Permissible Loan Originator Compensation

QUESTION

Our loan officer compensation plan has been approved by the Board of Directors. Over time, it seems that the factors used for adjusting compensation have changed. We want a core set of compensation factors that must always be applied. Is there a minimum set of compensation factors?

ANSWER

There is a set of factors, mostly in the form of illustrative examples; nevertheless, if these are to be used as a sort of core set of compensation methods, they can be relied on – unless otherwise prohibited by law. This list is not to be viewed as exhaustive.

Many compensation plans have at least the following nine compensation methods.

1. The loan originator’s overall loan volume delivered to the creditor. This can be based on the total dollar amount of credit extended or the total number of originated loans.
2. The long term performance of the originator’s loans.
3. An hourly rate of pay to compensate the originator for the actual number of hours worked.
4. Whether the consumer is an existing customer of the creditor or a new customer.
5. A payment that is fixed in advance for every loan the originator arranges for the creditor. For illustration purposes, an example would be $600 for every originated loan or $1,000 for the first 1,000 arranged loans and $500 for each additional arranged loan.
6. The percentage of applications submitted by the loan originator to the creditor that result in consummated transactions.
7. The quality of the loan originator’s loan files submitted to the creditor. An example would be the accuracy and completeness of the loan documentation.
8. A legitimate business expense, such as fixed overhead cost.
9. Compensation that complies with the exception for compensation based on a fixed percentage of the transaction amount, which can be subject to a minimum and maximum dollar amount. 

[75 FR 58,509, 58,536, codified in 12 CFR Supplement I to Part 226-Official Staff Commentary § 226.36(d)(1)-3]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

CFPB: Focus on Deceptive Advertising

QUESTION

I have heard of recent CFPB’s enforcement actions involving deceptive advertising claims. Can you provide me with more detail?

ANSWER

Recently, the CFPB (or “Bureau”) filed a lawsuit against one mortgage lender for false and misleading reverse mortgage advertisements. [United States District Court for the District of Maryland, Baltimore Division on February 12, 2015 (CFPB v. All Financial Services, Inc.)]

Two other mortgage lenders have consented to the issuance of a Consent Order which, among other things, obligates the lenders to file compliance plans with the CFPB, pay significant civil monetary penalties and report certain of their actions to the CFPB. [Administrative Proceeding File No. 2015-CFPB-0005 dated February 10, 2015 (In the Matter of American Preferred Lending Inc.); Administrative Proceeding File No. 2015-CFPB-0006 dated February 11, 2015 (In the Matter of Flagship Financial Group, LLC)]

In the lawsuit against All Financial Services, the Bureau alleged, among other things, that the lender misrepresented the source of its advertisement by including an eagle resembling the Great Seal of the United States with the headers, “Government Lending Division” and “Housing and Recovery Act of 2008 Eligibility Notice.” Further, the Bureau claimed that the lender advertising a reverse mortgage payment as having “no monthly payments” is misleading, since a borrower is still responsible for taxes and insurance. 

In one of the Consent Orders (supra, Flagship Financial), the Bureau took issue with mailings that included the header, “Pursuant to the Federal Housing Administration (FHA) HUD No. 12-045” and that the mailer directed consumers to contact their “assigned FHA loan specialist.” In the other Consent Order (supra, American Preferred Lending), the CFPB objected to mailings that included the FHA-approved lending institution’s logo, along with reference to a FHA website, while obscuring the source of the advertisement. The CFPB deemed this to be misleading to a consumer as it provides the impression that the lender is in some way affiliated with the government.

Based on these recent enforcement actions, the Bureau is focusing attention on preventing not only false but also misleading advertisements. Residential mortgage loan originators must be particularly cautious in how they market their products and services. The lawsuit and Consent Orders referred to above make it clear that misleading claims of federal authority or affiliation will not be tolerated.

Michael Barone

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Total Interest Percentage or "TIP"

QUESTION

Recently, I learned that the new TILA/RESPA disclosure is going to have a disclosure term, called TIP. We already have the APR, why now do we need yet another interest rate disclosure? What is this TIP and how is it calculated?

ANSWER

Section 1419 of the Dodd-Frank Act amended TILA to add the new section 128(a)(19), which requires that, in the case of a residential mortgage loan, the creditor must disclose the total amount of interest that the consumer will pay over the life of the loan as a percentage of the principal of the loan. [15 USC 1638(a)(19)] TILA section 128(a)(19) also requires that the amount be computed based on the assumption that the consumer makes each monthly payment in full and on time, and does not make any overpayments.

