Presented by:

Ronette Schlatter, CRCMSenior Compliance Coordinator

Loan OriginatorCompensation

2014 IBA Human Resources Conference

Dodd-Frank Act LO Rules

Basic Provisions Regulates LO compensation Imposes LO qualification

requirements Requires LOs to include NMLS ID#

on certain loan documents

April 15, 2014 2014 IBA HR Conference 2

Who is an LO? A person who, in expectation of “compensation”

performs any of the following: Take an application Arranges a credit transaction Assists a consumer in applying for credit Offers or negotiates credit terms Refers a consumer to a loan originator or creditor Represents to the public that he/she can or will perform

any loan origination services

May/may not be registered Safe Act MLO

April 15, 2014 2014 IBA HR Conference 3

Note: broader

definition than

SAFE Act!

Referrals to an LOA person making a referral to an LO is not considered a LO, provided the person: Responds to consumer’s inquiry for LO referral; or Only provides contact information for a LO; and Does not discuss particular credit terms; and Does not direct the consumer to a particular LO based

on an assessment of consumer’s financial position

April 15, 2014 2014 IBA HR Conference 4

LO Activities do NOT include…

Providing general information in response to consumer inquiries

Loan-processing activities, e.g., assembling credit application packages & supporting docs

Verifying application info

Coordinating closings or communicating with consumers about dead-lines or documents needed to close

Underwriting activities, provided there is no communication with consumers re: credit terms

April 15, 2014 2014 IBA HR Conference 5

Compensation includes…

Salaries Commissions Annual or periodic bonuses Awards of merchandise,

services, trips or similar prizes An award of stock, stock

options, or equity interests

April 15, 2014 2014 IBA HR Conference 6

LO Compensation Prohibitions

LOs are prohibited from: Receiving compensation based on loan terms

or proxy for loan terms Receiving compensation from the both the

consumer and another person Steering a consumer to a particular loan

because the LO will receive greater compensation

April 15, 2014 2014 IBA HR Conference 7

Compensation based on Loan Terms

“Loan terms” include: Interest rate APR Collateral type (condo, detached home,

manufactured home, etc.) Existence of prepayment penalty Origination fees and points

April 15, 2014 2014 IBA HR Conference 8

Loan Term “Proxies”

Two-Step Analysis Factor consistently varies

with transaction term

and LO has the ability to,

directly or indirectly, add, drop or change factor during origination process

Proxy Examples Portfolio vs. Investor loan Credit product (FHA, VA) DTI, LTV, Credit Score Profitability Geography (census tract)

April 15, 2014 2014 IBA HR Conference 9

Permissible Compensation Bases Overall loan volume Fixed percent based on loan amount Long-term performance Existing customer vs. new customers Fixed amount determined in advance (including tiers) Loan quality (accuracy & completeness) Actual hours worked Percent of approved apps actually closed

April 15, 2014 2014 IBA HR Conference 10

Profits-Based Compensation

Generally constitutes “loan-term based” compensation and is prohibited, except for: Payments to designated tax-advantage, defined contribution or

defined benefit plans as long as contribution is not directly/indirectly based on terms of an individual LO’s transactions 401k plans, defined benefit plans, annuities, etc.

Payments via non-deferred profit-based compensation provided: Payment does not exceed 10% of “total compensation” OR LO originated 10 or fewer transactions in preceding 12 mos.

April 15, 2014 2014 IBA HR Conference 11

Non-Deferred Profit-Based Compensation

Bonus pools Profits pools Bonus plans

Profit-sharing plans Awards of merchandise, services,

trips, or similar prizes

April 15, 2014 2014 IBA HR Conference 12

Any non-deferred compensation arrangement where an individual LO may be paid variable, additional

compensation based in whole or in part on the mortgage-related business profits of the paying person

Non-Deferred Profit-Based Compensation

A non-deferred profits-based compensation plan does not include the following bonus plans because they are not based on mortgage-related profits: A retention bonus budgeted for in advance A performance bonus paid out of a bonus pool set aside at the

beginning of the company’s annual accounting period as part of the company’s operating budget

