Loan Originator Compensation

The Consumer Financial Protection Bureau released its final rules regarding Loan Originator Compensation Requirements under the Truth in Lending Act (Regulation Z), on January 20, 2013. The final rule implements requirements and restrictions imposed by the Dodd-Frank Act concerning loan originator compensation; qualifications of, and registration or licensing of loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single-premium credit insurance. I am going to focus on how the new amendments will affect mortgage brokers and correspondent lenders.

There are only a few real changes, but you can tell our policy makers valued the input of our industry this time. The most dramatic change is the ability for mortgage brokers to do borrower paid loans AND be able to compensate their loan officers. The ban on dual compensation is still in effect for brokers, making them less competitive against their correspondent peers. It was an uninformed decision by our policy makers to let this happen to begin with, and they have corrected it. Only problem, it doesn’t go into effect until January of 2013.

Clarification on retirement plans has been included. It was unclear whether the contribution to employee retirement plans was allowed or not. It is clear now. Yes, mortgage loan originators can now have a retirement program without the worry of violating federal law. Employers are now able to contribute to a designated tax-advantaged plan for their employees, as defined by the IRS.

Also included with a few stipulations, is a profit based non-deferred compensation allowance. It basically allows a bonus up to 10% of a loan officer’s total compensation.

Here is a breakdown of all the changes:

Note: Originator is defined as a loan officer ( a person who takes applications and negotiates terms) and a mortgage broker ( an entity that does not fund loans from its own funds or warehouse line), not a depository bank employee or a correspondent lender.

Record Retention

Correspondent: Requires the retention of records regarding all compensation paid to your loan officers, the loan officer compensation agreements, for a period of three years from the date of the transaction.

Broker: Requires the retention of records regarding all compensation paid to your loan officers, the loan officer compensation agreements, compensation received from your Investors, your agreements with them, compensation received from a consumer or other person (borrower paid transactions), for a period of three years from the date of the transaction.

Payments based on terms of a transaction.(Broker/Correspondent)

You cannot compensate your loan officers based on any term (rate, profit, YSP, etc.) on a single transaction, multiple transactions, or a “pool” of transactions. You cannot pay them based on a “proxy” for a term either. A factor, although not an obvious loan term, is considered a “proxy” for a term of the transaction if the factor consistently varies with that term over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. It is allowable to pay your loan officers a “fixed percentage of the loan amount”, and if needed, setting a minimum and maximum commission amount.

You are allowed to make contributions to a “designated tax-advantaged plan” as compensation. A designated tax-advantaged plan means any plan that meets the requirements of Internal Revenue Code section 401(a), 26 U.S.C. 401(a); employee annuity plan described in Internal Revenue Code section 403(a), 26 U.S.C. 403(a); simple retirement account, as defined in Internal Revenue Code section 408(p), 26 U.S.C. 408(p); simplified employee pension described in Internal Revenue Code section 408(k), 26 U.S.C. 408(k); annuity contract described in Internal Revenue Code section 403(b), 26 U.S.C. 403(b); or eligible deferred compensation plan, as defined in Internal Revenue Code section 457(b), 26 U.S.C. 457(b). The contribution cannot be directly or indirectly based on the terms of that individual loan originator’s transactions.

A bonus can be paid under a non-deferred profits-based compensation plan based on the profits earned by the loan officer if the non-deferred compensation is not based on a loan term or condition and at least one of the following conditions is satisfied:

The compensation paid to an individual loan originator does not, exceed 10 percent of the individual loan originator’s total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid; or

The individual loan originator was a loan originator for ten or fewer transactions during the 12-month period preceding the date of the compensation determination.

Dual Compensation (Brokers)

Dual Compensation (receiving funds from the borrower and creditor) is still not allowed for mortgage brokers.Originators who are employed by a Mortgage Broker have been unable to receive compensation when the borrower paid origination fees and discount points (Borrower Paid). Beginning January 20th, 2014, a mortgage broker will be able to compensate their loan officers on these transactions, as long as the compensation is not based on terms or conditions of the loan.

Safe Harbor (Brokers)

When meeting the Safe Harbor requirement, some verbiage has changed as far as the options you must present to the customer:

The option that stated “The loan with the lowest total dollar amount for origination points or fees and discount points.” Has been changed to:

“The loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees).”

Seven Steps to Getting a VA Home Loan

Veterans Affairs (VA) mortgage loans have increased exponentially in recent years due to the downturn in the U.S. economy. This economic slump has resulted in banks tightening lending standards for conventional loans. The increase in VA loans is largely due to the fact that they are easier to qualify for than conventional mortgages and are one of the few mortgage options available for qualified borrowers who do not have a down payment.

VA loans often offer lower interest rates than other type of loans and are available for the “full reasonable value” of a given property. Consequently, a down payment is not required as with other government programs such as FHA, which requires a 3.5 % minimum down payment.

