Loan Originator Compensation: Past is Prologue - Part I

In the economic sphere an act, a habit, an institution, a law
produces not only one effect, but a series of effects.
Of these effects, the first alone is immediate;
it appears simultaneously with its cause; it is seen.
The other effects emerge only subsequently; they are not seen;
we are fortunate if we foresee them.
What Is Seen and What Is Not Seen[i]
Frédéric Bastiat

Since April 6, 2011, mortgage loan originators (MLOs) have struggled to comply with the many requirements imposed on them by the MLO compensation provisions of the Truth in Lending Act (TILA),[ii] as amended by Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). That date was the compliance effective date.[iii] Prior to that date, however, there were considerable and persistent efforts made to postpone its implementation. I tracked the burgeoning protests and litigation in a series of articles[iv] and newsletters.[v] Associations resisted these TILA revisions on behalf of their membership. The National Association of Mortgage Brokers (NAMB) and the National Association of Independent Housing Professionals (NAIHP) sued the Federal Reserve Board of Governors (FRB). Amicus briefs were filed. Many members of Congress, from both sides of the aisle, also protested aspects of the new MLO compensation requirements. All for naught!*

April 6, 2011 arrived. Resistance was futile!

The FRB had issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions, but further guidance came to a virtual full stop on January 26, 2011, when the FRB issued its Compliance Guide for Small Entities on Loan Originator Compensation and Steering.[vi] After that, the FRB offered some conference calls, a webinar – which ostensibly cleared up some confusion, while causing other confusion – and provided occasional updates of the oral, rather than the written, official variety.

In the meantime, the Consumer Financial Protection Bureau (CFPB) received its “enumerated authorities” on July 21, 2011. From that date forward, the CFPB was in charge of promulgating and administering these compensation guidelines.

And on October 6, 2011 - exactly six months to the day when the rule became effective - the first examination guidelines for loan originator compensation were promulgated.[vii] In the State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule, issued by the Multi-State Mortgage Committee (MMC),[viii] we were given a pretty good idea of the direction that federal and state regulators would be taking in their regulatory examinations for loan originator compensation.[ix]

For the most part, my firm’s clients were prepared for implementation of the compensation rule, but we spent hundreds of hours preparing them for it, consisting of many conferences and meetings, which included very comprehensive reviews of employment agreements, compensation plans, disclosures, policies and procedures, and many other details, both logistical and systemic.

Inevitably, I felt mortgage loan originators needed more information than was readily available. So, we consolidated our knowledgebase and offered the FAQs Outline - Loan Originator Compensation, a compendium of questions and answers about the MLO compensation requirements, first published on March 21, 2011 with 142 FAQs and 35 pages. About a year later, after 20 updates, the FAQs Outline was up to 450 FAQs and 147 pages![x]

In this article, the first in a two-part series, I will consider the recent CFPB proposal, issued on August 17, 2012, which contains certain proposed rules governing mortgage loan originations, especially relating to the MLO compensation guidelines in Regulation Z, the implementing regulation of TILA. Comments for this proposal are due by October 16, 2012.[xi]

In the second part of this series, I will explore these proposals in considerable depth, specifically their clarification of and expansion on existing regulations governing MLO compensation and qualifications.

The CFPB does plan to implement new laws, including a restriction on the payment of upfront discount points, origination points, and fees on most mortgage loan transactions. For this reason, I will conclude this article with a brief, generic outline of certain proposals. To some extent, these new proposals exemplify the hurly-burly, roller-coaster ride we’ve been jaunting about on, in the on-going, elusive quest to implement the MLO compensation rule.

Small Business Review Panel

There is only one difference between a bad economist and a good one:
the bad economist confines himself to the visible effect;
the good economist takes into account both the effect that can be seen
and those effects that must be foreseen.
What Is Seen and What Is Not Seen[xii]
Frédéric Bastiat

The CFPB is required to certify that a proposed rule will not have a significant, adverse, economic impact on a substantial number of small entities.[xiii] The Small Business Regulatory Enforcement Fairness Act (SBREFA) provides the basis for a review, inasmuch as, among other things, “small businesses bear a disproportionate share of regulatory costs and burdens.”[xiv] In order to comply with this requirement, the CFPB convened and chaired a Small Business Review Panel to consider the impact of the proposal and obtain feedback from representatives of the small entities that would be subject to the rule. When preparing the proposed rule and an initial regulatory flexibility analysis, the CFPB is expected to consider this panel’s findings.

