8 Issues We're Still Seeing With the Federal LO Comp. Rule
We just wanted to share some thoughts on some common issues we're still seeing that relate to the 2014 changes to the Federal LO Comp. Rule.
The Federal LO Comp. Rule was first issued in 2010. It was modified again this year. It covers loan officer compensation, training, screening, and steering. Here are 8 issues that we're still seeing that relate to this rule ... we're sharing so that you can fix them before the regulators come in. As we see it, an unlawful compensation plan is dangerous because it puts a question mark on every loan originated while it is still in place. Other issues under this rule are relatively easy to fix and will also limit your risk.
1.Purchase vs. Refinance Distinction
Long story short, the safest decision for lenders now is to NOT
compensate loan officers differently based on whether the loan is a
refinance or a purchase. This came as a surprise to compliance- minded people who had predicted otherwise until the CFPB's recent public statements.
We're still seeing a lot of companies with compensation plans that use this distinction. And fair enough- you don't just want your LOs churning your own portfolio. Nonetheless, there are safer ways to accomplish much the same thing. For example, you could structure the commission plan so that LOs are paid at a higher rate for "new" business (this is perfectly safe under the new rules).
2.Home Equity vs. Mortgage Distinctions
Same story here. For now, the safest decision is NOT to pay LOs differently for mortgages vs. home equity loans (this is not related to HELOCs at all--here we're discussing closed-end loans). This is not how most people predicted the CFPB to interpret this rule (but there are no enforcement actions on this), but they have said publicly that compensating differently based on home equity vs. mortgage can violate the LO Comp. Rule, so stay away from this!
3.Docking LO Pay for Mistakes
We still see clients who reduce their loan officers' pay for mistakes made prior to closing (or for other reasons)--these fees offset costs the borrower would otherwise be charged. A loan officer's compensation can only be docked to cover borrower expenses where the change is due to "unforeseen" circumstances (it's more detailed than that). This is being interpreted so narrowly by the CFPB that most clients are adopting the safest approach and have simply decided not to do this at all. This makes sense especially because there are less risky alternatives. For example, you could set up an annual bonus that is based on quality of the originator's loan files.
4.Lack of a Written Compensation Plan
A written compensation plan with your loan officers has become industry standard. The LO Comp Rule requires written evidence of the compensation agreement anyway, so there's little reason to try and rely on paystubs and other less formal methods of documentation. Just set the agreement out in writing and reference all compensation that you intended to pay the originator. We're still seeing organizations without written compensation plans, and simply think that opens them up to risk unnecessarily.
5.Employees Accidentally Considered "Loan Originators"
As we've discussed in other newsletters, the LO Comp Rule defines "loan originator" more broadly than the SAFE Act and employees can become "loan originators" (for purposes of Federal LO Comp. Rule) unexpectedly. A teller explaining mortgages rates to a customer, or a processor filling in for an LO and negotiating with a borrower might become a loan originator. If a bank president has lunch with a friend who he convinces to get a mortgage with the bank- "We have great rates, and with your credit score, you'll definitely qualify!" If those people become "loan originators," they'll have to meet all the standards: Compensation (generally no bonuses based on profits), training, screening (no felony convictions in 7 years), etc.
6.Policies & Procedures Not Adapted
Written policies and procedures on compliance with the LO Comp Rule are mandatory. This includes how you compensate your originators and addresses anti-steering rule. For depository institutions, it also includes new training and screening requirements that essentially require depositories to perform NMLS-like standards in-house (so depositories are still not required to participate in NMLS).
7.Anti-Steering Disclosures Completed Incorrectly
We see this most often with brokers- especially brokers that still accept different levels of compensation from different investors. Here, they are at risk of violating the anti-steering rule (also part of the LO Comp. Rule), but can be protected by a safe harbor if they complete an anti-steering disclosure by disclosing alternative loan options with better terms (APR, points, etc.). The debate goes something like this:
Loan Officer: "I 'steered' (note-to-self: avoid this word when dealing with regulators) the borrower into that particular loan because it was likely to close fastest, and speed-to-close was more important than price to the borrower!"
Regulator (or borrower in future): "Really? So the loan that you talked the borrower into just happened to be the loan to the investor where you earn the highest commission? Unless you can prove otherwise, I think you violated the anti-steering rule by not putting the borrower into a better loan where you would have made less money."
The anti-steering rule provides for a safe harbor (protection from the above mess) if the LO discloses alternative loan options that are likely available to the borrower. That way, the borrower is on notice that there are potentially better loans out there. After all, it might be true that an LO is going to earn a higher commission on a loan to an investor that nonetheless happens to be in the borrower's best interests for less obvious reasons--perhaps the rate isn't as competitive, but there is a much higher quality underwriting, higher level of customer service, or will close more quickly.
So we said all that just to say this: when you're filling out the anti- steering disclosure to get the safe harbor, you'll need to make sure you're looking at alternative loan options from a substantial number of other investors ("substantial" means at least 3). A problem we're still seeing is that the broker sends the processor one rate sheet to analyze for better alternatives, and the anti-steering disclosure is filled out with options from that sole investor. Note: If you earn the same commission no matter which investor takes the loan, you're safe from anti-steering and don't need the safe harbor anyway.
8.Brokers Not Paying Employees on Borrower-Paid Deals
Prior to 2014, brokers couldn't pay their loan officer employees on borrower-paid deals. That changed in 2014. Brokers are now permitted to do so.
Other news/thoughts/trivia:
A move by personal credit score provider FICO to leave out or discount medical debt from its scores will boost the credit ratings of many borrowers, while helping lenders to better assess risk." That's according to an article discussing the expected changes to the FICO.
Click here to sign up for the free webinar on August 26 for the upcoming RESPA/TILA disclosures from the CFPB and Federal Reserve.
Afraid of flying? They say that you're statistically more likely to be kicked to death by a donkey than you are to die in an airplane crash.
Looking for a motivational example of teamwork for your company? Here's a story from down undah (Australia) where a group of ordinary people lifted up a train to save a person pinned underneath--he wasn't hurt!
It's better to know about a mistake earlier, than to have an employee cover up the mistake until it becomes a much bigger issue. It may be tough to swallow the urge to inflict punishment, but you could deal with this issue by avoiding a "gotcha" mentality and implementing a culture that forgives mistakes. One of our consultants worked at a large Boston bank that had a unique approach. At management meetings, mistakes were forgiven if they were identified out loud to the entire group. Keep the mistake to yourself and try to fix it? That would blow up in your face and you'd face strict punishment. Suffer the embarrassment of disclosing it early in front of all of your peers? That's a get-out-of-jail free card-- you'd be safe from punishment. (Maybe the embarrassment was enough punishment in and of itself).
"Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are."
- John Wooden
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**