Presentation Slides

Report
EXPLOSION OF NEW MORTGAGE REGULATION
Loan Originator Compensation Rule
Mortgage Regulation Teleseminar Series
February 21, 2013
FINANCIAL SERVICES REGULATORY GROUP
Leonard A. Bernstein · [email protected]
Robert M. Jaworski · [email protected]
Travis P. Nelson · [email protected]
Kelly Bley · [email protected]
BACKGROUND AND EFFECTIVE DATES
Reg Z§1026.36
• FRB Proposal (August 2009)
• Dodd-Frank §1403 (July 2010)
• FRB Final Rule (September 2010) – did not implement
§1403
• CFPB Final Rule (January 20, 2013)
• Effective Date (January 10, 2014, except for
arbitration/credit insurance provisions which become
effective June 1, 2013)
2
KEY COMPONENTS
New LO
Qualification and
Disclosure
Requirements
LO Compensation:
Restrictions and
Clarifications
• New rules regarding
profit-sharing plans
New requirements
for policies and
procedures
Expanded LO
record-keeping
requirements
New prohibitions on
mandatory
arbitration clauses
and financing of
credit insurance
3
SCOPE
• Closed-end consumer credit transactions secured by a
dwelling
• First- or subordinate-lien
• Includes closed-end reverse mortgages
• Certain provisions (arbitration and credit insurance) also
apply to HELOCS secured by principal dwelling
4
PENALTIES – CIVIL ACTIONS
3-Year Statute of Limitations
Consumers can sue creditors, LOOs and/or individual LOs
• Expands liability to LOOs/LOs
For violations of LO comp restrictions, consumers can recover:
• Actual and statutory ($400-$4,000) damages
• Enhanced HOEPA damages (for material violations, sum of
all finance charges and fees paid by the consumer)
• Except that LOO and individual LO liability capped at 3
times amount of compensation received in connection with
loan
• Costs and attorney’s fees
5
PENALTIES – CIVIL ACTIONS
(Continued)
Violations of the LO comp restrictions also provide consumers
with defense to foreclosure
•
•
•
•
New, additional remedy under Dodd Frank
No statute of limitations
In nature of set-off or recoupment
If > 3 years after closing, damages capped as of end of 3year period
No enhanced HOEPA damages for violations of LO
Qualification/Disclosure, Arbitration, and Credit Insurance
provisions
6
PENALTIES – ADMINISTRATIVE ACTIONS
Who has jurisdiction?
Available Relief
• Prudential bank regulators:
depositories ≤ $10 billion in
assets
• CFPB: depositories > $10
billion in assets, and nonbank covered persons
• Agencies can undertake
lengthy investigations
• Role of state attorneys
general
• Permanent and temporary
cease and desist orders
• Fines
• Prohibition from working in
the banking industry (for
prudential regulators)
7
“LOAN ORIGINATOR” DEFINITION
§ 1026.36(a)(1)
Person, who in expectation of direct or
indirect compensation performs any of
the following:
•
•
•
•
•
Takes an application
Arranges or assists in obtaining credit
Negotiates for another person
Otherwise obtains or makes a loan
Advertises that it can perform one of above
8
“LOAN ORIGINATOR” DEFINITION (Continued)
Loan Origination activities include:
• Referring consumer to a loan originator
• Arranging a credit transaction
• Advising on specific credit terms; or collecting supporting
information on consumer’s behalf
• Presenting specific credit terms
• Advertising that one can perform LO activity.