The panel consisted of representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration (SBA), and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).[xv] On the panel were so-called small entity representatives (SERs), individuals who represent the business entities that would be subject to the CFPB’s proposal.[xvi] On July 11, 2012, the panel issued its report.[xvii]

Here are certain, salient topics that were reviewed by the panel:

• Payment of Discount Points
• Payment of Origination Points and Fees in Creditor-Paid Compensation
• Payment of Origination Points and Fees in Brokerage-Paid Compensation
• MLO Retirement Plans, Profit-Sharing, and Bonuses
• Pricing Concessions and Point Banks
• MLO Qualification and Training Requirements

Let us now consider the panel’s suggestions, concerns, resolutions, and recommendations.

Compensation: Coming or Going?

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions. He is the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

Prophecy is above my pay grade, but if I were a betting man - which I'm not! - I would bet on a postponement of the TILA loan officer compensation requirements currently scheduled to go into effect on April 1, 2011. Rarely have I seen such a messy roll out of a regulatory change that actually affects virtually all aspects of the mortgage banking industry in general, and mortgage brokers in particular.

Because I'm not a betting man, I hope for the best outcome for industry stability, but will prepare for the "alternative." Our clients will be as prepared as possible, whatever the situation, come April 1, 2011!

Perfect Storm - Exhibit 1: Congress

The Senate's Committee on Banking, Housing, and Urban Affairs, chaired by Tim Johnson (R-SD), is concerned that "regulators are not allowing adequate time for meaningful public comment on their proposed rules. We also believe that regulators are not conducting rigorous analyses of the costs and benefits of their rules and the effects those rules could have on the economy."

Dated February 15, 2011, the letter was sent by ten members of the Committee to Timothy Geithner of the Treasury, Gary Gensler of the CFTC, Sheila Bair of the FDIC, Ben Bernanke of the FRS, Mary Schapiro of the SEC, and John Walsh of the OCC.

In their letter, the Senators observe what has become abundantly obvious to most industry members: "the unprecedented scope and pace of agency rulemakings under the Dodd-Frank Act make it more important than ever that agencies engage in deliberative and rational rulemaking."

The letter enumerates five questions for the recipients to answer, and here is my abbreviated version:

1. Will the respective agencies provide at least 60 days for public comment on all proposed rules and studies required by the Dodd-Frank Act?

2. What steps are being taken to ensure that the rules you adopt under the Dodd-Frank Act are the least burdensome way to achieve the statutory mandate. (Provide how those steps satisfy the obligations under the Administrative Procedure Act and other applicable statutes to conduct cost-benefit and economic impact analyses.)

3. What steps are being taken to ensure that all empirical data and economic analyses submitted by commenters are thoroughly considered before a final rule is adopted.

4. What steps are being taken to ensure that the respective agency is acting in coordination with other agencies charged with adopting related rules? (How is this coordinating being established?)

5. Given the importance of rigorous cost-benefit and economic impact analyses and the need for due consideration of public comments, would additional time for adoption of the Dodd-Frank Act rules improve the respective agency's rulemaking process and the substance of its final rules?

Perfect Storm - Exhibit 2: SBA Office of Advocacy

The SBA Office of Advocacy has written not one, but two letters to the FRB, expressing concern that the "Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)" and recommending that the FRB prepare an initial regulatory flexibility analysis (IRFA).

The result of the first letter, dated January 13, 2011, brought forth from the FRB a "compliance guide" on January 26, 2011.

I put that FRB issuance in quotes, because (as previously noted) it is 'inadequate, incomplete, and regurgitates most features of the "already known" aspects of the Regulation Z final rule amendments affecting loan officer compensation.' Best as I can tell, the "compliance guide" seemed meant to be a rush-job response to SBA's January 13, 2011 letter. In other words, this "compliance guide" is 'a transparent attempt to satisfy a regulatory requirement, though the dubious result adds little to an overall resolution.'

In response to the FRB's "compliance guide," the SBA issued a second letter on January 26, 2011 to the FRB, noting specifically that the "guide may not meet the requirements of the Small Business Regulatory Enforcement Fairness Act (SBREFA)." The SBA letter points up the flaws in the "compliance guide," suggests that revisions should be made to it, and requests postponement.

The FRB's response to the SBA's second letter is, essentially, silence.

Perfect Storm - Exhibit 3: Lawsuits and Consternation

Several industry groups have expressed an intention to sue the FRB, or pursue some form of judicial recourse, with the aim of preventing implementation of the loan officer compensation rule on April 1, 2011. As but one example, the National Association of Independent Housing Professionals (NAIHP) is threatening to sue the FRB within the next few days. NAIHP has invited the NAMB to join them in their suit against the FRB. 