A plan that is determined with reference only to profits from a business other than mortgage-related business

April 15, 2014 2014 IBA HR Conference 13

Non-Deferred Profit-Based Compensation

10% Total Compensation Limit Use same timeframe for calculating 10% limit as

when compensation was earned (not when paid) “Total Compensation” includes:

Wages/tips actually paid during the relevant time period (Box 5 on W-2)

Cash value of awards of merchandise, trips, etc. 1099-Misc income paid May include contributions to tax-advantage plans

April 15, 2014 2014 IBA HR Conference 14

Increasing/Decreasing Compensation

Once compensation agreement is in place, compensation cannot be adjusted on selective basis (or per loan) E.g., creditor makes less on loan than expected LO does not follow creditor underwriting guidelines Match competitor’s offer or avoid HPML coverage

Exception: May be decreased to cover unforeseen increase in actual costs on HUD vs. GFE estimates

Compensation agreements may be adjusted prospectively

April 15, 2014 2014 IBA HR Conference 15

Other Compensation Considerations

Dual compensation is prohibited LO may not receive compensation from both consumer and

another person

Steering is prohibited A LO may not steer consumer to a loan for greater

compensation Safe Harbor provision: Provide consumer w/ loan options:

Loan w/ lowest interest rate Loan w/ lower interest rate & no risky features Loan w/ lowest orgination points & fees and discount points

April 15, 2014 2014 IBA HR Conference 16

LO Qualification Standards

Banks must insure their LOs: Are registered w/ NMLS; Obtain criminal background check through NMLS (or law

enforcement agency or commercial service); Obtain credit report; and Review any information related to administrative, civil or

criminal findings from NMLS background check

BEFORE acting in capacity of a LO.

April 15, 2014 2014 IBA HR Conference 17

LO Qualification Standards

Banks must also ensure LO has: Within last 7 years not been convicted or plead no

contest to a felony in a domestic or military court; or Ever been convicted of or plead no contest to a felony

involving an act of fraud, dishonesty, breach of trust or money laundering Expunged convictions and pardons do not count

April 15, 2014 2014 IBA HR Conference 18

LO Qualification Standards Based on credit report,

background checks, etc., bank must determine LO has demonstrated financial responsibility and good general character to warrant LO will act honestly, fairly & efficiently

Applicable to: LOs hired on or after 1/10/14 Existing staff that move into

LO position after 1/10/14

Not Applicable to: LOs hired prior to 1/10/2014 if

hired according to standard practices at the time of hire;

AND, Bank has no information indicating LO likely does not continue to meet standards April 15, 2014 2014 IBA HR Conference 19

LO Qualification Standards

Periodic training requirements Based on job duties As deemed necessary No required number of hours or topics Covering state and federal law Applicable to ALL LOs regardless of hire date Much flexibility granted in training delivery methods

April 15, 2014 2014 IBA HR Conference 20

Recordkeeping Maintain records sufficient to evidence:

All compensation received from creditors, consumers, and other individuals or entities if bank acts as LO

All compensation bank pays to individual LOs

The compensation agreements that govern those receipts or payments

For three years after the date of payment or receipt of compensation.

April 15, 2014 2014 IBA HR Conference 21

NMLS ID#

Must disclose name and NMLSD ID# of LO organization (bank)

and, Individual LO

Exactly as shown on NMLSR Primary LO at time

document is issued

On the following: Credit

application Note or loan

contract Security

instrument

April 15, 2014 2014 IBA HR Conference 22

Questions?

Additional Resources:

CFPB Small Entity Guide: http://files.consumerfinance.gov/f/201401_cfpb_complaince-guide_loan-originator.pdf

April 15, 2014 2014 IBA HR Conference 23

Ronette Schlatter

Senior Compliance Coordinator

Iowa Bankers Association

rschlatter@iowabankers.com

April 15, 2014 2014 IBA HR Conference 24