Jan. 18: What does the IRS think of LOs? The lender paid/borrower paid comp issue; builders not above the law

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

“Cleaning your house while your kids are still growing up is like shoveling the walk before it stops snowing.” I had to throw that in there, because I thought it was funny and un-mortgage related (like today’s R-rated joke), but now we have some pretty gritty meaty, humorless issues:

 

I received this note from KC: “May loan originators be classified as ‘statutory employees’ under the IRC? For the uninitiated, this classification means that the employee may deduct their expenses on a Schedule C rather than as an unreimbursed employee business expense (2106 form) and, more important, no longer within the scope of AMT. I’ve had zero success getting an answer from an accountant so I am hoping one of your readers or advisors would have some guidance.”

 

This is above my pay grade, and past my recollections from Cal’s MBA program in the 1980’s. David Medlin, however with Medlin & Hargrave, P.C. (www.mhlawcorp.com) kindly took his time to contribute, “Rob, Statutory employees are a special category of independent contractor created by the Internal Revenue Service (“IRS”) and by some state income taxing authorities, such as California’s Franchise Tax Board.  Generally, as alluded to by the question, there are two advantages realized in connection with statutory employees.  First, an employer is not required to withhold income taxes from pay paid to a statutory employee.  Second, a statutory employee is permitted to deduct on a Schedule C certain expenses which a common law employee may not deduct. 

 

In the case of the IRS, in order to be properly characterized as a statutory employee, the individual must: (1) be an independent contractor, under common law rules; (2) meet three conditions with respect to Social Security and Medicare taxes; and, (3) be employed in one of four specific job categories.  As I say, it is necessary that the employee comply with all three of these requirements.  I will start with the third requirement, as it is (in my opinion) dispositive in the context of mortgage loan originators, rendering an analysis under (1) and (2) irrelevant.  The four permitted job categories are:

1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.

2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.

4. A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.                

Many are of the opinion that mortgage loan originators do not come within any of these four job categories.  And, anyone whose job is not within one of these four categories may not be characterized as a statutory employee, whether or not he or she may be properly characterized as an independent contractor under common law and/or whether or not he or she can meet the three conditions with respect to Social Security and Medicare taxes.”

 

Tim writes, “Hey Rob, what are you hearing about discount points on Lender Paid Comp? My company is saying that you can’t have them but others seem to think you can. When the YSP shown doesn’t cover the LLPAs and the LPC then that would be considered a discount amount prior to the 10th but now it’s not a ‘bona fide’ discount amount so it can’t be done. What are your thoughts?”

 

And “I wanted to ask a question about your commentary’s topic ‘LO compensation continues to be a concern’. Some of our wholesale lenders are allowing ‘borrower paid’ compensation to be less than ‘lender paid’ compensation while some other lenders are saying that borrower paid compensation cannot be less than lender paid, which effectively eliminates the borrower paid option and the ability for the borrower to negotiate.  What do you know about the CFPB’s take on this? For example, is it ok to make 2% on a lender paid VA loan and then make 1.5% on a borrower paid conventional loan?”

 

The answer is that the entire industry is all over the map. The intent of the changes and of the regulations, of course, is to protect the consumer against steering and other unscrupulous practices. The CFPB is fully aware of this question, knows that the confusion in no way helps borrowers, and my guess (okay, maybe a little better than a guess) is that the CFPB will provide guidance at its soonest available time, after its staff has researched it. So stay tuned! And in the meantime: whistleblower@cfpb.gov. Or to submit a question: http://www.consumerfinance.gov/askcfpb/submit-question.

 

But here’s a note from New Penn on LO Comp: Lender Paid and Borrower Paid Comp MUST match.  More information and training can be found in the client library AR/QM section at www.gonewpenn.com.

 

And from Paramus, NJ, Hudson City Savings Bank let brokers know about the Hudson City Borrower Paid Comp Loans. “With the elimination of the .125% rate reduction for Borrower Paid Comp, there is no incentive for the borrower to opt to compensate the broker when the borrower can receive the same rate without paying a fee. The broker is required to offer the borrower the best option they have available. Even though Borrower Paid is still possible to register on OpenClose, please do not do so.  We will have to notify you that it is not possible.”

 

As best I can tell, this now cuts the broker comp to a max of 1.06%, and brokers are asking, “Why would you use a community bank as a source of funding? If I am doing inner city loans, I can’t live on 1.06%, and Hudson has always only paid a YSP of 1.06. In the old days brokers would charge the borrower .5 to 1 depending upon loan size, although I do not think there was a restriction. If brokers waived the YSP, Hudson discounted the rate .125. Those were their only options – so when the FRB rule came out it was either inside comp or outside comp. now it’s just inside and only the 1.06%. The CFPB needs to move their butts and issue a clear written interpretation between the usage of borrower paid/ lender paid and variable compensation to brokerage companies. I doubt that it was never CFPBs intention, per the industry meetings, to have borrower paid and lender paid as identical.”

