Tap your workforce for referrals / originations without running afoul of compliance?
In this Wednesday's SCA mortgage newsletter, we help you avoid compliance problems when shifting towards a more sales-oriented culture by encouraging, instead of discouraging, referrals from non-loan officer employees.
Here's what we're seeing and some compliance "straight talk" on how to overcome compliance challenges.
Industry Responds to Market by Looking In-House
Months ago volume dropped and we shifted to a purchase market. Many lenders struggled to find (or afford) loan officers who could be successful in this climate (good luck with a team of "refi. junkies"). The response? Lenders dusted off their pre-refinance - boom notes to brainstorm ways (other than mortgaging the branch to pay LO signing bonuses) to bring in loans, such as:
Seeking out third party originators--brokers/correspondents Investment in new channels--mobile/internet
Developing a call center model--supported by marketing efforts and technological purchases, and Getting more employees involved in origination activities, i.e. shifting to an "all hands on deck" sales origination culture. As explained to us- each employee has a valuable social network of friends, family...and it would be a waste not to encourage all employees (not just originators) to bring in business.
Reversal of Current Practice.
This last one--the idea of tapping your workforce for referrals / originations -- is the reverse of what occurs in many shops today. Many shops today actually discourage referrals/originations from non-originator employees out of concerns with licensing (NMLS) and compensation (LO Comp.) requirements. In other words- many lenders avoid in-house origination activity for fear of compliance concerns ... And that's what we want to discuss today.
Tips on Protecting Yourself
We applaud the outside-the-box thinking, but want to make sure our clients are protected if they attempt a similar culture shift. Here is a rough "checklist" of items to review before implementing this new plan.
The most important regulations to overcome will be:
The SAFE Act
The Federal LO Compensation Rule
SAFE Act Licensing/Registration
Carrying this culture change to the extreme would require more employees to be licensed or registered as required by the SAFE Act. The expense, hassle, and ongoing obligations associated with this process may stifle your interest in tapping non-LO employees as part-time sales staff...but it may not have to! Keep reading ...
Federal LO Comp = broader than SAFE Act
Some may not realize the SAFE Act and LO Comp. Rule are two entirely separate sets of rules. Be careful not to assume requirements and definitions overlap. For example- the LO Comp. Rule actually defines "originator" much more broadly than the SAFE Act-- therefore, many employees will have to meet LO Comp. requirements BUT NOT be licensed/registered under the SAFE Act. Indeed, the SAFE Act definition may be narrow enough to allow for a policy encouraging in-house referrals if only the LO Comp rule requirements are met (meaning no additional employees need to be registered/licensed under the SAFE Act).
Massachusetts defines "loan originator" for SAFE Act purposes as any person who:
Takes a residential mortgage loan application; OR
Offers or negotiates terms of a residential mortgage loan.
This is relatively narrow- an employee could refer loans in without triggering the SAFE Act's definition of "loan originator." However, under the LO Comp Rule, an LO is any person who:
takes an application,
arranges a credit transaction,
assists a consumer in applying for credit,
offers or negotiates credit terms,
makes an extension of credit,
refers a consumer to a loan originator or creditor, OR
advertises or communicates to the public that she can or will perform any loan origination services.
Much broader! So- the point of the story is that an employee might be able to refer in business without triggering SAFE Act requirements -- but that employee will still have to meet the requirements of the Federal LO Comp rule.
So what are the compliance pressure points with having a group of employees who are not licensed/registered under the SAFE Act referring in loans so as to fall within the LO Comp rule?
A. Compensation Plans (i.e. documentation of all benefits)
A major part of the LO Comp. rule is that employees must be paid according to a documented compensation plan--if an LO gets any financial or similar incentive, it must be documented.