9
“LOAN ORIGINATOR” DEFINITION (Continued)
“Individual loan originators” (“individual LOs”):
• Employees of loan originator organization
• Employees of creditor
• If they meet the LO definition
• Could be independent contractors
• Natural persons
“Loan originator organization” (“LOO”) – any LO that is not an
“individual loan originator”
10
“LOAN ORIGINATOR” DEFINITION (Continued)
“Table funding” creditor is a “loan originator”
“Creditors” are NOT LO’s if:
• Creditor uses its own funds, either
• Via a bona fide warehouse line of credit
• Or via its own deposits
LO qualification and LO disclosure requirements: all creditors
are “loan originators”
11
“LOAN ORIGINATOR” DEFINITION
Not loan originators…
LOAN ORIGINATOR does not include:
• Person performing purely administrative or clerical
tasks
• Employee of manufactured home retailer who does
not take application or advise on credit
• Real estate broker that performs only RE activity,
unless compensated by creditor or LO
• Seller financer (see criteria on next slides)
• Servicer modifying loan unless “refinance”
• Third party advisors, like accountants, FA’s.
12
“LOAN ORIGINATOR” DEFINITION
Not loan originators… (Continued)
Managers, administrative and clerical staff: “LO” status is not
triggered when responding to inquiries:
•
•
•
•
•
•
•
To supply an application form,
Accept completed form,
Deliver the application to an LO or creditor,
Generally describe application process or form
Provide general information
Provide LO or creditor contact info
Providing general guidance on credit criteria
13
“LOAN ORIGINATOR” DEFINITION
Not loan originators… (Continued)
Loan Processing: “LO” status is not triggered for creditor or LO
employee or agent that:
•
•
•
•
•
Compiles credit application packages
Verifies information; requests supporting docs.
Arranges settlement or other logistics
Provides info unrelated to credit terms
States that written offer has been sent
14
“LOAN ORIGINATOR” DEFINITION
Not loan originators… (Continued)
Underwriting, Pricing: “LO” status is not triggered for creditor
or LO employee that:
• Underwrites w/o consumer contact
• Approves credit terms w/o consumer contact
• Establishes credit pricing; provided others offer to public
15
“LOAN ORIGINATOR” DEFINITION
Not loan originators… (Continued)
“SELLER FINANCE” EXCLUSION – 3 PROPERTIES
• Person provides seller financing for 3 or fewer properties in
any 12 month period
• Person has not constructed property
• Financing:
• Fully amortizing
• Determine “in good faith” ability to repay; either under regulations or
streamlined approach in Commentary
• Fixed rate, or 5 year ARM with reasonable caps and widely available
index:
• safe harbor: 2 % annual and 6% lifetime
16
“LOAN ORIGINATOR” DEFINITION
Not loan originators… (Continued)
“SELLER FINANCE” EXCLUSION – 1 PROPERTY
• Natural person, estate or trust
• Person provides seller financing for 1 property in any 12
month period
• Person has not constructed property
• Financing:
• No negative amortization
• Fixed rate, or 5 year ARM with reasonable caps and widely available
index;
• safe harbor: 2 % annual and 6% lifetime
17
“LOAN ORIGINATOR” DEFINITION
“PRODUCING MANAGERS”
•
•
•
•
Managers who “sometimes” engage in LO activity
“Producing managers” are loan originators
Does not matter if compensation not transaction-specific
Manager can approve terms and set terms w/o being
deemed an LO, provided only an LO communicates with
consumer
18
LO QUALIFICATION REQUIREMENTS
Standards (§ 1026.36(f))
• Scope: “Loan originators” include all creditors for this rule;
rule covers transactions secured by dwelling
• TILA Liability: “Imposes a TILA obligation on all loan
originator organizations – mortgage brokers and both
nondepository and depository institution mortgage creditors –
to ensure that their individual loan originators are licensed or
registered to the extent required under the SAFE Act”
19
LO QUALIFICATION REQUIREMENTS
Standards (§ 1026.36(f)) (Continued)
Nonbanks: Imposes threat of TILA civil liability/enforcement if:
• LO fails to comply with state licensing/foreign qualification
• LO fails to ensure each individual LO is “SAFE Act”
licensed
• Bureau’s SAFE ACT Rule, 12 CFR 1008 (“Reg H”) sets
forth minimum licensing standards for states
20
LO QUALIFICATION REQUIREMENTS
Standards (§ 1026.36(f)) (Continued)
Bank/Subsidiary Individual LO’s: For each individual LO that
is a bank employee, bank must:
• OBTAIN criminal background check, credit report and info
about administrative, civil or criminal findings
• DETERMINE that individual LO has no felony conviction,
and has demonstrated “financial responsibility, character &
general fitness”
• TRAIN – provide periodic training re applicable law
• Timing – For employees hired on or after 1/10/14, and for
any individual who “likely” does not meet standards above.
