Iowa Bankers Association April 15, 2014 Loan Originator Compensation 2014 IBA Human Resources Conference Presented by: Ronette Schlatter, CRCM Senior Compliance Coordinator 2014 IMA HR Conference

Dodd-Frank Act LO Rules Basic Provisions Regulates LO compensation Imposes LO qualification requirements Requires LOs to include NMLS ID# on certain loan documents April 15, 2014 2014 IBA HR Conference

Note: broader definition than SAFE Act! Who is an LO? A person who, in expectation of “compensation” performs any of the following: Take an application Arranges a credit transaction Assists a consumer in applying for credit Offers or negotiates credit terms Refers a consumer to a loan originator or creditor Represents to the public that he/she can or will perform any loan origination services May/may not be registered Safe Act MLO Note: broader definition than SAFE Act! April 15, 2014 2014 IBA HR Conference

Referrals to an LO A person making a referral to an LO is not considered a LO, provided the person: Responds to consumer’s inquiry for LO referral; or Only provides contact information for a LO; and Does not discuss particular credit terms; and Does not direct the consumer to a particular LO based on an assessment of consumer’s financial position April 15, 2014 2014 IBA HR Conference

LO Activities do NOT include… Coordinating closings or communicating with consumers about dead-lines or documents needed to close Underwriting activities, provided there is no communication with consumers re: credit terms Providing general information in response to consumer inquiries Loan-processing activities, e.g., assembling credit application packages & supporting docs Verifying application info April 15, 2014 2014 IBA HR Conference

Compensation includes… Salaries Commissions Annual or periodic bonuses Awards of merchandise, services, trips or similar prizes An award of stock, stock options, or equity interests April 15, 2014 2014 IBA HR Conference

LO Compensation Prohibitions LOs are prohibited from: Receiving compensation based on loan terms or proxy for loan terms Receiving compensation from the both the consumer and another person Steering a consumer to a particular loan because the LO will receive greater compensation April 15, 2014 2014 IBA HR Conference

Compensation based on Loan Terms “Loan terms” include: Interest rate APR Collateral type (condo, detached home, manufactured home, etc.) Existence of prepayment penalty Origination fees and points April 15, 2014 2014 IBA HR Conference

Loan Term “Proxies” Two-Step Analysis Proxy Examples Factor consistently varies with transaction term and LO has the ability to, directly or indirectly, add, drop or change factor during origination process Proxy Examples Portfolio vs. Investor loan Credit product (FHA, VA) DTI, LTV, Credit Score Profitability Geography (census tract) April 15, 2014 2014 IBA HR Conference

Permissible Compensation Bases Overall loan volume Fixed percent based on loan amount Long-term performance Existing customer vs. new customers Fixed amount determined in advance (including tiers) Loan quality (accuracy & completeness) Actual hours worked Percent of approved apps actually closed April 15, 2014 2014 IBA HR Conference

Profits-Based Compensation Generally constitutes “loan-term based” compensation and is prohibited, except for: Payments to designated tax-advantage, defined contribution or defined benefit plans as long as contribution is not directly/indirectly based on terms of an individual LO’s transactions 401k plans, defined benefit plans, annuities, etc. Payments via non-deferred profit-based compensation provided: Payment does not exceed 10% of “total compensation” OR LO originated 10 or fewer transactions in preceding 12 mos. April 15, 2014 2014 IBA HR Conference

Non-Deferred Profit-Based Compensation Any non-deferred compensation arrangement where an individual LO may be paid variable, additional compensation based in whole or in part on the mortgage-related business profits of the paying person Bonus pools Profits pools Bonus plans Profit-sharing plans Awards of merchandise, services, trips, or similar prizes April 15, 2014 2014 IBA HR Conference

Non-Deferred Profit-Based Compensation A non-deferred profits-based compensation plan does not include the following bonus plans because they are not based on mortgage-related profits: A retention bonus budgeted for in advance A performance bonus paid out of a bonus pool set aside at the beginning of the company’s annual accounting period as part of the company’s operating budget A plan that is determined with reference only to profits from a business other than mortgage-related business April 15, 2014 2014 IBA HR Conference

Non-Deferred Profit-Based Compensation 10% Total Compensation Limit Use same timeframe for calculating 10% limit as when compensation was earned (not when paid) “Total Compensation” includes: Wages/tips actually paid during the relevant time period (Box 5 on W-2) Cash value of awards of merchandise, trips, etc. 1099-Misc income paid May include contributions to tax-advantage plans April 15, 2014 2014 IBA HR Conference

Increasing/Decreasing Compensation Once compensation agreement is in place, compensation cannot be adjusted on selective basis (or per loan) E.g., creditor makes less on loan than expected LO does not follow creditor underwriting guidelines Match competitor’s offer or avoid HPML coverage Exception: May be decreased to cover unforeseen increase in actual costs on HUD vs. GFE estimates Compensation agreements may be adjusted prospectively April 15, 2014 2014 IBA HR Conference

Other Compensation Considerations Dual compensation is prohibited LO may not receive compensation from both consumer and another person Steering is prohibited A LO may not steer consumer to a loan for greater compensation Safe Harbor provision: Provide consumer w/ loan options: Loan w/ lowest interest rate Loan w/ lower interest rate & no risky features Loan w/ lowest orgination points & fees and discount points April 15, 2014 2014 IBA HR Conference

LO Qualification Standards Banks must insure their LOs: Are registered w/ NMLS; Obtain criminal background check through NMLS (or law enforcement agency or commercial service); Obtain credit report; and Review any information related to administrative, civil or criminal findings from NMLS background check BEFORE acting in capacity of a LO. April 15, 2014 2014 IBA HR Conference

LO Qualification Standards Banks must also ensure LO has: Within last 7 years not been convicted or plead no contest to a felony in a domestic or military court; or Ever been convicted of or plead no contest to a felony involving an act of fraud, dishonesty, breach of trust or money laundering Expunged convictions and pardons do not count April 15, 2014 2014 IBA HR Conference

LO Qualification Standards Based on credit report, background checks, etc., bank must determine LO has demonstrated financial responsibility and good general character to warrant LO will act honestly, fairly & efficiently Applicable to: LOs hired on or after 1/10/14 Existing staff that move into LO position after 1/10/14 Not Applicable to: LOs hired prior to 1/10/2014 if hired according to standard practices at the time of hire; AND, Bank has no information indicating LO likely does not continue to meet standards April 15, 2014 2014 IBA HR Conference

LO Qualification Standards Periodic training requirements Based on job duties As deemed necessary No required number of hours or topics Covering state and federal law Applicable to ALL LOs regardless of hire date Much flexibility granted in training delivery methods April 15, 2014 2014 IBA HR Conference

Recordkeeping Maintain records sufficient to evidence: All compensation received from creditors, consumers, and other individuals or entities if bank acts as LO All compensation bank pays to individual LOs The compensation agreements that govern those receipts or payments For three years after the date of payment or receipt of compensation. April 15, 2014 2014 IBA HR Conference

NMLS ID# Must disclose name and NMLSD ID# of On the following: LO organization (bank) and, Individual LO Exactly as shown on NMLSR Primary LO at time document is issued On the following: Credit application Note or loan contract Security instrument April 15, 2014 2014 IBA HR Conference

Additional Resources: CFPB Small Entity Guide: http://files Questions? April 15, 2014 2014 IBA HR Conference

Senior Compliance Coordinator Iowa Bankers Association Ronette Schlatter Senior Compliance Coordinator Iowa Bankers Association rschlatter@iowabankers.com April 15, 2014 2014 IBA HR Conference