LO Comp Plans, 3 Percent QM Cap & LLPAs

"America is the only country where a significant proportion of the population believes that professional wrestling is real but the moon landing was faked." There is nothing fake about what is going to happen in January in the mortgage industry. Attorney Brian Levy with Katten & Temple, LLP reminded me, "The CFPB posted a great page on its website with a chart of all the new mortgage regulations and links to the regulations themselves, published guides and to PowerPoint 'videos' with more information.  It's a great resource to have links to all of the regulations in one place that you might want to share with your readers." Thank you Brian.

I received many comments from around the nation on the 3% QM cap, LO comp strategies, and the Castle & Cook news, that are worth passing along.

In response to this previous comment:

"Rob, have you heard of a new position: 'Director of Marketing'? Supposedly companies, in avoiding the LO name, have created a position whereby unlicensed loan officers, often high volume originators, are moving from banks to the non-banking sector. They do not discuss interest rates, but perform all other duties." First, no, I have not heard of this position. And second, in my opinion, the long term prospects are slim of companies "trying to get around" some regulation or legal verbiage."

I received this note from Virginia: "In our market this is commonplace. Local mortgage banks and net branches hire a 'marketer' put them on a high paying salary which fluctuates month to month (conveniently as volume fluctuates) and they supposedly do not discuss rate. That scenario that I just described is me being kind, in reality they are paying unlicensed LO's (either too lazy to study and pass the tests or worse those that are unfit to get licensed based on prior history) to originate loans and are calling them marketers. It's not legal and I compete with these rogue loan officers day in and day out, worst of all they are accountable to no one because they jump from lender to lender looking for the best payout."

And, on the note about spreading out commissions over future deals: "I question your answer to the question concerning paying LOs 70% of their commission then spreading the remaining 30% over other loans. This walks like and smells like a point bank, which CFPB has clearly stated is not an acceptable practice."

Regarding yesterday's note:

"Rob, is there anything wrong with me paying my LOs 70% of what they're owed on a loan, and then spreading the remaining 30% out over their next few closings?" As always, I recommend speaking to an attorney that specializes in compensation. In my uneducated opinion, putting a portion of the LOs compensation into a 'bank' and then spreading it out over the next few fundings is indeed something I have heard of, and it is probably legit."

Craig P. said, "I am not an attorney that specializes in compensation, but I did run HR for a mortgage branch division of a federally chartered bank and had numerous discussions with our attorney and consultants about this and other related topics. Your suggestion to speak to an attorney is probably correct because the policy suggested above is most likely going to violate state and/or federal laws regarding frequency of pay and timeliness of commissions. Most loan officer compensation is triggered by the funding of the loan which, as we know takes place weeks after its origination. For an employer to take a % of the compensation that is duly earned by the employee upon the funding of the loan and withhold it for a later date, which could be days or weeks later, will probably unjustly penalize the employee.

"And, what is the purpose? Is it to encourage the loan officer to assist with any post-closing deficiencies in the file? Is it to protect the company in the event that the loan is deemed un-saleable? This would call into question whether or not the loan officer is being unfairly punished for the poor decision of the underwriter or an oversight by one of the other employees. The only reason to hold back 30% of the money would be so the company could keep that money in the event that the employee does not perform some other action that is desired. In the end, not only does this policy sound like it violates labor laws, but it is probably a heavy-handed approach that will have a negative impact on the motivation of the loan originators."

"I have been in the mortgage banking industry for twenty five years, and with so many interpretations of the rules, it is very difficult to navigate a company today when there are so many gray areas. I most recently was reading the article about the suit by the CFPB against Castle & Cooke. The suit alleges that Castle & Cooke paid quarterly bonuses to the loan officers based upon higher interest rates that were charged to the consumer. I was just wondering, how this is different from the companies (many that we see) pay loan officers higher commissions, in turn charge higher interest rates. So the loan officer can pick their pay plan based up the rates they distribute to their customers. Start off at 70 basis points your rates are, 90 basis points your rates are higher. In theory, is this not the same as paying a bonus to the loan officer for higher rates? Is this not a Fair Lending issue? One consumer gets higher rate based upon what the loan officer gets paid by the same company on the same day. Yet we see many large national companies utilizing this pay plan. What am I missing?"

John H. observed, "Sounds like a pretty blatant violation of the FRB's LO Comp rule based on the CFPB release... Although there were ambiguities with the rule, the FRB was pretty clear, LO's cannot be compensated based on the rate or profitability of a loan...bonuses are ok, but not if they are tied to the rate... The irony, of course, is that regulators, lawmakers, and even the President continue to misuse or abuse the term "mortgage broker"... Here is our President again speaking of mortgage brokers in a derogatory.....insinuating mortgage brokers were taking advantage of 'ordinary Americans'...appalling to single out a segment of the industry like this.... 'But without a director in place, the CFPB would have been severely hampered. And the CFPB wasn't able to give consumers the information they needed to make good, informed decisions. Folks in the financial system who were doing the right thing didn't have much certainty or clear rules of the road. And the CFPB didn't have all the tools it needed to protect consumers against mortgage brokers, or credit reporting agencies, or debt collectors who were taking advantage of ordinary Americans.'  At the 4:30 mark HERE. Hopefully folks at the CRL and the like are paying attention that C&C is a mortgage bank...not a broker..."

