Mortgage Reform 2013-2014: What’s in...

9/26/2013

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BANKERS ASSURANCE COMPLIANCE CONFERENCE

LOAN ORIGINATOR COMPENSATION: 2014 SEPTEMBER 26, 2014

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TriNovus, LLC © 2013 Presenter: Leah M. Hamilton, Director TriComply Services

© 2013 TriComply Compliance Services

About the Speaker

Leah M. Hamilton

Director of TriComply Services with TriNovus

Serves about 850 financial institutions; 4700+ users

More than 18 years of experience in the financial services industry

A licensed attorney for more than 10 years, received Juris Doctorate from Northern Illinois University College of Law, and her Bachelor of Arts in General Studies degree from the University of Texas at Dallas with major in law and minor in business management

Nationally recognized speaker on banking compliance, including BSA/AML, offering real world stories to offer levity to very tough topics

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9/26/2013

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What you will learn

Coverage

Who is and who isn’t a loan originator

Loan originator qualifications

What is compensation

What is a term or proxy

There’s more

Action Plan

Resources

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Which loans are covered?

Must be:

Consumer

Closed end

Secured by a dwelling

Can be:

First or subordinate lien

Reverse mortgage

Can’t be:

HELOC

Timeshare

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NEW

Effective

date:

January 1st,

2014

9/26/2013

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Who is a loan originator?

Takes a residential mortgage loan

application; and

Offers or negotiates terms of a

residential mortgage loan

For compensation or gain

Takes an application, or

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; or

through advertising or other means

of communication represents to the

public that such person can or will

perform any of these activities

For compensation or gain

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MORTGAGE LOAN ORIGINATOR

SAFE ACT 12 CFR 1007.102

LOAN ORIGINATOR

REGULATION Z 12 CFR 1026.36


More LO details

Includes

An employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition

A creditor that engages in loan origination activities if creditor does not finance the transaction at consummation out of the creditor's own resources, including by drawing on a bona fide warehouse line of credit or out of deposits held by the creditor

All creditors that engage in loan origination activities are loan originators

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Taking an Application

If you:

Fill out the application (paper or electronic; in person or over the phone), or

Process or analyze the data on the application, or

Discuss specific credit terms

Then, you are an LO

If you:

Hand a consumer an application form, or

Explain the information requested on an application or where on the application the information goes at the consumer’s inquiry, or

Accept or receive a completed application, or

Pass the application on to a LO without helping the consumer complete it or talk about specific credit terms

Then, you are not an LO

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Who isn’t a loan originator?

Does not include:

Performs purely administrative or clerical tasks on behalf of a person who does engage in such activities

Does not take a consumer credit application or offer or negotiate credit terms available from a creditor,

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

Exception does not apply if offer or negotiate a transaction that constitutes a refinancing or obligates a different consumer on the existing debt

Other exceptions

Certain manufactured home retailer employees

Certain real estate brokerage firms, unless such person is compensated by creditor or loan originator or by any agent of such creditor or loan originator for a particular consumer credit transaction

Seller financer that meets certain criteria

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Simplicity

Application related administrative and clerical tasks

Inquiries and general information

Describe loan processing process

Underwriting, credit approval, credit pricing

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Simplicity

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All MLOs are LOs . . . but . . .

Not all LOs are MLOs

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Licensed

Registered and licensed

NMLS registered

NMLS ID#

For example

MLOs

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Non-licensed

Criminal back ground check

Don’t count expunged or pardoned records

Credit report

NMLSR info (if any)

What LO tells you

Can’t have

Felony in domestic violence or military court in last 7 years

Felony involving act of fraud, dishonesty, breach of trust, money laundering at any time

Okay if regulator says so though

Subject to conditions

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What is compensation?

Salaries

Commissions

Bonuses

Incentives

Prizes, awards, trips, days off,

gift cards

Call a rose by any other name

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What is okay?

Compensation into a designated tax-advantaged

plan or a benefit under a defined benefit plan that

is a designated tax-advantaged plan.

If a defined contribution plan, contribution shall not be

directly or indirectly based on the terms of that

individual loan originator's transactions

Examples

401k and other IRS defined retirement plans

Employee annuity plan

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Let’s talk about that bonus

Non-deferred profits-based compensation plan

i.e., any arrangement for the payment of non-deferred compensation that is determined with reference to the profits of the person from mortgage-related business), provided that:

Not directly or indirectly based on the terms of that individual loan originator's transactions; and

At least one of the following conditions is satisfied:

Compensation paid to an individual LO does not, in the aggregate, exceed 10% of his/her total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid; or

Individual LO was a LO for 10 or fewer transactions during the 12-month period preceding the date of compensation is determined

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What is a term of a transaction

Any right or obligation of the parties to a credit transaction

Amount of credit extended is not a term of a transaction or a proxy for a term of a transaction

Provided that based on a fixed percentage of amount of credit extended

May be subject to a minimum or maximum dollar amount

“Based on” a term of a transaction

Does not require a comparison of multiple transactions or proof that any person subjectively intended that there be a relationship between the amount of the compensation paid and a transaction term

Determination is based on the objective facts and circumstances indicating that compensation would have been different if a transaction term had been different.