According to a statement posted on the NAIHP website, the organization has been preparing legal action against the FRB for almost 2 months. Marc Savitt, the organization's President, states that preparation for their lawsuit has included "interviewing law firms, lining up expert witnesses, research, countless hours of planning and most importantly, raising funds."

In December, the Mortgage Bankers Association (MBA) sent a 19 page, carefully written and comprehensive letter to the FRB's Ben Bernanke  and Sandra F. Braunstein of its Consumer and Community Affairs Division. Under the rubric of "Questions on Federal Reserve Loan Originator Compensation Rule," the MBA lists 42 (sic) topics, plus sub-topics, of concern, confusion, and uncertainty, mixed with requests for clarity, interpretive guidance, and statutory support.

The Impact Mortgage Management Advocacy & Advisory Group (IMMAAG) has been very involved in seeking to "delay implementation until the appropriate impact studies have been concluded "or at least delay implementation to allow for a 'real' guide to be published and to allow the industry to absorb it and get questions answered."

The National Association of Mortgage Brokers (NAMB) has weighed in mightily and has intimated their interest in pursuing a legal remedy if nothing else will work. The NAMB is also threatening now to take "legal action." (Video)

In January, Michael J. D'Alonzo, President of the NAMB sent a letter to the FRB's Bernanke and Braunstein, requesting a delay in implementation of the loan officer compensation requirements, based in part on alleging that the FRB "has no legal basis for treating mortgage broker companies differently than other firms  carrying out the same or substantially similar business operations" and expressly seeking "clarification as to why the Rule permits  one class of mortgage market participants to: (1) receive incentive compensation based upon the type of loan originated; (2)  reduce their own compensation or income in order to capture more business; and (3) remain exempt from restrictions and  prohibitions set forth in the Rule, while other classes of market participants are held to significantly different standards."

Perfect Storm or Safe Harbor

The new loan officer compensation requirements have produced a plethora of webinars, lectures, training videos, questionnaires, surveys, so-called automated solutions, breakout sessions, magazine and news articles - a virtual cottage industry of Google Ads proclaiming "End-to-end mortgage automation solution for bankers and lenders," and "Confused About Dodd-Frank Changes? Sign Up For Onsite/Webinar Training."

In many of the aforementioned venues, speculation is a proxy for regulatory fact. Having a famous speaker or bigwig compliance professional opining on uninterpreted and unclarified TILA statutes makes me uneasy. There just is no replacement for regulatory guidance. Period!

Here's the reality: the largest loan originators and creditors will fend for themselves in this de facto unregulated environment, and all others will fall in line, unless and until the FRB provides clarification or delays implementation. Otherwise, the notion that the large originators get to make the interpretation of federal statutes, in the absence of the FRB interpreting them concisely, unambiguously, and cogently, is all a bit too Darwinian for my taste!

This is precisely why FRB regulations are promulgated: to assure a stable market and to avoid large companies determining for all the other companies what the FRB means. Furthermore, impact of the new loan officer compensation rules on the industry is a fundamental feature of any such foundational change to the residential real estate finance market. How is it even conceivable that such a change can be implemented without comprehensive impact studies required by federal statutes?

This is not a wave, but a tsunami of confusion with no safe harbor in sight - yet!

I am not a prophet, but betting on a delay seems like a good bet!

Be prepared to implement the loan officer compensation rules on April 1, 2011 - and be sure to consult competent compliance professionals for guidance - even if this dynamic environment continues to cause confusion and ambiguity. But, in the absence of the FRB adequately responding to its role in this debacle it is also wise to do what you can to stand up for the greater good of all market participants.

What do you think?

I would welcome your comments.

Please feel free to email me or leave your comments below.

Compensation: One Statute Too Many?

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions. He is the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

As I've previously notified you, I am writing an article on the loan officer compensation requirements that are due to go into effect on April 1, 2011. While I have been writing the article, in the current environment some of our clients seem to be forming a sort of siege mentality.

And I can't blame them, since there is so much confusion and, more substantively, the actual reading of federal staff commentaries to specific statutes in the revised TILA are causing them quite a bit of consternation.

We'll look at just one of the more controversial provisions!

Going too far?

Let's read the following passage together, slowly, carefully, attentively. 

Below I will deconstruct it.

