Oct. 19: Can a mortgage loan originator earn more, or be penalized, from mistakes? If an LO changes jobs, are they still owed money?
Let’s see what is on the minds of co-workers from coast to coast (although one of these is from Alaska) and try to learn something along the way.
D.S. asks, “If an LO works for a banker and, let’s say, there is a $1,000 GFE disclosure error that results in the company having to CURE the error to close the deal, is the banker-company allowed to take the $1,000 away from the loan officer’s compensation come payday? Conversely, if the terms of a transaction results in an increase in profit (let’s say the LTV or FICO is improved at a level greater than original disclosures dictated) is the loan officer allowed to receive the extra compensation or does the company have to keep the extra profit (assuming the company doesn’t credit the borrower for the price improvement)…? And finally, is a banker-company allowed to give a loan officer a certain bps compensation for leads that are generated by the LO and a different bps compensation for leads generated by the company?”
For the answers this time around I turned to Brad Hargrave of Medlin & Hargrave (http://www.mhlawcorp.com/) for his opinion. “If the loan transaction results in an increase in the anticipated profit, the loan originator may not receive that profit, or any portion thereof. The profit belongs, without exception, to the company. Accordingly, the question posed in the second paragraph is an unequivocal, ‘no.’
“The first question posed is a little more difficult to answer. Under the existing LO Compensation Rule, the answer to the question was clearly ‘no’. The Final Rule, however, may have offered a life-line of sorts with respect to a narrow range of loan-level losses; meaning, that these losses perhaps may be passed from the company to the LO. Dave (Medlin) and I have some concerns, however, that this life-line could be overused, and thus we are advising caution.
“The general rule under 1026.36(d)(1) is that the amount of an originator’s compensation for a particular loan transaction is not subject to change (increase or decrease) based on whether different credit terms are negotiated. In the Final Rule, now set to take effect on January 1, there is a new comment in the Official Interpretation to Reg. Z which provides a limited exception to this general rule. Specifically, Comment 36(d)(1)-7 provides that 36(d)(1) does ‘not prohibit a loan originator from decreasing its compensation to defray the cost, in whole or part, of an unforeseen increase in an actual settlement cost over an estimated settlement cost disclosed to the consumer pursuant to section 5(c) of RESPA [that section of RESPA pertaining to the giving of the Good Faith Estimate] or an unforeseen actual settlement cost not disclosed to the consumer pursuant to section 5(c) of RESPA.’ Interestingly, there is no language in Reg. Z itself which correlates directly with this new Comment.
“The Comment then provides that the word ‘unforeseen’ means an increase that occurred even though ‘the estimate provided to the consumer is consistent with the best information reasonably available to the disclosing person at the time of the estimate.’ In my opinion, this could be a pretty ‘high bar’ when it comes to determining whether an increased cost, which led to a company loss, was truly unforeseen. Moreover, it is an open question in my mind what the CFPB means by ‘reasonably available’ in this context. Accordingly, caution is advised before applying any LO comp. deduction policy across the board that doesn’t address how this analysis will be made. (By the way, I italicized the word ‘its’ in the quoted language above to raise a point. The use of a gender-neutral term like ‘its’ suggests that this limited exception is meant to apply only to a loan originator organization, and not to an individual LO, in which case this exception might mean that a mortgage broker shop could reduce its compensation received on the loan, but that the compensation due the individual loan originator that originated the loan could not be reduced. But who knows—it might also just be an example of less than ideal drafting). But notwithstanding the ‘its’ side-issue, this new Comment does suggest that certain decreases to loan originator compensation will be permitted come January 1, provided they relate to charges that were under-disclosed, on the GFE, or charges that weren’t disclosed at all on the GFE, but should have been. The Official Interpretation provides two ‘real life’ scenarios that might permit a deduction. The first references an expired rate lock, but does so in connection with a title issue that delayed the closing which, in turn, caused the rate lock to expire, thus giving rise to a rate-lock extension fee. This example could suggest that any expired rate lock might justify a deduction in the LO’s compensation in order to recover the rate-lock extension fee, or it could mean that the loss must be tied to a particular settlement charge disclosed on the GFE that led directly, and in an unforeseen manner, to a blown rate lock. In other words, the rate lock loss might be a measure of the amount to be deducted from the LO’s compensation, but a loss due to a blown rate lock, in and of itself, may not be a proper subject for a deduction in every instance. This is still an open question, in my view. The second example involves a tolerance violation of $70 that must be cured, and holds that ‘provided the violation was unforeseen, the rule is not violated if the individual loan originator’s compensation decreases to pay for all or part of the amount of the tolerance violation.’ This second example seems like a safer rationale upon which to dock the LO’s compensation, rather than docking the LO for every rate-lock extension fee. And finally, and as I believe others have suggested in your newsletter, one must be very cautious about state employment law before deducting company losses from a ‘W-2’ employee’s paycheck. Company losses due to an employee’s actions, even if those actions are negligent, may violate numerous sections of a state’s Labor Code and decisional law. So, again—caution is advised, and employers may wish to run this issue past their employment law counsel before making any big changes to their compensation policies.”