So what is a VA loan? VA loans are home mortgages guaranteed by the U.S. Department of Veterans Affairs however they are not a direct lender. The loan is made through a private lender (of your choice) and is guaranteed by the VA as long as guidelines are met. What are the guidelines and who actually qualifies for a VA loan? To follow are the seven basic steps you will need to take to successfully obtain a VA home mortgage loan.

Step One: Determining Eligibility

Most members of the military – veterans, reservists, and members of the National Guard are eligible to apply for a VA loan. The spouses of military who died in active duty or as a result of service-connected disability may also apply. Active duty members qualify after about six months of service.

Reservists and National Guard members must wait six years to apply unless they are called to active duty, where they gain eligibility after 181 days of service. However, during war periods members are generally eligible after 90 days of service. In consideration of your status of service, loan applications can differ. Your VA regional office personnel can assist you with any additional eligibility questions.

After pre-determining your eligibility, the first step for potential borrowers is to obtain a Certificate of Eligibility (26-1880) before applying for a loan. At this juncture, you will need to select an accredited VA loan specialist who will assist you in moving forward in the loan process which includes accessing and submitting this eligibility form online.

Step Two: The Pre-Approval Process

Before embarking on step two of the VA loan process, it is crucial that you have pulled your credit report in advance with all three credit reporting agencies to see where you stand with your FICO credit score. You should thoroughly examine the report for any errors and/or identity theft, taking care of any such issues beforehand. Although Veteran’s Affairs does not require a minimum score for a VA loan, most lenders have internal requirements, asking for a credit score of 620 or higher.

After you have completed this important task, you will provide this information to your VA loan specialist. They can answer any questions that you have and help you with determining the loan amount you are eligible for through a pre-approval process. The pre-approval process is required by most realtors before working with you to find a home. It serves to give you piece of mind and a price range that you can afford based on a pre-approved amount.

To obtain a VA loan, the law requires that:

• The applicant must be an eligible veteran who has available entitlement.

• The loan must be for an eligible purpose.

• The veteran must occupy or intend to occupy the property as a home within a reasonable period of time after closing the loan.

• The veteran must be a satisfactory credit risk.

• The income of the veteran and spouse, if any, must be shown to be stable and sufficient to meet the mortgage payments, cover the costs of owning a home, take care of other obligations and expenses, and have enough left over for family support.

Your experienced VA loan specialist will be able to further discuss specific income and other qualifying requirements. According to the VA Loan Quick Guide, the VA loan limits generally do not exceed $417,000 (exception in maximum limits with VA Jumbo loans in designated High Cost counties – calculations can vary).

Step Three: Decide on a Home & Make an Offer

Select a realtor to work diligently with you to find your desired home. After finding the home based on your personal and financial criteria, you will make your offer. The offer should not be too low or too high, as you want to stay ahead of the pack in bidding but not risk overpaying for the property. After making the offer, you will be required to place a deposit down ($500.00 is customary) on the property.

In placing your offer, be aware that there are certain fees such as brokerage and lender fees, commissions or buyer-brokerage fees that the seller may have to absorb as they are disallowed by the VA to be charged to the veteran buyer. This amount may need to be factored into the offer/purchase price to be acceptable to the seller.

Step Four: Signing the Purchase Agreement

It is recommended that two contingency provisions: 1) upon financing and 2) upon inspection, are inclusive or amended to the purchase agreement. Fact: A “pre-qualification” letter does not necessarily guarantee financing so you must be covered in the event that it does not go through. However, if you have proceeded as directed in Step Two and you are “pre-approved,” you should be fine. The pre-approval process is a more extensive check performed by your VA loan specialist on your financial background and credit rating. After completion, your lender will provide a conditional commitment on the amount of your loan.

A home inspection can be a critical contingency provision, giving you the option to back out if repairs are costly and substantially decrease the fair market value of the property. Fact: VA fee appraisers are not required to step on the roof for inspection nor do they have the specialized knowledge that a certified home inspection can provide.

The VA appraiser’s job is to ensure that the home lives up to minimum property requirements. He/she establishes fair market value for the home and a Certificate of Reasonable Value is issued. However this VA appraisal does not take the place of a detailed inspection of the property. Although optional, it is highly recommended that your offer be contingent upon a detailed home inspection.

Step Five: Offer Accepted

Contact your lender immediately and let them know that your offer was accepted. Congratulations! You are on your way to homeownership! If you have not done so already, you will need to provide the last two or three years of tax returns, pay stubs and bank statements. He/she will help you complete your application and submit it to processing and approval.

Subsequently, the lender will order a VA appraisal and the certified home inspection. Your VA loan specialist will complete the appraisal and perform a complete review and verification of your credit, income and assets to give a “clear to close.” This will initiate the date, time and place where you will close to sign all necessary documentation to have the title transferred to you.

Step Six: VA Funding Fees

The VA funding fee is an essential component of the VA Home Loan Program. This basic one-time funding fee must be paid to the VA by all but certain exempt veterans. First time users of the VA loan benefit program with no down payment requires a 2.15% fee. A down payment of at least 5 percent but less than 10 percent requires a 1.5% fee, and a down payment of 10% or more requires a 1.25% fee.