 

Here’s another pressing issue for lenders: “I continue to hear each lender is treating the issue of LLPAs differently: seems that most are removing LLPAs from the rate sheet in order to avoid having to include them in the 3% QM calculation. The pricing adjustments, however, are still there…the LLPAs are just being ‘baked into’ the rate/price. That is, the rate sheet is generic, but if you use a pricing engine the price for a particular loan scenario is different based on the loan parameters and borrower information, i.e., credit score, LTV, loan amount, etc.  All the lender has done is remove the LLPAs from plain sight…they removed them from the rate sheet. So, the rule has resulted in less transparency by the lender with no actual effect. I hope this sounds as crazy to you as it does to me. I have learned some lenders are disclosing which LLPAs are being used, without disclosing the actual pricing adjustment, for what is referred to as “educational purposes.” But more than half of the lenders have simply removed them from the rate sheet altogether. Can the intention of the QM 3% rule really be less transparency?”

 

And while we’re at it, how about this question: “Rob, I am hearing of some builder indiscretions in terms of deals being offered. Are you hearing about those, and if so, are they kosher?” Good questions – after all, if the lending industry is under a microscope, why not builders… and real estate agents? For example, as I understand it one builder had recently changed its commission structures for the selling agents on new homes to be 2.5% on the first $100K of the home price and 1.5% on the remaining amount of the home. But then a “door prize” is added in: a prize ‘drawing’ that they pay the realtors $1,000 in cash if someone’s name is drawn – and we know how that works, right? Some builders also offer ‘coupons’ they are sending directly to the repeat agents that sell their homes frequently which allow them to receive an extra $1,000 in commission earned on the next transaction. And while they’re at it, I have heard of not allowing seller paid closing costs to any customers who do not agree to use the builder’s mortgage company. Hey, don’t lose this e-mail address: whistleblower@cfpb.gov.

 

Last Saturday I had the privilege of posting some comments from various organizations from around the nation about why any individual or company should join. I received a few more.

 

Nick Parisi (president of the Illinois Mortgage Bankers Associationhttp://www.imba.org/i4a/pages/index.cfm?pageid=1) writes, “I concur with my fellow state association presidents. Our Association does not only offer informative networking and educational events but serve as advocates to address the issues that affect our members (and non-members). We have intervened on behalf of our industry members to address legislative issues that we feel may be harmful to our members. We have indeed been effective in having our voices heard as influential agents of change. We dedicate a significant portion of our lives on the job. Having the opportunities to network and exchange ideas with our fellow industry members enhances our work experiences and has resulted, in my case as well as many others, in lifetime friendships.”

 

And Jamie Letts, Administrative Director of the Colorado Mortgage Lenders Association (http://cmla.com/) contributes, When I’m asked, ‘Why should I join the CMLA?’ my immediate response, is, ‘Why wouldn’t you join?’ Because a strong, solid mortgage lending industry is crucial to the strength of America’s economy, any organization/individual that has a vested interest in the success of this industry should be a member.  Belonging to an industry association provides immeasurable benefits, but the Colorado Mortgage Lenders Association specifically focuses on three main areas – what we call the ERN principal- Education, Representation and Networking.  Because of the recent changes as a result of the DFA, education is more crucial than ever.  In regards to representation, our full-time lobbyist and Legislative and Regulatory Affairs Committee work tirelessly on behalf of the industry to ensure companies are not bogged down by rules and regulations that will negatively impact their day to day operations.  Additionally, we provide numerous networking opportunities for members to advance and grow their businesses and develop strong working and personal relationships in a protected, non-recruiting environment.”

 

Jamie’s note continued, “We also give members access to multiple programs encouraging them to be more actively involved in CMLA.  Some of these programs include our Mortgage Forums, which provides opportunities for industry leaders to join together as peers to share ideas and opinions and to work together to understand, discuss and solve issues confronting the mortgage lending industry.  We have a nationally recognized Mortgage Leadership Program, which is dedicated to growing influential leaders through networking, industry knowledge and growth, community service and CMLA involvement. Members are also offered the opportunity to earn the Certified Mortgage Lenders designation (CML) which recognizes them to their clients and peers as leaders in the industry. Everything CMLA offers and provides is based on a solid Code of Ethics cannon all new and renewing members are required to sign.  Because CMLA benefits the entire industry- members and non-members alike – again I ask, why wouldn’t you join the CMLA?”

 

 

(Rated R: racy situation)

No matter what this husband did in bed; his wife never achieved, uh, “finished”.

Since a Jewish wife is entitled to sexual pleasure, they decide to consult their Rabbi.

The Rabbi listens to their story, strokes his beard, and makes the following suggestion:

“Hire a strapping young man. While the two of you are making love, have the young man wave a towel over you. That will help your wife fantasize and should help her ‘finish’.”

So they go home and follow the Rabbi’s advice.

They hire a handsome young man and he waves a towel over them as they make love.

It does not help and the wife is still unsatisfied.

Perplexed, they go back to the Rabbi.

“Okay,” he says to the husband, “Try it reversed. Have the young man make love to your wife and you wave the towel over them.”

Once again, they follow the Rabbi’s advice.

They go home and hire the same strapping young man.

The young man gets into bed with the wife and the husband waves the towel.

The young man gets to work with great enthusiasm and soon the woman has an enormous, room shaking, ear-splitting screaming ‘finish’.

The husband smiles, looks at the young man and says to him triumphantly, “See that, you schmuck? THAT’S how you wave a towel!”

Rob

(Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)