Loan Originator Compensation

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Loan Originator Compensation the New
Underwriting Rules Joseph M. Kolar Jonathan
W. CannonBuckleySandler LLPWashington, DC
Experienced Specialized Accomplished Cost-Effectiv
e Collaborative
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Overview

• Mortgage Originator Compensation Restrictions
  under Dodd-Frank and the Federal Reserve Boards
  Final Rule
• New Underwriting Standards and the Qualified
  Mortgage Exception

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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 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 will address this
  restriction in a subsequent rulemaking.
• 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.
• 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 publics 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
• Restricting a consumers 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
  originators 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
  consumers 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
  publics 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 originators
  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.
• Compensation (i) for long-term performance of the
  originators 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 originators 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 loans 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 originators 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 lenders 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.
• 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 consumers
  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)
• 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.
• 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
  Dodd-Frank provisions, but it doesnt 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.
• 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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• Mortgage Underwriting Reforms

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Mortgage Underwriting Reforms

• Under Dodd-Frank, the creditor must make a
  reasonable and good faith determination that the
  consumer has a reasonable ability to repay the
  loan
• Determination must be based on verified and
  documented information
• Determination must take into account loan, taxes,
  insurance (including MI), and assessments
• Creditor must combine payments if more than one
  loan
• Nonstandard loans must be assessed using a
  fixed, fully indexed rate and a fully amortizing
  repayment schedule.

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Mortgage Underwriting Reforms

• The ability to repay determination must include a
  consideration of the following
• credit history
• current income
• expected income
• current obligations
• DTI or the residual income
• employment status
• other financial resources other than equity in
  the dwelling

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Mortgage Underwriting Reforms

• Income Verification Income or assets (including
  expected income or assets) must be verified by
  reviewing the following
• W-2
• tax returns
• payroll receipts
• financial institution records, or
• other reasonably reliable third-party documents
• Consideration of income history must include IRS
  tax transcripts (or other method subject to
  rulemaking).
• Seasonal or irregular income, including income
  from a small business, may be considered.

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Mortgage Underwriting Reforms

• Federal departments or agencies may exempt
  refinancings under a streamlined refinancing from
  the income verification requirement as long as
  the following conditions are met
• No 30-day or greater delinquency
• No increase in principal (except for fees allowed
  by agency)
• Total points and fees do not exceed 3 of loan
  amount
• Interest rate is lower (unless refinancing from
  an ARM to fixed then subject to agency
  guidelines)
• Refinancing is subject to payment schedule that
  fully amortizes loan
• No balloon payment
• Both the loan being refinanced and the
  refinancing satisfy all requirements of the
  department or agency

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Mortgage Underwriting Reforms

• Qualified Mortgage Exception
• Any creditor (and any assignee subject to
  liability) may presume that the residential
  mortgage loan has met the ability to repay
  requirements if the loan is a qualified mortgage

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Mortgage Underwriting Reforms

• Qualified mortgage means any residential
  mortgage loan that meets the following criteria
• payments do not increase principal balance or
  defer payment of principal
• loan does not contain a balloon payment (except
  in limited circumstances)
• income and financial resources are verified and
  documented
• underwriting process is based on fully amortizing
  payments including taxes, insurance, and
  assessments
• for ARMs, underwriting is based on the maximum
  rate permitted under the loan during the first
  five years
• the loan complies with guidelines or regulations
  (to be established) regarding DTI or other
  methods of analyzing ability to pay
• total points and fees (defined below includes
  fees paid to affiliates) do not exceed three
  percent of the total loan amount
• loan term is thirty years or less

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Mortgage Underwriting Reforms

• Qualified mortgage further provisions
• Reverse mortgages may be considered QMs if they
  satisfy standards set forth in regulations
• Regulations must be issued to adjust points and
  fees criteria for small loans
• Regulations may adjust QM safe harbor if changes
  are necessary to ensure the extension of
  responsible, affordable mortgage credit
• HUD, VA, Ag., Rural Housing must define their own
  QM
• Rural and underserved areas will have special
  rules
• Prepayment are substantially restricted for QMs
  and prohibited for non-QMs

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Mortgage Underwriting Reforms

• Points and fees (which must not exceed 3 of
  loan amt. for a QM) generally include
• Fees and charges paid to the mortgage originator,
  lender, or affiliate of lender or MO
• All compensation paid directly or indirectly by a
  consumer or creditor to a mortgage originator
  from any source, including MO in a table-funded
  transaction
• Credit insurance premiums paid at closing
• Maximum prepayment penalties
• Points and fees do not include bona fide
  third-party fees paid to non-affiliates

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Mortgage Underwriting Reforms

• Points and fees (which must not exceed 3 of
  loan amt. for a QM) do not include the
  following
• Up to and including 2 bona fide discount points,
  but only if the interest rate from which the
  mortgage's interest rate will be discounted does
  not exceed by more than 1 percentage point the
  average prime offer rate or
• Up to and including 1 bona fide discount point,
  but only if the interest rate from which the
  mortgage's interest rate will be discounted does
  not exceed by more than 2 percentage points the
  average prime offer rate.
• The amount of the interest rate reduction
  purchased must be reasonably consistent with
  established industry norms and practices for
  secondary mortgage market transactions.

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For further information

• Joseph M. Kolar
• BuckleySandler LLP
• 1250 24th Street, NW
• Suite 700
• Washington, DC 20037
• jkolar_at_buckleysandler.com
• 202-349-8020
• Jonathan W. Cannon
• BuckleySandler LLP
• 1250 24th Street, NW
• Suite 700
• Washington, DC 20037
• jcannon_at_buckleysandler.com
• 202-349-8063