We are going to consider the FRB commentary on a TILA section, entitled "Compensation in connection with a particular transaction" [§ 226.36(d)(2)]:

"If any loan originator receives compensation directly from a consumer in a transaction, no other person may provide any compensation to a loan originator, directly or indirectly, in connection with that particular credit transaction. ... The restrictions imposed [under this section] relate only to payments, such as commissions, that are specific to, and paid solely in connection with, the transaction in which the consumer has paid compensation directly to a loan originator.

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 section] even if the consumer directly pays a loan originator a fee in connection with a specific credit transaction.

However, if any loan originator receives compensation directly from the consumer in connection with a specific credit 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."

Interpolation & Interpretation

Now, permit me to unpack this language and render it in less ambiguous terms:

First, let's recognize that the terminology and phrasing in this provision are somewhat mangled. For interpretive ease, staying within the context of the commentary itself, it seems entirely clear that the "loan originator" is a mortgage broker, a company or employer.

Second, I will use some literary license and call the employee of a mortgage broker a "loan officer."

So, here goes my interpolation and interpretation:

Compensation tied to Transaction

Text: If any loan originator receives compensation directly from a consumer in a transaction, no other person may provide any compensation to a loan originator, directly or indirectly, in connection with that particular credit transaction. ... The restrictions imposed [under this section] relate only to payments, such as commissions, that are specific to, and paid solely in connection with, the transaction in which the consumer has paid compensation directly to a loan originator.

Interpolation: When a mortgage broker is directly compensated by a consumer, no other compensation may be provided to the mortgage broker from another source, directly or indirectly.

Interpretation: When the consumer directly compensates the mortgage broker in a transaction, the mortgage broker may not receive additional compensation from any other source, directly or indirectly; but, the text does not restrict the mortgage broker from paying a portion of such compensation to the loan officer.

Example

Text: 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 section] even if the consumer directly pays a loan originator a fee in connection with a specific credit transaction.

Interpolation: The mortgage broker may pay salary or hourly wages to a loan officer for originating loans that are not tied to a specific loan transaction, although a consumer may pay a fee to the mortgage broker to originate a specific loan.

Interpretation: Salary and hourly wages are incidental to loan officer compensation, when not tied to a specific loan transaction, irrespective of whether a mortgage broker receives direct compensation from a consumer for a particular transaction.

Source of Compensation

Text: However, if any loan originator receives compensation directly from the consumer in connection with a specific credit 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.

Interpolation: When a mortgage broker is directly compensated by a consumer in a transaction, no other compensation may be paid to the mortgage broker and the loan officer by the creditor.

Interpretation: Compensation paid directly by the consumer to the mortgage broker on a transaction concomitantly causes the elimination of the mortgage broker's and loan officer's ability to receive compensation by the creditor.

Does the FRB disagree with itself?

One would think that the plain meaning of the text - such as it may be derived in its own context - is sufficiently clear to make sense of the FRB's actual position on loan officer compensation, at least with respect to compensation directly paid to mortgage loan originators by consumers.

However, some of our clients have contacted me about an alleged position unofficially circulated by the FRB itself, which seems to contradict my aforementioned interpretations. Various industry and media organizations are stating that the FRB allegedly holds that loan officers can be paid only salary or hourly wages on loan transactions where mortgage broker compensation is directly received by the consumer. Supposedly, this view is alleged to be held by certain industry organizations and some lawyers who are offering legal opinions.

Perhaps I am in the minority, but the plain meaning of the text - as I see it - does not prevent a loan officer from receiving compensation from a mortgage broker on specific loan transactions where compensation to the mortgage broker is directly paid by the consumer, so long as the above-mentioned constructs are fully met. If it were otherwise, certain TILA statutes - and numerous RESPA statutes, and various provisions in the Dodd-Frank Act - would become incoherent.

I don't think I've got the wrong interpretation. Maybe the FRB should read its own statutes and then revise its own commentary.

And if the allegation is true, is the FRB asserting that some kind of "dual compensation" would take place if mortgage brokers shared a portion of their commission with their loan officers? I think that conclusion would be contrary to a fair reading of the above-outlined provision.

An official clarification would be nice!

Until that happens - and I expect it to happen! - let's keep in mind that the rampant confusion in the mortgage industry, caused in no small part by the revised loan officer compensation requirements, is just one more reason why the implementation date of April 1, 2011 should be delayed.

Postpone Implementation

The FRB needs to provide credible, clear, and unambiguous information for the entire residential mortgage industry in order to expect systemic compliance with foundational changes.

Here are two recent newsletters we have sent out on this subject.