• SAFE Act Rule – 12 CFR 1007 (“Reg G”) for bank LO’s
21
LO QUALIFICATION REQUIREMENTS
Standards (§ 1026.36(f)) (Continued)
• Can check individual’s status: www.nmlsconsumeraccess.org
• Subsequent reviews not required unless new knowledge
• “Financial responsibility”: judgments, tax liens, delinquencies;
not required to consider medical debts
• “Character & general fitness”: acts of dishonesty (including
employment applications), disciplinary actions.
• SAFE HARBOR: For “financial responsibility, character and
general fitness” standard, establish and comply with written
procedures for that individual.
• Training – applies regardless of individual’s hiring date.
22
LO DISCLOSURE REQUIREMENTS
(§ 1026.36(g))
• Scope: Consumer credit transactions secured by dwelling
• “Loan Document” Disclosure: LOO must include name and
NMLSR ID (if there is one), for both LOO and individual LO.
• “Loan Documents”: application, note, mortgage; NOT TILA or
RESPA disclosure, pending the integration process.
• TILA Liability – presume liability if disclosure missing
23
LO COMPENSATION RESTRICTIONS
Three prohibitions
1. No comp based
on loan terms
(§ 1026.36 d 1 )
• No compensation
may be paid to or
received by a LO
based on loan
term (or other
factor that serves
as a proxy for
loan term)
2. No “dual
compensation”
(§ 1026.36 d 2 )
3. No improper
“steering”
(§ 1026.36(e))
• No comp may be
paid to or
received by a LO
from both
consumer and
party other than
consumer for
same loan (with
certain
exceptions)
• LO may not
“steer” consumer
to a loan that
provides greater
comp to LO
unless loan is “in
the consumer’s
interest”
24
LO COMPENSATION RESTRICTIONS
Three prohibitions (Continued)
Restrictions apply to compensation paid to individual LOs,
producing managers, and LOOs
“Compensation”: Any financial or similar benefit, e.g.,
salaries, commissions, bonuses, awards of stock,
merchandise, services, trips, etc., but not:
• Payment to LO for bona fide and reasonable charges
passed on to independent 3rd party; e.g. credit reports
• Payment to LOO or LOO affiliate for bona fide and
reasonable charges for non-loan origination activities
• “Average charge pricing” (but “upcharge” is comp)
25
LO COMPENSATION RESTRICTIONS
No comp based on loan terms (§ 1026.36 d 1 )
• Prohibition applies to both consumer-pay and lender-pay
• Expansion: current rule - only lender pay
• Prohibition applies to compensation that is based on:
• A “term of a transaction”
• Terms of multiple transactions by individual LO, OR
• Terms of multiple transactions by multiple individual LOs
(e.g., comp based on mortgage-related profits)
• Term of a transaction” includes any right or obligation of the
parties, except under certain circumstances amount of credit
extended
26
LO COMPENSATION RESTRICTIONS
No comp based on loan terms (Continued)
Comp based on any of the following permitted:
• Amount of credit extended provided comp is determined as
fixed % (w/ or w/o dollar cap and/or floor)
• LO’s overall loan volume
• Long-term performance of LO’s loans;
• Hourly Rate of pay for actual hours worked
• Whether existing or new customer
• Fixed dollar amount for every loan
• LO pull-through rate
• Quality of LO’s files (accuracy and completeness)
27
LO COMPENSATION RESTRICTIONS
No comp based on loan terms (Continued)
Comp based on any of the following “terms” not permitted:
• Loan interest rate
• APR
• Type of collateral (e.g., condo, co-op, detached home,
manufactured housing)
• Existence of prepayment penalty
• Pooled comp where LOs originate loans with different
terms and earn different commissions
• “Proxy” for a loan term
28
LO COMPENSATION RESTRICTIONS
No comp based on loan terms (Continued)
“Proxy”: Factor, not a “term of a transaction”, which:
• Consistently varies with a “term of a transaction” over a
significant number of transactions, and
• LO has ability, directly or indirectly, to add, drop or change
when originating the loan.
