Wednesday, October 27, 2021

Audit Season: Loan Officer Comp Plans vs Loan Officer Employment Agreements

Questions Persist on the Meaning of "Employment Agreement" or "Compensation Plan"


With the onset of annual audit season, we have noticed a large increase in the number of requests we get for compensation plans and loan officer agreements. We need to set the record straight on some definitions so that you have clarity on what is required and what the regulator is requesting.

First, there are two different things at play. 
  • The need to establish the arrangement between the loan originator and the company as to employment. This item is referred to as an employment agreement. 
  • The need to establish the pay rate for the originator is referred to as a compensation plan
  • These two items are exclusive of each other, although an agreement may refer to a compensation plan. 

Employment Agreements are NOT Compensation Plans


Employment agreements define job duties, the terms of employment, and how employment will terminate. In other words - this is your job; do these things and don't do other things. If you do things we say not to do, we can terminate you. This is how we'll wrap matters up if you separate from the company voluntarily or involuntarily. 

One of the difficulties we face in providing compliance services is that we often get asked for advice. Largely, advice on compliance relates to understanding what regulatory rulemaking means. This is not interpretation or advice, it simply is a translation of the rules into a more easily understood or practical application. Employment agreements, on the other hand, are contracts. In order to draft a contract for a third party you need to be authorized to practice law: an attorney or lawyer. A compliance company should not provide this service. Instead, you should seek the advice of a competent advisor familiar with the employment laws of a state. 

When we provide this free sample loan originator employment agreement, we are actually calling it a comp plan, because it forms part of the comp plan. You may copy the text and use it as a model for drafting an agreement yourself. 

That said, we have some general, common-sense guidance for the creation of employment agreements:

1.) Separate compensation plans from the employment agreement by attaching the compensation plan as an exhibit which is SUBJECT TO CHANGE AT ANY TIME.
2.) An Employment Agreement states the general minimum job requirements of the position. You can augment that by having a very detailed job description such as that in our Loan OriginatorLoan ProcessorLoan Closer or Underwriting policies and procedures. 

Compensation Plans are NOT Legal Agreements


A compensation plan simply states the rate of pay for various services. In the case of the current regulatory scheme, we have to be aware of anti-steering rules. A compliant compensation plan defines how compensation to loan originators happens in a way that does not violate the anti-steering rules. 

Elements of a Compensation Plan


  • Loans Subject to the Rule
  • Definition of a Loan Originator
  • Exclusions from the LO Comp Rule
  • Dual Compensation, Upfront Points and Fees
  • Proxies for Loan Terms
  • Non-Loan-Term Items
  • Profits-Based Compensation
  • Pick-A-Pay Plans
  • Pooled Compensation
  • Compensation for LOs that Work as a Team
  • Pricing Concessions
  • Point Banks
  • Competition for LOs
  • SAFE Act Requirements
  • Anti-Steering Provisions/Safe Harbor
  • Record Retention
  • QMs and Double Counting
  • LO Qualifications
  • Written Policies and Procedures
  • Non-Cash Compensation Incentives
  • Splitting Comp Between LOs
  • Bonuses and Retirement Plans
  • Bonuses Based on Volume
  • Non-Producing Managers and Sales Executives
Our Compliance Module provides a policy and procedure that addresses all of these issues. 







Monday, May 3, 2021

Dear Old 1003, I'm sorry. I didn't know how good you were...

We have updated our Quality Control Data Validation checklist to conform to the organization of the redesigned URLA, which was required for use after 4/1/2021. 

Best Practice - Send for Signature, Not in Blank


The new Uniform Residential Loan Application (1003) form is required for SUBMISSION to Fannie Mae. It is NOT useful as a form to be sent to an applicant to collect information. In fact, there are areas in the form which explicitly state "TO BE COMPLETED BY LENDER" which belies the actual intent of the form. 

Send this document to your customer for completion at your own peril.  The reality is you will NOT send a blank application to the borrower to fill out. Instead, you should capture the information in your LOS, and send the completed form to the borrower for signature. If you want to put data collection responsibilities on the borrower, use the pre-application kit process. 

PROBLEM 1 - Too Complex, Too Long

That is the biggest problem with this product - asking a (single) applicant to parse THIRTEEN pages of application forms correctly, in most mortgage industry participants' experience - means it won't be returned. If it is, it will not be correct. 

Recommended Procedure - Only Sign in Final Form

For those of you who grew up with the old HUD-2900, you will remember that the HUD Application was only signed once the underwriter had approved the loan. This is the same approach. 