Generally, when there is a compensation policy in place and the objective facts and circumstances indicate the policy was followed, the determination of whether compensation would have been different if a transaction term had been different is made by analysis of the policy.

In the absence of a compensation policy, or when a compensation policy is not followed, the determination may be made based on a comparison of transactions originated and the amounts of compensation paid.

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What is a proxy?

Terms

Interest rate,

APR

LTV

Prepayment penalty included

Closing costs

Not a proxy

Consumer's credit score

Representation of credit risk, e.g., DTI

Assume that consumer A and consumer B receive loans from the same loan originator and the same creditor

Consumer A has a credit score of 650, and consumer B has a credit score of 800

Consumer A's loan has a 7% interest rate, and consumer B's loan has a 6.5% interest rate because of consumers' different credit scores

If creditor pays LO$1,500 for consumer A's loan and $1,000 for consumer B's loan because the creditor varies compensation payments in whole or in part with a consumer's credit score, LO’s compensation would be based on the transactions' terms or conditions

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What can we do?

LOs overall loan volume

total dollar amount of credit extended

total number of loans originated, delivered to the creditor

Long-term performance of the originator's loans

Cannot ding LO for a current loan or retroactively on a prior transaction

Can re-evaluate comp plan for loans going forward

If last quarter (Q1) was bad, next quarter (Q2) pay 5% instead of 10% on loans made in Q2

Q1 was outstanding, so want to increase percentage Paid 10% Q1; pay 15% Q2

Okay even if Q2 interest rates are all higher

Hourly rate of pay for the actual number of hours worked

Whether consumer is an existing customer or a new customer

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What can we do?

Payment amount fixed in advance for every loan LO arranges

e.g., $600 for every loan arranged for the creditor, or $1,000 for the first 1,000 loans arranged and $500 for each additional loan arranged

Cannot vary with the amount of credit extended

e.g., 1% of amount of credit extended for loans of $300,000 or more, 2% of amount of credit extended for loans between $200,000 and $300,000, and 3% of amount of credit extended for loans of $200,000 or less

Percentage of applications submitted by the LO to creditor that resulted in consummation

Quality of the loan originator's loan files

e.g., accuracy and completeness of the loan documentation

Legitimate business expense

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There’s more . . .

Record retention

3 years from the date

of compensation paid

Not the consummation

date unless paid that

day

SAFE Act

First written communication

Regulation Z

Each copy

Application

Note / loan agreement

Security instrument

LO and Institution NMLS name and ID#

GSEs and investors

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TRACKING THE MONEY DISCLOSURES REQUIRING ID#

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Action Plan


Your Action Plan

Read the rules

Skim the proposed rules

Don’t wait for the final!

Submit comments

Reach out to your vendors

Are they already preparing?

Software

Settlement agents

Brokers

Closely monitor CFPB website

Identify staff impacted

Training: who, what, how and when

Risk Assessment

Products/Services

Monitoring schedule

Schedule sample test early on

Budget: time, resources, $$

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Action Plan

“Four P’s”

Policies

Procedures

Products

Personnel

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Questions?

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A strong foundation in compliance is perhaps the most important

building block of your institution, and TriNovus’ TriComply Services can

provide you with the resources you need to ease the burden in today’s

complex compliance environment. 25

• We’ll answer questions specific to your institution via our online Knowledgebase where you can also view questions and answers to issues other institutions are facing

TriComply Knowledgebase

• Access to our regulatory compliance manual, written by bankers for bankers

TriComply Compliance Manual

• We'll review your current compliance policies or create a new template for all to share

• Access to the TriComply Policy Manual

Policies

• We'll review your ads & disclosures for compliance, including UDA(A)P and best practices

Advertisements & Disclosures

• Receive a weekly compliance newsletter authored by Blair Rugh, Leah Hamilton and the TriComply Team addressing the most pressing compliance issues and providing advice for your institution

Compliance Newsletter

• View and share our online compliance videos with your staff

• Certificates of completion provided

Online Training Library

• Keep up-to-date with all the compliance deadlines by using the handy Compliance Calendar located in our TriComply Knowledgebase

Compliance Calendar

CONTACT:

STAR LARGIN

[email protected]

205.541.2127

Thank You!

Mortgage Reform 2013-2014: What’s in...

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