Examples:
• Different comp for portfolio (all fixed-rate 5-year balloons) v.
non-portfolio (30-year loans at higher fixed-rates) = proxy
• Different comp for loans secured by property in VT v MA
(even if rates differ) ≠ proxy
29
LO COMPENSATION RESTRICTIONS
No comp based on loan terms (Continued)
Pricing concessions
• LO’s comp may be decreased to defray unforeseen
settlement cost or increase in disclosed settlement cost
• LO’s or LOO’s comp may not be decreased to meet a
competitor’s better offer, or avoid high cost loan trigger, or
for other reason
30
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans?
Designated tax-advantaged defined contribution plan:
• Most common type: 401(k) plan
• Definition: “A plan which provides for an individual
account for each participant and for benefits based solely
on the amount contributed to the participant’s account,”
adjusted for earnings, losses, expenses and allocation of
forfeitures
• Meets Internal Revenue Code requirements for taxqualified plans
• Both employee and employer can contribute to
employee’s account in the plan
31
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
Designated tax-advantaged defined benefit plan:
• Commonly referred to as a pension plan
• Definition: “Any plan which is not a defined contribution
plan”
• Meets Internal Revenue Code requirements for taxqualified plans
• Employer contributions are made to the plan to pay an
accrued benefit at retirement
• Example: Participant receives monthly benefit payable for
life and for the life of his or her spouse
32
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
Non tax-advantaged (nonqualified) deferred compensation
plan:
• Deferred compensation plan that does not meet Internal
Revenue Code requirements for tax-advantaged plans;
subject to Internal Revenue Code Section 409A
• Not subject to the same limitations on contributions as are
tax-advantaged plans
• Example: Excess plan (which provides contributions in
excess of the amounts permitted under a tax-advantaged
defined contribution or defined benefit plan)
33
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
Non-deferred profits-based compensation plan (“Bonus Plan”)
• Bonus plan based in whole or in part on mortgage-related
profits
• Compensation received now rather than at retirement
(unlike the tax-advantaged plans)
• Paid now, taxed now
• Distributions may be determined by fixed formula or at
discretion of person paying
34
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
Individual LO may receive, and person may pay,
compensation in the form of a:
• Contribution to a designated tax-advantaged defined
contribution plan, provided contribution not directly or
indirectly based on terms of the individual LO’s transactions
• Benefit under a designated tax-advantaged defined benefit
plan”
But NOT for contributions to or benefits under a nonqualified
deferred compensation plan
35
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
Individual LO may also receive, and person may pay,
compensation under a Bonus Plan, provided
• Comp not directly or indirectly based on terms of the LO’s
covered transactions AND
• Comp paid under plan may not exceed 10% of LO’s total
compensation (“10% Limit”), unless LO originated ≤ 10
loans during preceding 12 months
36
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
Example: Creditor pays individual LO:
•
•
•
•
$15,000 year-end bonus for 2012 (in Jan. 2013)
$80,000 in commissions (in 2013)
$10,000 contribution to LO’s 401-K (in 2013)
$10,000 year-end bonus for 2013 (in Jan. 2014)
Bonus for 2013 satisfies 10% Limit
• Assuming creditor counts 401-K contribution, total comp =
$100,000 ($15,000 bonus for 2012 does not count) →
maximum bonus for 2013 = $10,000 (10% of $100,000)
37
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
Bonus Plans (subject to 10% Limit) include:
• Quarterly or annual bonuses, trips, other prizes or
incentives
Do not include:
• Guaranteed quarterly bonus in specified amount if LO
exceeds performance benchmarks (e.g., $1M in
originations each month) – bonus earned w/o regard to
profits
• Retention bonus budgeted for in advance
38
LO COMPENSATION RESTRICTIONS
What about profit-sharing plans? (Continued)
• Comp paid under Bonus Plan NOT subject to 10% Limit if
plan determined with reference only to profits from nonmortgage-related business “as determined in accordance
with reasonable accounting principles”
• More cautious approach may simply be to apply 10% Limit.
