, SO LONG AS
 no person other than the consumer may pay fees to the originator if the
consumer directly compensates the originator or if the consumer pays
upfront discount points, origination points, or fees other than bona third
party charges not retained by the creditor, the originator, or an affiliate of
either (the FRB may waive this restriction if in the consumers’ or public
interest), and
 such fees or costs do not vary based on the terms of the loan (other than
the loan amount) or the consumer’s decision about whether to finance
such fees or costs; or
 Prohibiting incentive payments to a mortgage originator based on the
number of residential loans originated within a specified period of time.
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Mortgage Originator Compensation
Loan Originator Comp in Dodd-Frank: What Does It Mean?
 First, it is clear that mortgage originator compensation may
never be based on the terms of the loan, other than loan
amount. The meaning of the phrase “terms of the loan” is
illustrated in the FRB rule (see below)
 Second, if the consumer directly compensates the mortgage
originator, no one other than the consumer, including the
creditor, may compensate the loan originator.
 Third, the consumer may continue to buy up or buy down the
rate with discount points, so long as no one but the consumer
compensates the mortgage originator. This restriction is subject
to a waiver if found not to be in consumers’ or the public’s
interest.
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Mortgage Originator Compensation
Restrictions on Loan Originator Comp in FRB rule
 Like the Dodd-Frank provisions, the FRB rule
prohibits any compensation to the loan originator
based on the loan terms.
 But this restriction does not apply if only the consumer
directly compensates the loan originator (in which
case no one other than the consumer may
compensate the loan originator).
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Mortgage Originator Compensation
The FRB rule and the commentary accompanying the rule add
these further clarifications:
 Compensation includes salaries, commissions, and any financial
or similar incentive provided to a loan originator that is based on
any of the terms or conditions of the loan originator’s transactions.
 Compensation to a loan originator may be based on a fixed
percentage of the loan amount, and may be subject to a minimum
or maximum dollar amount, so long as the minimum or maximum
dollar amounts do not vary with each transaction.
 A creditor may not offer “tiered percentages” of compensation,
such as 1% of principal for loans of $300,000 or more, 2% of
principal for loans between $200,000 and $300,000, and 3% of
principal for loans below $200,000.
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Mortgage Originator Compensation
The FRB rule and the commentary accompanying the
rule add these further clarifications:
 In addition to terms such as interest rate, annual
percentage rate, loan-to-value ratio, or the existence of
a prepayment penalty, the rule prohibits basing loan
originator compensation on a factor that serves as a
proxy for loan terms and conditions. Credit score could
serve as a proxy if it determines the interest rate.
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Mortgage Originator Compensation
The FRB rule and the commentary accompanying the
rule add these further clarifications:
 Compensation (i) for long-term performance of the
originator’s loans, (ii) based on an hourly rate for
number of hours worked by the originator, (iii) based on
whether the consumer is a new customer, (iv) based on
a fixed flat fee for each loan, (v) based on the
originator’s pull-through rate (percentage of
applications that result in closed loans), (vi) based on
the quality of the loan files, or (vii) based on a legitimate
business expense, such as fixed overhead costs, is not
compensation based on the loan’s terms.
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Mortgage Originator Compensation
The FRB rule and the commentary accompanying the
rule add these further clarifications:
 Once a creditor offers to extend a loan with specified
terms (such as the rate and points), the amount of the
originator’s compensation for that loan is not subject to
change (increase or decrease) based on whether
different loan terms are negotiated.
 Payment by a consumer of lender’s points that are then
used by the lender to pay the loan originator are not
considered payments received directly from the
consumer.
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Mortgage Originator Compensation
 Unlike Dodd-Frank, the FRB rule does not prohibit
compensation to a loan originator from a person other
than the consumer where the consumer pays
discount points or origination points or fees to the
lender. That provision will be addressed in future
rulemaking.
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Mortgage Originator Compensation
 The FRB rule does, however, adopt an anti-steering
provision that prohibits a loan originator from directing
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.