1.) Collect application data using LOS or Pre-Application Kit
2.) Enter information into LOS
3.) Generate form for signature

We are NOT advocates of having loan originators or consumers completing this form directly as it is extremely inefficient and fraught with problems, particularly since the representations and warrants on the application form are SO STRINGENT that sending out an application, other than the final verified application, is risky. Our recommended approach is to utilize the LOS screens to complete the form, and have the printed form reviewed by a senior processor or underwriter prior to release. 

The URLA is not necessary to begin an "application" as defined under other regulations


ECOA, TRID, and other regulations that are triggered by an "application" are not referring to this specific form. The regulations DO NOT require the use of the new URLA 1003 form to establish an application, so you can use any method you like to assemble the information (including obtaining a credit authorization). In fact, for AUS Data Submission, (DU/LP/Catalyst-TOTAL/GUS) the system is not calling for the form, simply the underlying data. Once the application is complete and ready for underwriting submission, you can send the compiled application. 

Our recommended process


1.) For customer facing data collection, use a pre-application kit or web form, with EDI to the LOS
2.) Download a re-configured data integrity review checklist aligned with the new 1003 here

Pre-Application Kit Sample



URLA Review Checklist Sample



Comment - Why all the fuss for a few small changes? Only several new fields added.

Once you dive down into the changes, you can see how minute they are. The new form doesn't add significantly to the collection of data and could have been added to the old form. 

For instance, the addition of a cell phone capture. Honestly, the cell phone could replace the Home Phone, which no one uses anymore. And since each co-borrower now has his or her own application, this actually represents the unique identifier of the loan. 


A litany of pre-filled choices... and then, still, "other"... drives me nuts. Simplification or obfuscation. 

Here is the updated URLA Policy and Procedure - depending on which module you review it goes in the following sections:







Thursday, March 25, 2021

UWM Renewals - Reviewers Asking Lenders to Locate Items in QC Plans

We have seen an uptick of inquiries from our customers who engage with several national wholesalers. At the root of the inquiry is the reviewer asking the customer to locate items in the QC Plan. To forestall this we wanted to show you what a standard response looks like.

More than this, though, is an understanding of the terms. Our plans are all delivered in Word format. This means you can easily search them for a particular phrase. The problem is that the reviewers aren't using standard QC nomenclature. Key phrases include: 

  • Independence - does the plan show that reviewers are not involved in underwriting or production?
  • Completion - are loans reviewed within 90 days of closing?
  • Selection - does the plan require a 10% sampling
  • Schedule - does the plan require reporting results to management within 90 days
  • Scope - does the plan review all origination documents, underwriting, and closing documents?
==============================

They want to know who your QC person is and provide a resume. If you are using a 3rd party, you need to show that in the plan. The Plan itself shows independence here:






On the matter of timing the plan is clear:



Reporting results to management:




Sample size is addressed here:




Scope is addressed here:


Of course, if you ever have a problem with any of our products, we welcome the opportunity to fix it and make it right. We want you out there doing business, not worrying about whether your policies and procedures are updated!

#QCPlans #LenderAnnualReview #Compliance Audit

Thursday, February 25, 2021

The New QM - Ability to Repay Requires understanding HPML Requirements

QM - What Changed?

  • Abandon Appendix Q 
  • Rate Threshold Determination for QM Status: 2.25%
  • Seasoned QM for performing loans > 36 months
  • 4 month either/or GSE status patch - use either old or new guidelines

What didn't change

  • Compensation limits
  • Loan type constraints
  • Transaction exemptions
  • Qualifying rate

At the core of the Qualified Mortgage (QM) rules is the issue of the borrower's ability to repay. One of the most significant effects of the Trump Administration's housing policy efforts was shepherding the GSEs (Fannie Mae and Freddie Mac) out of the business of providing government guarantees. The vast majority of QMs were made by virtue of an automatic waiver of QM rules for loans guaranteed by the government like Fannie and Freddie, but also FHA, VA, USDA. 

The deregulators conceived of a much simpler test for a qualified mortgage. Instead of a 43% DTI measurement, along with a myriad of guidelines for what could be used, they chose an agnostic indicator for QM status: the rate. If it's less than 2.25% over the Average Prime Offered Rate (APOR), it qualifies for presumption of rebuttable status. And it's so simple...

Sadly, nothing's that simple. It was a quick fix and the rate trigger crossed over some other regulations which add a layer of complexity, most notably the HPML Rules. 