And, "With respect to the Castle & Cook, LO Comp matter, what regulatory exposure do the individual Loan Originators who accepted the non-compliant compensation have for damages, restitution and their future licensing status as an LO?  This is a huge question; the answer to which could change the entire playing field on which individual LO's weigh the competing merits of prospective employers' value propositions.  Once LO's realize that they personally face serious regulatory exposure for receiving non-compliant comp it will be a significant game changer. Not only does the FRB Final Rule on MLO Flat Compensation & Anti-Steering provide aggrieved borrowers who have been victimized by violators of the Act with the potential for treble damage awards, it also permits the borrowers to assert a Life-of-Loan defense against foreclosure actions that may be attempted by the lender at any future point in time. How will the investors which purchased the tainted loans react?  Will there be a massive put-back attempt against the originating lender for violations of their Reps & Warrants based on this defect?  How will the lender's warehouse line providers, Surety Bond and E&O issuers react?   Will HUD investigate as to whether there were violations of its 'Tiered Pricing' rule?"

And this from a broker in New Jersey: "What are discomforting are all the comments on the 3% Rule. CFPB spent millions on its design and the hearings. Here we are 5 months + after its finalization, and 5 months before its implementation and some of the smartest people in the industry cannot fully explain it. Let me paraphrase here, but as Einstein once said, 'if you cannot explain a concept to your grandmother, you do not fully understand the concept.' How hard would it be for CFPB to put out a simple punch list of what is and is not included?"

Mike K. with Sierra Pacific Mortgage writes, "Hi Rob- Tagging on to the topic of LLPAs that you raised last week and that Tammy Butler has recently and capably addressed for Optimal Blue, I offer a conversation I had with a CFPB attorney last month. First, let's restate the actual bullet from the Points-and-fees Calculation section of the Qualified Mortgage rule: 'Note that up-front fees you charge consumers to recover the costs of loan-level pricing adjustments imposed by secondary market purchasers of loans, including the GSEs, are not considered bona fide third-party charges and must be included in points and fees.'

"I'd received an e-mail from MBA President Dave Stevens stating emphatically that, 'LLPAs do not count towards the 3% cap if they are included in the rate, which is how most lenders pass them along. However, if they are charged separately at closing as part of the HUD-1, then they are included.' I followed up with a question to CFPB's Q&A e-mail, CFPB_reginquiries@cfpb.gov (they'll also take calls at 202-435-7700) to present 2 specific examples of LLPA impact on pricing and how they would be handled under the 3% cap. In the first example, the LLPAs were completely absorbed by premium pricing so there was no cost to borrower. In the second example, the LLPAs resulted in a net discount to the borrower of 1 point. In both examples, 200 bps in LLPAs were included in pricing to arrive at a net price to borrower. I got a call back a week later from a CFPB attorney. (They will not respond in writing and want their centralized database of written rules, regs and commentary to be the single source of documentation.) The CFPB attorney stated that since LLPA's in both examples were a 'component of pricing,' which they did not need to be considered within the 3% cap. The 1% discount produced by LLPAs in the second example did need to be considered within the 3%, but could be excluded as bona fide discount if the rate-to-APOR test was favorable. He clarified further that whether or not LLPA's are included in the 3% cap 'depends on the creditor's cost recovery system,' and that CFPB is seeking to ensure that creditors do not 'exclude LLPAs from treatment' by separating them from other aspects of pricing. The phrasing of this bullet as a 'Note' is to remind creditors that they cannot escape the impact of LLPA's by disclosing them as a separate item or items. I don't know of a single lender that charges LLPAs separately, but CFPB is clearly trying to preempt the practice."

"I came away with the clear understanding that LLPAs, if built into pricing, are not to be included within the 3% Points and fees cap under QM, but rather that the net price, if discount, must be appropriately considered for inclusion or exclusion from the cap. This was consistent with what I'd heard from Dave Stevens, and is consistent with Tammy Butler's document." Thanks Mike! (Sierra Pacific, by the way, is still developing its official policy on QM.)

Anyone interested in compliance, and who isn't, might want to tune in today to the free California Mortgage Bankers Association's Mortgage Quality and Compliance Committee (MQAC) call. At 11AM PST, the topic will be "Ability to Repay/QM" with the speakers being Ari Karen and Bart Shapiro from C3 Compliance Consultants. "To Join the Teleconference Portion, follow the instructions below: 1. Dial 1-800-351-6802, 2. When prompted by the operator, provide the passcode: 4378.

In the markets, there isn't much to talk about although rates crept higher yesterday; agency MBS did slightly better than Treasury rates. Most of it was attributed to June's New Home Sales jumping 8% from May, and are at their highest level since May 2008, and some strong European manufacturing data. (Neither helped stocks, which also sold off.) The 10-yr closed at a yield of 2.60. This morning we'll have Jobless Claims and Durable Goods; in the early going the 10-yr is up to 2.62% and MBS prices are basically unchanged.