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Mortgage Originator Compensation
 Safe Harbor Regarding Steering. The anti-steering
provision is not violated if the loan originator presents the
following loan options for the type of transaction in which
the consumer expressed an interest (there are three
“types of transactions” – fixed rate mortgage, ARM, or
reverse mortgage):
 The loan originator must obtain loan options from a significant
number of the creditors with which the originator regularly does
business (this number is 3 or more, unless the originator does not
deal with that many creditors)
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Mortgage Originator Compensation
 Safe Harbor Regarding Steering (continued)
 The loan originator must present:
 The loan with the lowest rate
 The loan with the lowest rate without neg am, a prepayment
penalty, interest-only payments, a balloon payment in the first 7
years, a demand feature, shared equity, 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 for origination
points or fees and discount points
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Mortgage Originator Compensation
 Safe Harbor Regarding Steering (continued)
 The loan originator must have a good faith belief that
the consumer likely qualifies for the options presented
 For each type of transaction, if the originator presents
more than three loans, the ones satisfying the criteria
above must be highlighted
 Fewer than three loans can be presented if the loans
presented satisfy the criteria described above
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Mortgage Originator Compensation
 Under the FRB rule, if the consumer directly
compensates the mortgage originator, no one other
than the consumer, including the creditor, may
compensate the loan originator.
 The rule and commentary make clarifications to this
rule.
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Mortgage Originator Compensation
 The rule and the commentary make the following
clarifications:
 The restriction applicable to loans where the consumer
compensates the loan originator relates only to
payments, such as commissions, that are specific to,
and paid solely in connection with, the transaction.
 Thus, payments by a mortgage broker company to an
employee in the form of a salary or hourly wage, which
is not tied to a specific transaction, do not violate this
provision even if the consumer directly pays a loan
originator a fee in connection with a specific credit
transaction.
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Mortgage Originator Compensation
 The rule and the commentary make the following
clarifications:
 But, if any loan originator receives compensation
directly from the consumer in connection with a specific
transaction, neither the mortgage broker company nor
an employee of the mortgage broker company can
receive compensation from the creditor in connection
with that particular credit transaction.
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Mortgage Originator Compensation
 The rule and the commentary make the following
clarifications:
 Affiliates are treated as a single person, so if a holding
company has two mortgage lenders, and a loan
originator may deliver loans to both lenders, they must
compensate the loan originator in the same manner.
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Mortgage Originator Compensation
Restrictions on Loan Originator Comp in FRB rule: What
Does it Mean?
 The FRB rule provides clearer guidance on loan
originator compensation restrictions than the DoddFrank provisions, but it doesn’t address the most
problematic of the Dodd-Frank provisions (the
prohibition on paying a loan originator compensation if
the consumer pays any upfront discount points or
origination points or fees, presumably to the creditor).
 The FRB rule does provide clarity on what
compensation is and is not “based on the loan terms.”
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Mortgage Originator Compensation
Restrictions on Loan Originator Comp in FRB
rule: What Does it Mean?
 FRB rule also provides guidance on the permissibility
of non commission-based salaries to employees even
where the consumer pays the loan originator directly.
 However, its treatment of managers as loan
originators based on the fact that their compensation
is based on whether the loan is made, even if they do
not perform loan originator functions, raises concerns.
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Mortgage Originator Compensation
Restrictions on Loan Originator Comp in FRB
rule: What Does it Mean?
 Finally, the FRB rule provides guidance on the new
anti-steering provision, but additional questions
remain, including how a mortgage broker is to
determine whether a consumer likely qualifies for a
loan for the purposes of the safe harbor.
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For further information:
Clinton R. Rockwell
[email protected]
424-203-1002
Jonathan W. Cannon
[email protected]
424-203-1007
BuckleySandler LLP
100 Wilshire Boulevard
Suite 1000
Santa Monica, CA 90401
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