SBA - 2nd Request to Postpone New LO Compensation Rules (2/1/2011)

FRB's Loan Officer Compensation "Guidance" (1/31/2011)

Until the mortgage industry:

(1) adequately understands its Regulation Z (TILA) enforcement obligations and loan officer compensation requirements; and

(2) has been given the statutorily mandated findings of the overall economic impact on the industry of the aforementioned provision, among others; and

(3) receives a complete and comprehensive mortgage compliance guide from the FRB, containing the requisite outline provided by the SBA's Office of Advocacy;

and until, that is, other planning requirements are met, I don't see how compelling the implementation of the loan compensation requirements on April 1, 2011 can be viewed as anything but disruptive, if not destructive, to the livelihoods of mortgage loan originators.

SBA - 2nd Request to Postpone New LO Compensation Rules

Yesterday I notified you about the so-called "small entity compliance guide" issued on January 26, 2011 by the Federal Reserve Board. 

The "Guide" is inadequate, incomplete, and regurgitates most features of the "already known" aspects of the Regulation Z final rule amendments affecting loan officer compensation. 

That rule is scheduled to go into effect on April 1, 2011.

As you may know, I am writing an article on this subject - which will be published in March 2011 in the National Mortgage Professional Magazine - so I am watching this issue pretty closely and have had numerous discussions with industry members, such as compliance counsel, corporate officers, mortgage loan originators, and even a few lobbyists and politicians.

It is now clear to me that FRB's "Guide" is probably meant to be a response to the January 13, 2011 letter from the SBA's Office of Advocacy, which expressed concern, among other things, that the "the Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)." That is, the "Guide" is a transparent attempt to satisfy a regulatory requirement, though the dubious result adds little to an overall resolution.

Let's read the basis for the authority of the SBA's Office of Advocacy (Advocacy), as stated in its January 13, 2011 letter that: (My emphasis) 

• "Congress established the Office of Advocacy under Pub. L. 94-305 to represent the views of small business before Federal agencies and Congress. Because Advocacy is an independent office within the Small Business Administration (SBA), the views expressed by Advocacy do not necessarily reflect the views of the SBA or of the Administration. Section 612 of the Regulatory Flexibility Act (RFA) requires Advocacy to monitor agency compliance with the Act, as amended by the SBREFA. In 1980, Congress enacted the RFA after determining that uniform federal regulations produced a disproportionate adverse economic hardship on small entities. In order to minimize the burden of regulations on small entities, the RFA mandates that federal agencies consider the potential economic impact of federal regulations on small entities.
• In 1996, Congress amended the RFA with SBREFA. Among other things, SBREFA requires agencies to provide plain English compliance guides to clearly explain each final rule that has a significant economic impact on a substantial number of small entities. The intent of section 212 of SBREFA is to ensure that small businesses have a way to understand complex and technical federal regulations."

Advocacy's January 13, 2011 letter recommended that the Board publish a "compliance guide in the immediate future and extend the time for small entities to comply to reflect the delay in the availability of the guide." 

Obviously, Advocacy must have believed that the FRB would provide a robust and comprehensive compliance guide. But that has not been forthcoming, while the effective date of April 1, 2011 draws ever closer.

Today, February 1, 2011, Advocacy issued yet another letter to the FRB, again asking for a postponement and this time specifically enumerating the expectations of what constitutes satisfaction of compliance with Section 212(a)(4) of SBREFA, the section that sets up the requirements of a compliance guide.

The following outline provides my brief synopsis of Advocacy's letter to the FRB.

Best wishes,
Jonathan

Synopsis of Advocacy Letter  

Citation

(4) Compliance actions.
(A) In general.--Each guide shall explain the actions a small entity is required to take to comply with a rule.
(B) Explanation.--The explanation under subparagraph (A)--

(i) shall include a description of actions needed to meet the requirements of a rule, to enable a small entity to know when such requirements are met (emphasis added); and

(ii) if determined appropriate by the agency, may include a description of possible procedures, such as conducting tests, that may assist a small entity in meeting such requirements, except that, compliance with any procedures described pursuant to this section does not establish compliance with the rule, or establish a presumption or inference of such compliance.

(C) Procedures.--Procedures described under subparagraph (B)(ii)--

(i) shall be suggestions to assist small entities; and

(ii) shall not be additional requirements, or diminish requirements, relating to the rule.

(5) Agency preparation of guides.
The agency shall, in its sole discretion, taking into account the subject matter of the rule and the language of relevant statutes, ensure that the guide is written using sufficiently plain language likely to be understood by affected small entities. Agencies may prepare separate guides covering groups or classes of similarly affected small entities and may cooperate with associations of small entities to develop and distribute such guides. An agency may prepare guides and apply this section with respect to a rule or a group of related rules.