• Safe harbor for individual LO who relies in good faith on
accounting or statement provided by person who made
profits-based compensation determination
39
LO COMPENSATION RESTRICTIONS
No dual compensation (§ 1026.36 d 2 )
Rule: If consumer pays LO directly, no LO may receive
additional compensation from any other person in connection
with the transaction
Exception: If consumer pays LOO directly, LOO may pay
commission to individual LO, BUT neither LOO nor individual
LO may receive additional comp from creditor
• Proposal to require “zero-zero” alternative dropped
40
LO COMPENSATION RESTRICTIONS
No dual compensation (Continued)
Consumer-paid compensation includes:
• Payments to LO out of loan proceeds
• Payments to LO by person other than creditor or affiliate
(e.g., non-creditor seller, builder, home improvement
contractor, real estate agent) pursuant to agreement with
consumer
41
LO COMPENSATION RESTRICTIONS
No dual compensation (Continued)
Consumer-paid compensation does not include:
• Payments by consumer to the creditor (direct or out of loan
proceeds)
• Funds from creditor that are applied to reduce consumer’s
settlement costs (including origination fees paid by creditor
to LO) and which are disclosed as “credits” on HUD-1
42
LO COMPENSATION RESTRICTIONS
No improper steering (§ 1026.36(e))
Rule: LO may not steer consumer to loan that pays LO more
unless loan is “in consumer’s interest”
Safe harbor: Loan is deemed “in consumer’s interest” if LO
presents consumer with three specified loan options
43
LO COMPENSATION RESTRICTIONS
No improper steering (Continued)
Specified loan options are:
• Loan with lowest interest rate
• Loan with lowest interest rate, but no neg. am., prepayment
fee, interest-only payments, balloon payment in first 7
years, demand feature or shared equity/shared
appreciation feature
• Loan with lowest dollar amount of discount points,
origination points or origination fees
• New qualification: If more than one such loan, must offer
loan with lowest interest rate
44
LO COMPENSATION RESTRICTIONS
Records Retention (§ 1026.25(c))
• Creditors: Must maintain for 3 years records “sufficient to
•
•
•
•
evidence” all payments to individual LOs and LOOs and
compensation agreement that governs each payment.
LOOs: Must maintain for 3 years:
• records “sufficient to evidence” (a) all comp received from
creditor, consumer, or other person, and (b) all comp paid
to any individual LO, and
• governing compensation agreement(s)
Individual LOs: Need not retain these records
What constitutes “sufficient to evidence”?
Oral agreements: Record retention still applies
45
Policies and Procedures (§ 1026.36(j))
Banks must establish and maintain written policies and
procedures to ensure compliance with:
•
•
•
•
Restrictions on payments to LOs – 36(d)
Prohibitions on steering – 36(e)
LO qualification requirements – 36(f)
LO disclosure requirements – 36(g)
TILA civil liability attaches for no or inadequate policies
46
Prohibition on Mandatory Arbitration
(§ 1026.36(h))
• Scope: Consumer credit secured by a dwelling (including
HELOCs)
• Effective date: June 1, 2013
• Arbitration:
• No mandatory arbitration clauses
• Consumer and creditor may agree – after dispute arises –
to use arbitration to resolve
• Waivers:
• No predispute waiver of federal claim
• Waiver of right to trial by jury OK
47
Prohibition on Financing Single-Premium
Credit Insurance (§ 1026.36(i))
• Scope: Consumer credit secured by a dwelling (including
HELOCs)
• Effective date: June 1, 2013
• Creditor may not finance, directly or indirectly, single
premium credit insurance
• “Credit insurance” = credit life, credit disability, credit
property
• Credit unemployment: May be financed under certain
conditions
• Does not apply to mortgage insurance.