This calculation is the “Total Interest Payment,” or “TIP.” Briefly put, TIP is the total amount of interest that a consumer will pay over the loan term as a percentage of the loan amount.

The Bureau commissioned a report on the concept, known as the Kleimann Testing Report. This report concluded that participants used the TIP as a measure of what they would pay in interest in the Closing Disclosure. Further, it showed that participants expressed surprise at how much they would pay in interest on their mortgage loans and seemed to appreciate the disclosure for this reason.

The TIP concept is controversial. There were numerous comments about it before it became the law of the land. Among other things, some loan originators believe that TIP information is completely unnecessary and will prove very confusing for consumers. They assert that the interest rate and the annual percentage rate (APR) are already required to be disclosed on these forms. Adding a third rate, the TIP, would be very confusing and consumers will simply not understand that this rate is unrelated to the interest rate and APR, which is essentially the costs over the long term expressed as a rate. [§ 1026.37(l)(3) and comments 37(l)(3)-1 as proposed]

There are mortgage industry members who think that the TIP will only serve to alarm consumers when they see how high the TIP is, especially if consumers believe there is some connection to the other rates listed. In other words, these consumers would simply not understand the reason this rate is high, how it is calculated, or whether they may choose the type of loan to apply for based on the fact that the TIP may be lower - even though another type of loan may be more appropriate. 

Importantly, residential mortgage lenders and originators themselves are unsure about how the TIP rate is calculated if (1) the interest rate can change over the life of the loan and (2) the future rates are not known at the time of application. Nevertheless, the Bureau held that the total interest percentage is a useful tool for consumers.

Calculating the TIP requires a set of algorithms that utilize the assumptions set forth in the requirement to disclose the total interest percentage on the Loan Estimate, found in § 1026.37(l)(3) and its commentary.

The Bureau also provides guidance to creditors on calculating the TIP for adjustable rate mortgage loans. In particular, when creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosure should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. [§ 1026.37(a)(10)(i)(A), § 1026.37(l)(3); comment 17(c)(1)-10] For Step Rate loan products, the creditor computes the TIP in accordance with § 1026.17(c)(1) and its associated commentary. [§ 1026.37(a)(10)(i)(B), § 1026.37(l)(3)]

For negative amortization loans, the creditor computes the TIP using the scheduled payment, even if it is a negatively amortizing payment amount, until the consumer must begin making fully amortizing payments under the terms of the legal obligation. [§ 1026.37(a)(10)(ii)(A), § 1026.37(l)(3)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

CAN-Spam Preemption

QUESTION

Our bank’s compliance officer has the view that CAN-SPAM requirements preempt all state laws that are similar to it. Are there any instances where state law trumps CAN-SPAM?

ANSWER

CAN-SPAM preempts any statute, regulation, or rule of a state, or even a political subdivision of a state, that expressly regulates the use of electronic mail to send commercial messages – except to the extent that any such statute, regulation, or rule prohibits falsity or deception in any portion of a commercial electronic mail message or information attached thereto. [15 USC § 7707(b)(1)]

Thus, CAN-SPAM carves out an exception from preemption for state laws that govern the use of commercial email by prohibiting fraud or deception in messages or attachments.

CAN-SPAM does not preempt the applicability of (1) state laws that are not specific to electronic mail, including state trespass, contract or tort laws, or (2) state laws that relate to acts of fraud or computer crime. [15 USC § 7707(b)(2)]

State laws that are not specific to commercial email, but would apply to commercial email (together with other types of communication or activity), are not preempted; neither are state laws that address computer fraud or crime more generally.

Although not specific to mortgage banking, policies and procedures used by "internet access services" to block spam are also protected from preemption. Internet access services’ policies and procedures are preempted from CAN-SPAM with respect to declining to transmit, route, relay, handle, or store certain types of electronic mail messages. [15 USC § 7707(c)]

Questions as to which state anti-spam laws are preempted, and to what extent such laws are preempted, are ultimately answered through the legal interpretation of courts. So far, the issue of CAN-SPAM preemption has been addressed by three Federal Circuit Courts of Appeals: the Fourth Circuit, the Fifth Circuit, and the Ninth Circuit.

Jonathan Foxx

President & Managing Director

Lenders Compliance Group