Has the FRB met its Obligations?

Points raised by Advocacy include:

• Concern that the FRB has not met the obligation to "include a description of actions needed to meet the requirements of a rule, to enable a small entity to know when such requirements are met."

• The guide does not have sufficient information to enable a small entity to know when the requirements have been met.

• The guidance answers almost none of the questions that the industry has about the rule and view it as simply a summary of a complex issue and not guidance on how to comply with the requirements of the rule.

• The FRB has an obligation to provide the industry with a description of the actions needed to comply with Regulation Z in a manner specific enough that will enable a small entity to know if it has met the requirements of the rule.

The FRB should amend the compliance guide to provide appropriate instructions.

Facilitating Revisions to the Guide

Points raised by Advocacy include:

• Advocacy is available to facilitate a meeting between the small entities and the FRB in terms of clarifying which issues the small entities believe need clarification and guidance.
• Advocacy believes that such a meeting would not only benefit the small entities, but it would provide the FRB with some insight into the problematic areas of the rule.

Consumer Advocacy

Points raised by Advocacy include:

• It is important for consumers to receive services from businesses that fully comprehend the requirements of this rule.
• Issuing a proper compliance guide not only helps the small entities, it also assists the Board in meeting its goal of protecting consumers.

Postponement Request

Points raised by Advocacy include:

• Because the effective date of the rule is rapidly approaching at a time that industry does not feel as though it has workable guidance, Advocacy once again encourages the FRB to postpone the implementation date for small entities.
• A delay to educate small entities on the proper implementation of the requirements of the rule will benefit the entities and the consumers who utilize their services.

Visit Library for Issuance 

Letter from SBA Office of Advocacy to Federal Reserve Board
February 1, 2011

FRB's Loan Officer Compensation "Guidance"

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

On January 26, 2011, the Federal Reserve Board issued a "Guide" - a "small entity compliance guide"  required under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), as amended. 

I have placed "Guide" in quotes because I haven't seen such a perfunctory and virtually useless issuance from the FRB in quite a long time in a matter of such consequence!

It seems to me that the "Guide" is more of a reaction to the January 13, 2011 letter from the SBA's Office of Advocacy, which expressed concern, among other things, that the "the Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)."

If this is meant to be a response to that letter, and to comply with the SBREFA, it falls far short of the mark; and, in any event, it surely doesn't seem to fulfill the statutory requirements carefully reasoned in the SBA's letter. 

Much of the FRB "Guide" is no more than a regurgitation of the "already known" aspects of the Regulation Z amendments affecting loan officer compensation. I doubt our clients will get much help from this document!

The SBA's letter recommended that the Board publish a compliance guide in the immediate future and extend the time for small entities to comply - now scheduled for April 1, 2011 - to reflect the delay in the availability of the guide. 

To quote directly from the SBA letter:

• "Small entities have indicated that the requirements of some of these changes are unclear and confusing. They are concerned that the lack of clarity may lead to problems in compliance.

• Advocacy reviewed the Board's website. Advocacy commends the Board for having a SBREFA compliance guide page on its website. However, although there are compliance guides for Regulations C, D, E, F, H, I, J, L, M, O, P, R, V, X, AA, BB, CC, DD, and GG, Advocacy was unable to find a compliance guide for Regulation Z."

Nevertheless, at this time it does not appear that a delay is being seriously considered.

In reviewing our Library and Archives, it appears that we have well over 300 documents on the subject of loan officer compensation. So I decided to open a new section in the Library devoted to COMPENSATION - MLOs. Over time, it will receive more and more relevant documents. Check back or bookmark the page, if you want to keep track of this controversial subject.

At this time, I am completing an article that will be published in the March 2011 edition of National Mortgage Professional Magazine, the country's premier magazine of the mortgage industry. The article will cover, comprehensively and practically, the salient features of loan officer compensation that will become effective on April 1, 2011. 

Moreover, my article will provide clear guidelines to assist mortgage loan originators in understanding and applying compensation requirements. 

In the meantime, we will watch the situation closely and provide updates, where needed.

Best wishes,
Jonathan Foxx

Some Highlights of the "Guide"

Definitions of a Loan Originator and Mortgage Broker:

• All persons who originate loans, including mortgage brokers and their employees, as well as mortgage loan officers employed by depository institutions and other lenders.

