Are new CFPB interpretations of LO Comp. rule surprising?
The CFPB has recently taken a surprising stance on how to apply the federal loan originator compensation rule regarding the "proxy" analysis in two specific situations.
We'll go through a quick overview before getting into two surprising examples. But first- what's the danger in a mistake in your loan officer compensation plan? If you have 30 loan officers, and they originate 1,000 loans before the compensation package is brought into compliance ... could someone argue there existed an incentive to illegally steer borrowers in all 1,000 loans? Is each loan called into question? What are your thoughts?
Quick Overview
According to the LO Comp rule, lenders cannot vary compensation for loan officers on the basis of:
(1)Any "term of a transaction"
e.g., interest rate, APR, type of collateral, (but not overall dollar volume, which is absolutely okay)
(2)Any "proxy" for a term of a transaction
This is factor that is not itself a "term," but is nonetheless something the LO has control over that consistently varies with a term. e.g. portfolio v. saleable product ... likely to only hold a certain type of product in portfolio, if you only originate ARMs to portfolio, then compensation paid for portfolio originations will consistently vary with a term of the transaction- interest rate
So far so good. In structuring your comp. plan, you have to ask first- does comp. vary with any term of a transaction? "No, I'm not paying my originators at a higher rate for ARMs than I am fixed rate." Okay. Next, you have to ask- am I varying comp. based on a proxy? That also is a two-part test:
"Proxy" Analysis
Question One:
Does the factor "consistently vary" with a term of the transaction (although is not a term itself) for a "significant number" of transactions?
Question Two:
Does the LO have any ability to influence this factor?
**You need both!**
The factor is not considered an improper proxy unless the answer to both questions is, Yes.
Two Surprising Examples
Now we'll look at two surprising examples of how the CFPB is applying this proxy analysis.
#1) Purchase vs. Refinance
Here we're talking about paying an LO more or less depending on whether the transaction is a purchase or refinance. Whether a loan is a purchase or refinance is not a "term" itself. Therefore- we turn to the "proxy" analysis.
Let's look at the two proxy questions!
Question One--is the distinction between purchase and refinance a factor that will consistently vary with a term of a transaction? Well, maybe. Closing costs will vary (that is a "term"). Do some lenders offer different interest rates? Will refinances more often be fixed rates?
Question Two--This is where we would expect the analysis to end. Obviously, the loan officer can't control whether a borrower purchases or refinances! Right? ... Right?! Unfortunately, the CFPB might disagree. The CFPB has now publicly expressed the following concern - borrowers intending to refinance an existing property may be convinced to purchase a new property (or the other way around) by an influential loan officer. This would therefore mean the purchase/refinance distinction fails the proxy analysis and this cannot be used to compensate the LO!
#2) Location of the Property
Here we're talking about paying an LO more or less depending on where the property is located.
Question One--let's assume that a lender generally charges more for property secured in Vermont than in Massachusetts. This could be for a variety of reasons ... VT could be outside its assessment area, the lender could be less comfortable lending in VT.
Question Two--Again, question two is where we think the proxy analysis obviously ends ... how can an LO influence where the home securing the loan is? The LO didn't build it! Well- the written regulations seem to agree with you. Great! Here are excerpts from the official preamble and commentary (from CFPB):
Location within a broad geographic unit is unlikely to be deemed a proxy for a term of a transaction. .... Loan originators have no ability to change the location of property that a consumer purchases. Thus, absent very unusual circumstances, the second prong and thus the larger test would not be satisfied. Thus, the geographic location in this example would not be considered a proxy for a term of a transaction.
Assume a loan originator organization pays loan originators higher commissions for transactions secured by property in State A than in State B. For this loan originator organization, over a significant number of transactions, transactions in State B have substantially lower interest rates than transactions in State A. The loan originator, however, does not have any ability to influence whether the transaction is secured by property located in State A or State B. Under these circumstances, the factor that affects compensation (the location of the property) is not a proxy for a term of a transaction.
Here again- unfortunately- we can't move too fast. Despite the above quotes, the CFPB has recently publicly expressed the view that LOs may be able to convince the borrower to buy in one state versus another state ... in such a case, an LO comp. plan paying more depending on location would be illegal!
Are these examples surprising? Or are they simply evidence of the CFPB refusing to provide sweeping, bright-line guidance, and instead forcing compliance decisions to be made on a fact-specific basis? True- bright-line rules can be abused ... but bright-line rules also make compliance a lot less costly. Perhaps the best option is to self-impose bright-line standards, e.g. not paying LOs differently based on location of property? Practically speaking --how can lenders do any differently? It's not like you have any control on a case-by-case basis whether an LO is going to talk to a borrower about where to buy a home, or whether to purchase a new home versus refinance ... those are simply conversations that will arise. We'll stick by our suggestion in November ... "[A] simpler compensation package [may be] advantageous both in light of the new regulations and common business sense."
In other news:
When a HELOC resets (or is modified) into a closed-end loan, does this become a covered transaction under the ATR/QM rule? No. It was originated as an open-end loan (exempt from ATR/QM), therefore it remains exempt even after it converts because it does not amount to a new obligation.
Silent but deadly ... interesting take on the CFPB suggesting they've levied a lot of fines that we haven't heard about because they've been handled by private settlement.
Here's a timely joke sent in by a reader from the ABA-- "Kim Kardashian and Kanye West are among Barbara Walters' 10 most fascinating people of 2013. In a related story, Barbara has been named one of the 10 most easily fascinated people of 2013." -- Jay Leno
You know what I like about working here at SCA? There's a performance-based culture here. Is the guy working late, sending e-mails out at all hours, really your hardest worker? Or is he just not taking care of business during regular business hours? There's something to be said for an employee who gets his stuff done during the work day and spends evenings and weekends recharging his batteries (not to mention spending time with family). SCA recognizes work done more than hours logged. However, there are those rare individuals- motivated and focused enough to work 80 hours/week, find time for family, and still bring passion and positive energy to the workplace. If you do know such a person, they're certainly entitled to an incredible amount of respect and appreciation. But again, such a person is impressive for working so hard for so long ... not just for working so long.
"The best place to work is a place where you can be your best."
- Rosalene Glickman, Ph.D.
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