48
Final Topic in this Four-Part Teleseminar Series
Escrow Rule; HOEPA/HighCost Mortgage Rule;
ECOA Appraisal Rule;
Appraisals for High-Risk
Mortgage Rule
March 7, 2013, Noon (EST)
To access an audio recording and presentation slides from our previous
teleseminars, please visit the series website:
http://www.reedsmith.com/Financial-Services-Regulatory-GroupMortgage-Regulation-Teleseminar-Series/
49
Leonard A. Bernstein
• Founder and chair of the firm's Financial Services Regulatory
Group
• Concentrates his practice in the representation of banks, thrifts,
mortgage bankers and finance companies in providing
consumer credit compliance advice on federal, Pennsylvania
and New Jersey laws and regulations
• The FSR Group addresses credit card, auto finance, deposit,
residential mortgage and other retail finance products
• Nationally known for expertise with federal Truth-in-Lending Act,
[email protected]
215 851 8143
Philadelphia, PA
609 520 6005
Princeton, NJ
Real Estate Settlement Procedures Act, and similar laws, and
works regularly with federal and state financial services
regulators
• Defends class actions and individual claims filed against
financial services providers
• Elected to the American College of Consumer Financial
Services Attorneys
50
Robert M. Jaworski
• Member of the Financial Industry Group and the Financial
Services Regulatory Group
• Focuses on consumer credit compliance and other regulatory
issues of concern to banks, thrifts, mortgage bankers, secondary
mortgage lenders, finance companies and industry-related trade
associations
• A frequent speaker on compliance issues before state and
[email protected]
609 520 6003
Princeton, NJ
national groups, Bob has authored numerous articles on the
subject
• Formerly Chief Editor of Pratt’s Mortgage Compliance Letter;
Co-Chair of the RESPA/Housing Finance Subcommittee of the
ABA Consumer Financial Services Committee; Chair, New
Jersey Bar Association Banking Law Section; and Member,
Governing Committee of the Conference on Consumer Finance
Law
• Developed and taught courses on federal and state laws and
regulations affecting mortgage bankers, brokers, and servicers
51
Travis P. Nelson
•
Member of the Financial Industry Group and the Financial Services
Regulatory Group
•
Former Enforcement Counsel with the Office of the Comptroller of
the Currency, U.S. Treasury Department, Washington, D.C.
•
Focuses his practice on financial services regulation, enforcement
defense, internal investigations, and litigation matters
•
Represents clients before federal law enforcement and regulatory
agencies, including the OCC, the CFPB, and HUD, as well as
various state authorities across the country
•
Adjunct faculty teaching Regulation of Financial Institutions at
Villanova University School of Law
•
Co-Leader, Reed Smith Financial Institutions Enforcement &
Investigations Task Force
•
Editor-in-Chief of the Reed Smith Financial Services blog –
www.financialregulatoryreport.com
•
National President, Office of the Comptroller of the Currency Alumni
Association
[email protected]
609 524 2038
Princeton, NJ
212 549 0236
New York, NY
52
Kelly L. Bley
• Associate in the Tax, Benefits & Wealth Planning Group, where
she concentrates her practice in the area of employee benefits
law
• Has extensive experience in all aspects of employee benefits
law, but her primary focus is on the legal issues associated with
tax-qualified plans
• Has represented domestic and international employers of all
sizes, both public and private, with regard to compliance with
the Internal Revenue Code and ERISA
[email protected]
412 288 7182
Pittsburgh, PA
• Has experience working with governmental plans and not-for-
profit plan sponsors
• Routinely represents employers before the Internal Revenue
Service and the Department of Labor
• Regularly counsels employers regarding the complex issues
associated with plan administration
• Former in-house counsel for a bank holding company where she
served as the head of the Compensation and Benefits Practice
Group for the legal department
53

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