Payments based on transaction terms or conditions:

• Prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions, except the amount of credit extended.
• Compensation can neither be increased nor decreased based on the loan terms or conditions.
• When the creditor offers to extend a loan with specified terms and conditions (such as rate and points), the amount of the originator's compensation for that transaction is not subject to change, based on either an increase or a decrease in the consumer's loan cost or any other change in the loan terms.
• The amount of credit extended is deemed not to be a transaction term or condition of the loan for purposes of the prohibition, provided the compensation payments to loan originators are based on a fixed percentage of the amount of credit extended. (Such compensation may be subject to a minimum or maximum dollar amount. The minimum or maximum amount may not vary with each credit transaction.)
• Creditors may use other compensation methods to provide adequate compensation for smaller loans, such as basing compensation on an hourly rate, or on the number of loans originated in a given time period.
• An originator that increases the consumer's interest rate to generate a larger yield spread premium can apply the excess creditor payment to third-party closing costs and thereby reduce the amount of consumer funds needed to cover upfront fees. (There is no prohibition from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction's terms or conditions.)

Payments by persons other than the consumer:

• If compensation is received directly from a consumer in a transaction, no other person may provide any compensation to a loan originator, directly or indirectly, in connection with that particular credit transaction.
• Payments made by creditors to loan originators are not payments made directly by the consumer, regardless of how they might be disclosed under HUD's Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA).

Prohibition on steering and allowance of Safe Harbor:

• Prohibits a loan originator from "steering" a consumer to a lender offering less favorable terms in order to increase the loan originator's compensation.

• Provides a safe harbor to facilitate compliance:

To be within the safe harbor, the loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business.

The loan originator can present fewer than three loans and satisfy the safe harbor, if the loan(s) presented to the consumer otherwise meet the criteria in the rule. For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified in the rule.

The safe harbor is met if the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and the loan options presented to the consumer include:

(A) the loan with the lowest interest rate for which the consumer qualifies;

(B) the loan with the lowest total dollar amount for origination points or fees, and discount points, and

(C) the loan with the lowest rate for which the consumer qualifies for a loan without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation.

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FRB - Small Entity Compliance Guide - Regulation Z:
Loan Originator Compensation and Steering,
12 CFR 226 (1/26/11)
Print and Website Versions

NMLS: MLO Registration to Commence

In its first Financial Institution Letter of the year, the FDIC issued on January 4, 2011 its issuance FIL-1-2011 in which the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System,, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Farm Credit Administration, and the National Credit Union Administration, (collectively, Agencies) announced that they expect the system for federal registration of residential mortgage loan originators (MLOs) to begin operation on or around January 31, 2011.

The Agencies' rules implementing the SAFE Act require MLOs to register with the Nationwide Mortgage Licensing System and Registry (Registry) within 180 days of the date the Registry begins accepting federal registrations. The Agencies will confirm the opening date for federal registration closer to the actual date and will publish notice of that date in the Federal Register.

On July 28, 2010, the Agencies announced the Federal Register publication of rules implementing the SAFE Act through this joint press release.

In any event, the federal bank and thrift regulatory agencies have said that they expect to be ready to accept residential mortgage loan originator registrations by about January 31, 2011.

Under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act), loan originators must register with the Nationwide Mortgage Licensing System and Registry within 180 days of the date the Registry announces it can accept registrations. A precise date will be published in the Federal Register when it is determined, the agencies said.

A loan originator that does not register within the 180-day period will be prohibited from originating residential mortgage loans until it has completed its registration. There will be an exception for those who originated no more than five loans during the previous 12 months.

Rules adopted jointly by the agencies establish the registration requirements for loan originators employed by agency-regulated institutions and set the requirements for these institutions, which include the adoption of policies and procedures to ensure compliance with the S.A.F.E. Act and final rules.

The rules also require that each loan originator obtain a unique identifier through the Registry that will remain with that loan originator, regardless of changes in employment. This is intended to give consumers access to employment and other background information about loan originators. Registered mortgage loan originators and agency-regulated institutions will be required to provide these unique identifiers to consumers.

Compliance Effective: On or around January 31, 2011

OUTLINE OF MLO REGISTRATION TIMEFRAME

• The press release states that advance notice would be provided for the date the Registry would begin accepting federal registrations: the Agencies currently expect federal registration to begin on January 31, 2011.

• MLOs employed by Agency-regulated institutions will have 180 days from the date on which the Registry begins accepting federal registrations to complete initial registration. At present, the Agencies expect the initial registration period to expire on July 29, 2011.

• After the initial registration period expires, MLOs will be prohibited from originating residential mortgage loans until they successfully complete the federal registration process.

• The Agencies' rules provide a de minimis exception whereby MLOs that originated 5 or fewer mortgage loans during the previous 12 months are not required to complete the federal registration process.

