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1 Reg. Z Rules for Loan Originator Compensation Mortgage Success April 13, 2011 James M. Milano
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Transcript of 1 Reg. Z Rules for Loan Originator Compensation Mortgage Success April 13, 2011 James M. Milano
1
Reg. Z Rules forLoan Originator Compensation
Mortgage Success
April 13, 2011
James M. [email protected]
Introduction
Topics:• How We Got Here
• Reg Z Rule – Back to Basics
• What to Do Right Now
How We Got Here
• Regulators Primary Concern:
o LOs Put Own Interests First
o No Liability
LO Comp Rule - General
• 9/24/10 – FRB Final Rule
• Regulation ZoRegulationoOfficial InterpretationoUnofficial comments
• Effective date: April 1, 2011• Revised Effective Date: Litigation Stay
Scope
What transactions covered? • Closed-end consumer credit
transactions secured by a dwelling• All liens, forward and reverse
What transactions not covered? • HELOCs and Timeshares• Business purpose loans
Scope (cont’d.)
• Whose compensation?
• “Loan originator” - person who for compensation or gain, or expectation, arranges, negotiates, or otherwise obtains an extension of consumer credit for another
Scope (cont’d.)
NOT subject to the new rule:• “Creditors” - close loan in own name with
own funds• Non-Producing Managers:
o Do not arrange, negotiate or obtain, or
o Compensation is not based on whether any particular loan is originated
LO Compensation
• “Compensation”oSalaries, wages, commissions, “thing
of value”
• ExcludedoBona fide third party charges
Rule 1 - Terms/ConditionsNo LO shall receive, and no person pay, an LO (directly or indirectly) compensation based on any loan terms/conditions.
• “Term/Condition”: o Interest rateo APRo LTV ratioo Prepayment penaltyo Proxies (e.g., credit score or DTI ratio)
Rule 1 No T/C Payment
•Permitted:
oFixed percentage of loan amount, where percentage same for all loans (floors and caps allowed)
oOverall loan volume, pull through (RESPA)
oLong-term performance of loans (Employment Law)
Rule 1 - Some Permitted Methods
•Existing vs. new customers
•Fixed dollar amount per loan
• Hourly/salary pay for actual hours worked
•Quality of files (e.g., accuracy and completeness)
•Legitimate business expenses, e.g., fixed overhead costs
Rule 2 – No Dual Compensation
• LO may either receive compensation directly from consumer, or directly or indirectly from other person, but not both
Rule 3 – No Steering
• Really a Broker Restriction Rule
• LOs prohibited from “steering” consumer to loan based on fact that LO will receive more compensation in that transaction than in other transactions LO offered or could have offered, unless in consumer’s interest
Rule 3 – No Steering (cont’d.)
3 general ways to satisfy:1.Creditor employees: LO employees of creditors
complying with prohibition on compensation based on loan terms/conditions deemed compliant with steering prohibitions
2.Least amount of compensation: LO reviews possible loan offers available from significant number of creditors with which LO regularly does business and directs consumer to transaction paying the least amount of creditor-paid compensation
3.Safe harbor: Satisfy safe harbor requirements (Details below)
Rule 3 – No Steering (cont’d.)
1. Present consumer with loan options from significant number of creditors with whom regularly do business, including:
• Loan with lowest interest rate; • Loan with lowest interest rate and no risky features, and • Loan with lowest total dollar amount for origination points or
fees and discount points
2. If more than 3 loan options presented for each type of transaction, LO must highlight the 3 options meeting above criteria; and
3. LO must believe consumer likely qualifies for the loan options presented
Rule 3 – No Steering (cont’d.)
•Don’t have to:
o Establish new creditor relationships
o Inform consumer about loans if not likely to qualify
oDirect consumer to transaction providing least compensation if in consumer’s interest
That’s It!
What to Do Right Now
• Stop reading, start writing
• The Real Rule:oRegulation Z 12 CFR 226.36(d) and
226.36(e) oOfficial Staff Commentary
Legal Disclaimer:Today’s webinar is for informational purposes only. The information contained herein and associated with this presentation are not intended to constitute, and is not a substitute for, legal or other advice.These materials provide an overview of some of the federal regulations that may affect mortgage loan originations. These materials are designed to alert the reader to the regulatory that may have a bearing upon the reader's business activities. The materials cover areas in which the proper interpretation of law and regulation can be highly dependent upon particular facts. Consideration of particular facts may reveal exceptions or differing interpretations these regulations. Accordingly, taking action simply upon the basis of information provided in these materials is not advisable. These materials are not a substitute for consultation with qualified legal counsel regarding the manner in which the laws and regulations referenced herein may be interpreted and apply to particular facts.You should consult appropriate counsel or other advisers, taking into account your relevant circumstances and issues.
Questions?
21
Reg Z Rules for
Loan Originator Compensation
202 628 2000