Thursday, August 29, 2013

Prohibitions on Loan Originator Compensation

What is the salient prohibition pertaining to loan originator compensation? 

Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions - the only exception being the correlation of compensation to the amount of credit extended.

A loan originator's compensation can neither be increased nor decreased based on the loan terms or conditions.

Once the creditor offers to extend a loan with specified terms and conditions (i.e., rate and points), the amount of the originator's compensation for that transaction may not change, based on either an increase or a decrease in the loan cost or any other change in the loan terms. For instance, if a consumer requests a lower interest and the creditor accepts that rate, the creditor is not permitted to reduce the amount it pays to the loan originator based on that change in loan terms. Similarly, any reduction in origination points paid by the consumer must be a cost borne by the creditor.

The amount of credit extended is deemed not to be a transaction term or condition of the loan for purposes of the Regulation Z prohibition, provided that the compensation payments to loan originators are based on a fixed percentage of the amount of credit extended. Such compensation may be subject to a minimum or maximum dollar amount; however, the minimum or maximum amount may not vary with each credit transaction.

Creditors may use other compensation methods to provide adequate compensation for smaller loans, such as basing compensation on an hourly rate, or on the number of loans originated in a given time period.

[See 12 CFR 226, §§ 226.36(d)(1) and (d)(2)]

*Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, August 22, 2013

Affiliated Business Arrangements

What is an Affiliated Business Arrangement under RESPA and what is required when an originator and a settlement service provider have an affiliated business arrangement?  

An Affiliated Business Arrangement is defined in Section 8 of the Real Estate Settlement Procedures Act (RESPA) and Section 3500.14 of Regulation X, its implementing regulation, as an arrangement in which:

(1) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of the settlement service; and 

(2) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.

The term “associate” includes the following: spouse, parents, or child of the referrer; a corporation/business entity that controls the, or is under common control with, the referrer; an employer, officer, director, or partner of the referrer; and anyone who has an agreement the purpose of which is to enable a financial benefit to occur as a result of the referral of settlement services.

A referral to an affiliated business is permissible if all of the following requirements are satisfied:

(1) The consumer is provided at or prior to the time each referral is made with an Affiliated Business Arrangement Disclosure which describes the relationship (explaining the ownership and financial interest) between the provider and the loan originator, and giving an estimated charge or range of charges made by such service provider; 

(2)  The consumer is not required to use the referred service provider (with certain exceptions such as the lenders attorney, credit reporting agency and appraiser); and

(3) There is no consideration or item of value received from the arrangement other than reasonable payments for goods, facilities or services actually furnished and revenues derived from a party having an ownership interest in the provider.  

A sample Affiliated Business Arrangement Disclosure can be found in Appendix D of Regulation X. 

* Michael Barone
Director/Legal and Regulatory Compliance
Lenders Compliance Group

Thursday, August 15, 2013

Notice of Incompleteness

In issuing a "Notice of Incompleteness" under the Equal Credit Opportunity Act, what is a "reasonable time frame" to give the applicant for completion of the application?

We are a lender with a current policy of allowing an applicant an additional thirty (30) days beyond the initial thirty (30) day ECOA requirement to complete an "incomplete application". In accordance with policy, if the application is not completed within this thirty (30) day period, the loan needs to be moved to withdrawn by the applicant or is deemed a cold lead.

However, we are finding that this policy requires many files to be disposed of well before the applicant has either finished shopping lenders, or chosen a house to buy.

Is it possible for us to change the thirty (30) day period for the applicant to complete the application to sixty (60) days?

In issuing a "Notice of Incompleteness", the creditor must provide a "reasonable period of time" for the applicant to complete the application.  [12 CFR § 1002.9(c)]

Unfortunately, Regulation B does not prescribe what constitutes a "reasonable period of time" nor is there any guidance on this issue.  Under the ECOA, a completed application is one in which the "creditor has received all of the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested", and presumably would include information relating to the collateral. 

Thus, if the lender is finding that many applicants need additional time to choose a home to buy, an extension of the time period from 30 to 60 days seems reasonable and appears to be justified under the regulations. 

By contrast, since an applicant is under an obligation to exercise due diligence in obtaining the information, if the real force behind extending the time period for completion of the application is to allow the applicant time to finish shopping the loan, the lender would not be justified in extending the time period. [12 CFR §1002.2(f)]

*Joyce Pollison
Director/Legal and Regulatory Compliance 
Lenders Compliance Group