Brad finished with, “The question in the third paragraph is also one that’s not as ‘cut and dried’ as we might like. That said, I think it is defensible to take the position that the source of the lead, i.e., whether it be LO-sourced, or company-provided, is not a ‘term’ of a transaction, nor a proxy for a term, as those words are defined in the Rule, including the Final Rule, and thus that an argument can be made that the creditor, or loan originator organization, may vary an LO’s commission rate between these two channels. But anyone choosing to take this position should consult with their counsel first to ensure that they understand the rationale under the Rule for the variance, and the potential risks associated therewith.” Thank you very much Brad!
Paul Giangrande with Americash writes, “With all the transition going on in the industry, especially with loan officers, here is an interesting question I received last week. ‘What is the law regarding paying loan officers on deals they sourced and originated but the LO leaves to another company prior to funding. Is the LO still legally due their commissions?’ I am not sure that there is ‘a law,’ and from what I understand it will depend on the agreement that the LO signed with the company. But this does lead to a related topic…”
His note continued, “I believe the correct answer to the above question will vary by State. In California, we believe the correct answer to be partial pay for partial work. Using a sliding scale, and conducted at the time of the exit interview, the status of each loan should be evaluated and the LO should be paid based on how far along the loan file is in the process. Definition of loan status could look like: In underwriting, appraisal ordered, in processing, underwriter approved, at docs, etc. Based upon where the loan is at in the overall process, the LO could be compensated accordingly, as a percentage of the total commission. Let’s not forget that most loans, in order to be sold on the secondary, have to have the name of an active and currently licensed Loan Officer on the 1003. Most business owners would most likely have to consider paying a commission to the new Loan Officer for taking over the file and signing the 1003.”
And some “advice” for the CFPB: “We all know that the CFPB, like any government regulator, is well intentioned in the main. The problem is always in execution. Government agencies, like armies, justify their methods by their mission, and the mission of the CFPB is to protect the consumer through education, risk management, creation of a complaint resolution process, rule-making, and enforcement. But like the gardener with size 14 shoes who walks out into the newly planted plot of land to water, as much harm as good seems to come from their efforts.”
Regarding buybacks and paying for the sins from long ago, RL sent, “I’ve got to tell you our plight with Lehman Brothers. Our mortgage company has been around for nearly 15 years. It sold hundreds and hundreds of loans to Aurora Loan Service (Lehman Bros). About a year ago what was left of Lehman Bros (from 33000 to around 250 employees) sued our company for two loans from 2006 that went bad. (That’s (2) 7-year old loans.) Aurora wanted around $400,000 for the loans. These loans were 100% LTV, Stated Income, Investment Properties where Aurora Loan Services created the loan programs and underwrote the loans. If you recall, many in the industry believe that ALS created these ‘liar loan’ programs so they could dump even more poorly constructed and shoddily underwritten loans on their unsuspecting customers when they violated their fiduciary relationship to protect those customers. Our attorney informed us that it would take $90K to defend the case just to get to court, then probably another $60K in court. So after 12 months defending, I finally ran out of money to continue defending. This week Lehman will obtain a $400,000 judgment against our great company and there’s really nothing more I can do. We will never have our day in court. I understand from my attorney that they’ve sued hundreds of other reputable firms across the country and would love to hear any feedback on that front.”
Thule Airbase Greenland (rated PG for language):
A US Air Force C-130 was scheduled to leave Thule Air Base, Greenland, at midnight during a winter month. During the pilot’s pre-flight check, he discovers that the latrine holding tank is still full from the last flight. So a message is sent to the base and an airman who was off duty is called out to take care of it.
The young man finally gets to the air base and makes his way to the aircraft only to find that the latrine pump-truck has been left outdoors and is frozen solid, so he must find another one in the hangar, which takes even more time.
He returns to the aircraft and is less than enthusiastic about what he has to do. Nevertheless, he goes about the pumping job deliberately and carefully (and slowly) so as not to risk criticism later.
As he’s leaving the plane, the pilot stops him and says, “Son, your attitude and performance has caused this flight to be late and I’m going to personally see to it that you are not just reprimanded but punished.”
Shivering in the cold, his task finished, he takes a deep breath, stands tall and says, “Sir, with all due respect, I’m not your son; I’m an Airman in the United States Air Force. I’ve been in Thule, Greenland, for 11 months without any leave, and reindeers’ a$ses are beginning to look pretty good to me. I have one stripe; it’s 2:30 in the morning, the temperature is 40 degrees below zero, and my job here is to pump s— out of an aircraft. Now, just exactly what form of punishment did you have in mind?”
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