• The Agencies will confirm the actual registration start date before the initial registration period begins and publish an announcement in the Federal Register.

Visit Library for Issuance SAFE Act - Update: Registration of Residential Mortgage Loan Originators, FIL-1-2011 January 4, 2011

Florida Reverses Requirement to License Mortgage Loan Underwriters

Licensing Obligations for Individuals Acting as In-House Underwriters

The Office of Financial Regulation (OFR) has changed its licensing requirements: earlier this year the OFR passed a mandate that mortgage processors and underwriters must become licensed as loan originators. This requirement has been reversed, because "underwriters did not clearly fit [the] description" of a "loan originator."

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On August 17, 2010, the OFR provided a legal opinion (Opinion), issued by Jenny S. Kim, the OFR's Assistant General Counsel, which gave the following clarification to substantially the following question:

Whether individuals employed by Florida-licensed mortgage lenders who exclusively conduct underwriting activities for their employer will be required to be licensed as "mortgage loan originators" on October 1, 2010?

According to the Opinion, effective October 1, 2010, the definition of "loan originator" means:

[A]n individual who, directly or indirectly, solicits or offers to solicit a mortgage loan, accepts or offers to accept an application for a mortgage loan, negotiates or offers to negotiate the terms or conditions of a new or existing mortgage loan on behalf of a borrower or lender, processes a mortgage loan application, or negotiates or offers to negotiate the sale of an existing mortgage loan to a non-institutional investor for compensation or gain. The term includes the activities of a loan originator as that term is defined in the S.A.F.E. Mortgage Licensing Act of 2008, and an individual acting as a loan originator pursuant to that definition is acting as a loan originator for purposes of this definition. The term does not include an employee of a mortgage broker or mortgage lender who performs only administrative or clerical tasks, including quoting available interest rates, physically handling a completed application form, or transmitting a completed form to a lender on behalf of a prospective borrower. [Section 494.001(14), Fla. Stat. - Emphasis Added]

The Opinion indicates that the Florida definition of "loan originator," does not explicitly include underwriting. Section 1503(4) of the S.A.F.E. Act, however, provides that an underwriter "means an individual who performs clerical or support duties at the direction of and subject to the supervision and instruction of (i) a State-licensed loan originator; or (ii) a registered loan originator." Section 1504(b) of the S.A.F.E. Act further states that "supervised" underwriters (who do not represent to the public that they perform loan origination activities) are not required to obtain loan originator licenses, while independent contractors "may not engage in residential mortgage loan origination activities as a[n]...underwriter unless such independent contractor is a State-licensed loan originator."

Opinion's Interpretative Conclusions

• Underwriters who are W-2 employees of licensed mortgage lenders are not required to obtain loan originator licenses with the OFR.

• If underwriters intend to underwrite exclusively for one employer, they would not be subject to HB 1281's requirement that "loan processors" file declarations of intent to engage solely in loan processing in order to contract with multiple mortgage brokers or mortgage lenders.

Finally the Opinion states that in-house underwriters who work for a licensed lender must be supervised by a licensed loan originator in order to comply with the S.A.F.E. Act and Chapter 494, Florida Statutes.

Our Advice & Summary

Effective October 1, 2010

• The licensing requirement can be properly effectuated in compliance with both the S.A.F.E. Act and Chapter 494, Florida Statutes by assuring that the originating entity's underwriting manager is licensed, though the underwriters subordinate to the underwriting manager do not need to be licensed.

• Florida-licensed loan originators who solely act as a loan processor will be permitted to contract with one or more mortgage brokers and/or mortgage lenders, simultaneously. This correction will permit licensed loan originators who work for companies that exclusively perform processing services to process mortgage loans for more than one entity.

• The term "loan processor" will be defined as an individual who is licensed as a loan originator and who only engages in:

1. "the receipt, collection, distribution, and analysis of information common for the processing or underwriting of a residential mortgage loan"; or

2. "communication with consumers to obtain the information necessary for the processing or underwriting of a loan, to the extent that such communication does not include offering or negotiating loan rates or terms or does not include counseling consumers about residential mortgage loan rates or terms."

• In order to act as a "loan processor," an individual licensed as a loan originator will provide the OFR with a declaration of intent to engage solely in loan processing activities. The OFR will provide a new form so individuals can declare their intent to engage exclusively in loan processing activities.

For questions about this matter or assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director.

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Licensing Obligations for Individuals
Acting as In-House Underwriters
Florida - Office of Finance Regulation
August 17, 2010

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.