Presented by: Ronette Schlatter, CRCM Senior Compliance Coordinator

1. Loan Originator Compensation 2014 IBA Human Resources Conference Presented by: Ronette Schlatter, CRCM Senior Compliance Coordinator

2. Dodd-Frank Act LO Rules Basic Provisions • Regulates LO compensation • Imposes LO qualification requirements • Requires LOs to include NMLS ID# on certain loan documents 2014 IBA HR Conference

3. Who is an LO? • A person who, in expectation of “compensation” performs any of the following: • Take an application • Arranges a credit transaction • Assists a consumer in applying for credit • Offers or negotiates credit terms • Refers a consumer to a loan originator or creditor • Represents to the public that he/she can or will perform any loan origination services • May/may not be registered Safe Act MLO Note: broader definition than SAFE Act! 2014 IBA HR Conference

4. Referrals to an LO A person making a referral to an LO is not considered a LO, provided the person: • Responds to consumer’s inquiry for LO referral; or • Only provides contact information for a LO; and • Does not discuss particular credit terms; and • Does not direct the consumer to a particular LO based on an assessment of consumer’s financial position 2014 IBA HR Conference

5. LO Activities do NOT include… • Providing general information in response to consumer inquiries • Loan-processing activities, e.g., assembling credit application packages & supporting docs • Verifying application info • Coordinating closings or communicating with consumers about dead-lines or documents needed to close • Underwriting activities, provided there is no communication with consumers re: credit terms 2014 IBA HR Conference

6. Compensation includes… • Salaries • Commissions • Annual or periodic bonuses • Awards of merchandise, services, trips or similar prizes • An award of stock, stock options, or equity interests 2014 IBA HR Conference

7. LO Compensation Prohibitions LOs are prohibited from: • Receiving compensation based on loan terms or proxy for loan terms • Receiving compensation from the both the consumer and another person • Steering a consumer to a particular loan because the LO will receive greater compensation 2014 IBA HR Conference

8. Compensation based on Loan Terms “Loan terms” include: • Interest rate • APR • Collateral type (condo, detached home, manufactured home, etc.) • Existence of prepayment penalty • Origination fees and points 2014 IBA HR Conference

9. Loan Term “Proxies” Two-Step Analysis • Factor consistently varies with transaction term and • LO has the ability to, directly or indirectly, add, drop or change factor during origination process Proxy Examples • Portfolio vs. Investor loan • Credit product (FHA, VA) • DTI, LTV, Credit Score • Profitability • Geography (census tract) 2014 IBA HR Conference

10. Permissible Compensation Bases • Overall loan volume • Fixed percent based on loan amount • Long-term performance • Existing customer vs. new customers • Fixed amount determined in advance (including tiers) • Loan quality (accuracy & completeness) • Actual hours worked • Percent of approved apps actually closed 2014 IBA HR Conference

11. Profits-Based Compensation • Generally constitutes “loan-term based” compensation and is prohibited, except for: • Payments to designated tax-advantage, defined contribution or defined benefit plans as long as contribution is not directly/indirectly based on terms of an individual LO’s transactions • 401k plans, defined benefit plans, annuities, etc. • Payments via non-deferred profit-based compensation provided: • Payment does not exceed 10% of “total compensation” OR • LO originated 10 or fewer transactions in preceding 12 mos. 2014 IBA HR Conference

12. Non-Deferred Profit-Based Compensation • Bonus pools • Profits pools • Bonus plans • Profit-sharing plans • Awards of merchandise, services, trips, or similar prizes Any non-deferred compensation arrangement where an individual LO may be paid variable, additional compensation based in whole or in part on the mortgage-related business profits of the paying person 2014 IBA HR Conference

13. Non-Deferred Profit-Based Compensation • A non-deferred profits-based compensation plan does not include the following bonus plans because they are not based on mortgage-related profits: • A retention bonus budgeted for in advance • A performance bonus paid out of a bonus pool set aside at the beginning of the company’s annual accounting period as part of the company’s operating budget • A plan that is determined with reference only to profits from a business other thanmortgage-related business 2014 IBA HR Conference

14. Non-Deferred Profit-Based Compensation 10% Total Compensation Limit • Use same timeframe for calculating 10% limit as when compensation was earned (not when paid) • “Total Compensation” includes: • Wages/tips actually paid during the relevant time period (Box 5 on W-2) • Cash value of awards of merchandise, trips, etc. • 1099-Misc income paid • May include contributions to tax-advantage plans 2014 IBA HR Conference

15. Increasing/Decreasing Compensation • Once compensation agreement is in place, compensation cannot be adjusted on selective basis (or per loan) • E.g., creditor makes less on loan than expected • LO does not follow creditor underwriting guidelines • Match competitor’s offer or avoid HPML coverage • Exception: May be decreased to cover unforeseen increase in actual costs on HUD vs. GFE estimates • Compensation agreements may be adjusted prospectively 2014 IBA HR Conference

16. Other Compensation Considerations • Dual compensation is prohibited • LO may not receive compensation from both consumer and another person • Steering is prohibited • A LO may not steer consumer to a loan for greater compensation • Safe Harbor provision: Provide consumer w/ loan options: • Loan w/ lowest interest rate • Loan w/ lower interest rate & no risky features • Loan w/ lowest orgination points & fees and discount points 2014 IBA HR Conference

17. LO Qualification Standards Banks must insure their LOs: • Are registered w/ NMLS; • Obtain criminal background check through NMLS (or law enforcement agency or commercial service); • Obtain credit report; and • Review any information related to administrative, civil or criminal findings from NMLS background check BEFORE acting in capacity of a LO. 2014 IBA HR Conference

18. LO Qualification Standards Banks must also ensure LO has: • Within last 7 years not been convicted or plead no contest to a felony in a domestic or military court; or • Ever been convicted of or plead no contest to a felony involving an act of fraud, dishonesty, breach of trust or money laundering • Expunged convictions and pardons do not count 2014 IBA HR Conference

19. LO Qualification Standards • Based on credit report, background checks, etc., bank must determine LO has demonstrated financial responsibility and good general character to warrant LO will act honestly, fairly & efficiently • Applicable to: • LOs hired on or after 1/10/14 • Existing staff that move into LO position after 1/10/14 • Not Applicable to: • LOs hired prior to 1/10/2014 if hired according to standard practices at the time of hire; • AND, Bank has no information indicating LO likely does not continue to meet standards 2014 IBA HR Conference

20. LO Qualification Standards Periodic training requirements • Based on job duties • As deemed necessary • No required number of hours or topics • Covering state and federal law • Applicable to ALL LOs regardless of hire date • Much flexibility granted in training delivery methods 2014 IBA HR Conference

21. Recordkeeping • Maintain records sufficient to evidence: • All compensation received from creditors, consumers, and other individuals or entities if bank acts as LO • All compensation bank pays to individual LOs • The compensation agreements that govern those receipts or payments • For three years after the date of payment or receipt of compensation. 2014 IBA HR Conference

22. NMLS ID# Must disclose name and NMLSD ID# of • LO organization (bank) and, • Individual LO • Exactly as shown on NMLSR • Primary LO at time document is issued On the following: • Credit application • Note or loan contract • Security instrument 2014 IBA HR Conference

23. Questions? Additional Resources: CFPB Small Entity Guide: http://files.consumerfinance.gov/f/201401_cfpb_complaince-guide_loan-originator.pdf 2014 IBA HR Conference

24. Ronette Schlatter Senior Compliance Coordinator Iowa Bankers Association rschlatter@iowabankers.com 2014 IBA HR Conference