B.Permissible Compensation
You'll have to apply the same rules to these employees as you currently do with LOs. Salary or hourly wages are perfectly fine. Be careful to structure bonuses to avoid LO Comp violations. In terms of providing an incentive to refer in loans- a simple flat fee per loan is a safe and effective option for this situation, e.g., "for every residential mortgage borrower that Employee refers in, Employee receives a flat fee of $250."
C.Qualifications and Training
Take care to document and apply the LO Comp. rule's requirements for LOs not licensed under the SAFE Act. There are qualifications standards that, for example, require lenders to determine that all new hires (and sometimes current employees) "[h]ave demonstrated financial responsibility, character, and general fitness such as to warrant a determination that the individual loan originator will operate honestly, fairly, and efficiently"- (unless the employee is licensed under the SAFE Act).
There are also training requirements - unlicensed LOs will need to receive periodic training that covers the Federal and State laws/regulations governing mortgage loan origination.
Our 2 cents? None of these are too onerous ... you can protect yourself with relative ease if interested in making this transition. This isn't an area where compliance should stifle production. We don't want to see it slow you down ... My boss, John Spillane, has said to me, "Ben, you're going to find yourself saying, 'I should do this,' 'I should do that,' ... but to avoid being a 'should- head,' sometimes you've to take the idea and actually do it."
Other news/thoughts/trivia:
Martha Coakley made good on her threats and sued the FHFA (and Fannie/Freddie) for violations of State law ... Mrs. Coakley doesn't want creditors to be able to prevent non- profit organizations from buying foreclosed properties and selling back to the original owners
"A new study found that a growing number of dog owners are giving their pets anti-anxiety medication as a way to calm them down and reduce unwanted stress in their lives. Then dogs said, 'Or, you could just sell the vacuum cleaner.'" -- Jimmy Fallon
The mortgage industry was blamed for the "Great Recession." Indeed- that's why we have the CFPB and all these new regulations. But there are those who say the government and its "dumb accounting rule" deserve 90% of the blame (you know who they/you are- "demand-side" economists). The accounting rule is the FASB's mark-to-market accounting requirements:
Criticism of mandatory mark-to-market accounting = it forces banks to take losses before they really need to ... forcing "losses" to run through the bank's balance sheet prematurely, reducing regulatory capital even where there is still strong cash flow ... ultimately forcing banks to write down loan losses that have yet to occur. Thus- even if the loan pays off, the damage is already done.
Analogy*
A fire is burning in your neighborhood. You live in a $500,000 home with a $250,000 mortgage. Your banker knocks on your door and says- "We need to mark this house to market right now. What do you think your house is worth right now with the fire burning close by?" Maybe you agree to $200,000, and to pay $300,000- this leaves you with a $200,000 asset with a $100,000 mortgage - EVEN IF the winds shift, and your house ultimately escapes without damage! Of course- if you can't come up with the $300,000--in this crazy example -- you would be declared bankrupt and lose the house. From the demand- side view ... this was the situation the banks were forced into by the mark-to-market accounting rule--they were not given time to see if they would avoid the fire.
*Acknowledgment - some of these ideas (including this specific analogy) were adopted from "It's Not as Bad as You Think" by Brain Wesbury and Amity Shlaes.
Some economists blame the mark-to-market accounting rule for both the Great Depression and Great Recession ... here is part of their argument:
In 1938, Franklin Roosevelt suspended the mark-to- marketing requirements after experts blamed them for contributing to the Great Depression
In 2007, the FASB reinstated mark-to-market accounting for the first time.
Between 1938 - 2007: The U.S. saw no economic disruptions similar to the Great Depression or Great Recession
On March 9, 2009, the stock market hit an all-time low ("The Day Stocks Bottomed Out"- Forbes)- it only got better from there. What else happened on March 9, 2009? That was the same day the FASB suspended the mark-to-market rule again, just as Franklin Roosevelt had done in 1938!
"It is the mark of an educated mind to be
able to entertain a thought without accepting it."
- Aristotle
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**These are our opinions. We're not authorized, or willing, to express those of others.**