Can't read the spreadsheet - link here

Qualified Mortgage Guidelines 3/1/2021


Table of Qualified Mortgage Guidelines

Current APOR see FFIEC (Based on Loan Type)







Rate Spread Calculator







General Qualified Mortgage - With HPML Kicker (below) - < than

2.25%






Calculate Based on



Exempt :HELOC Reverse, Bridge, Construction, Land

Fully Indexed Rate (Balloons use balloon term, not payment)



ARMs Less than 5 Years use Worst case- highest possible rate



Prohibited Neg Am or I/O or terms >30 years

Points and Fees Limits: See HPML



HPML General Thresholds







1st mortgage

1.50%






Non Agency (Jumbo)

2.50%






2nd

3.50%






HPML and Low Balance QM Thresholds







HMPL Appraisal Exemption

$27,300

Appraisal Exemption Rule Link

Required on HPML 1.) Escrow 2.) 2 appraisals for flips (lender must pay)







Points, Fees and Rate Thresholds

Loan Amount >

Max Fee

QM Threshold

Mobile Home

2nd Lien

$110,260

3.00%


2.25

2.25


$66,156

$3,308

5.00%

3.5

6.5

3.5

$22,052

5.00%


6.5

6.5


$13,783

$1,103

8.00%


6.5


0




6.5

6.5

HOEPA

$22,052

$1,103

8%




Required ATR Standard Guidelines - Must consider


1. Income - current or reasonably expected income or assets .

Can consider seasonal or bonus income, rental income, commissions, interest payments, dividends, retirement benefits, trust income, public assistance payments, alimony, child support, and other sources of income. can also consider future income if verified it is using reasonably reliable third-party records. Further, can use assets like a savings account, amounts vested in a retirement account, stocks, bonds, certificates of deposit, and amounts available to the consumer from a trust fund.

2. Current employment status - if used

including full-time, part-time, seasonal, irregular, military, and self-employment.

3. monthly mortgage payment

calculate monthly mortgage payment using the introductory or fully indexed interest rate, whichever is higher, and monthly, fully amortizing payments

4. Payments on 2nd and other loans on home


5. Taxes and Insurance

property taxes, fees and special assessments, condo, coop, HOA, ground rent or lease, homeowners, flood and mortgage insurance premiums

6. Current debts, alimony, and child-support obligations.

include student loans, auto loans, revolving debt, and existing mortgages not being paid off at or before consummation. Can exclude an obligation is likely to be paid off soon

7. Debt-to-income (DTI) ratio or residual income.

The monthly DTI ratio or residual income must be calculated using the total of all of the mortgage and non-mortgage obligations listed above, compared to total monthly income.

8. "Consider" but non-prescribe particular credit history.

Credit history might include information about number and age of credit lines, payment history, judgments, collections, bankruptcies, and nontraditional credit references, such as rental payment history or utility payments.


Secondary marketing should have these changes well in hand, as there are different thresholds depending on whether the product offered is an ARM or Fixed rate. 

We have also updated free sample Ability to Repay policy 

Tuesday, January 26, 2021

What to do when a Regulator asks for a Business Plan or Org Chart

Vague Company Licensing Requirements can Cause Confusion



With the surge in the mortgage demand, we see many new companies throwing their hat in the ring to become a licensed provider. For the uninitiated, prepare to spend some time gathering and uploading documents. For new and experienced alike, some of the requirements, and the vague way the Nationwide Mortgage Licensing System describes them in their requirement templates, can cause confusion. We get many of these calls every day. Here we provide a primer on answering the less obvious requests:

Provide a Copy of Your Business Plan...

A business plan is a great idea. The SBA definition of a business plan, and what most people think of as a business plan - including agencies like Fannie/Freddie and others - allows you to memorialize how you will do business; the ways and means including LOS selection, pricing, startup costs, volume projections, staffing as well as unique business propositions, marketing strategies, and other relevant elements. It looks like this:

This is a sample of a table of contents of an SBA-Style Business Plan



But... THIS IS NOT what the regulator wants. The regulator wants an answer to specific questions about how you will do business. We recommend that you write a 1 pager and simply answer the questions in a Q&A format. In this way, there can be no question as to the narrative. For Example:

NMLS Requirement for a Business Plan which is quite vague

NMLS Requirement for a Business Plan which is quite vague

For the business plan requirement, we recommend that you simply draft a memorandum answering the questions:

  • What is your marketing strategy?
  • What products will you offer?
  • Who will you market these products to?
  • How will you operate - e.g.; branch processing, centralized? Manager? Loan Originators? Processors? Whom will they report to?

Organizational Chart Requirement

Once again, an organizational chart makes a great tool to ensure that all of a company's responsibilities get assigned to an individual and who reports to whom. Microsoft includes a good organizational chart template in Word, which we use in our products, too, as below.

Sample Organizational Chart for a Mortgage Business


However, for a small company, an organization "Chart" where you draw lines between functions doesn't really apply.

This is the text from the NMLS requirement for an Organizational Chart

Again, instead of a policy, draft a memorandum to Identify who, within your organization, is in charge of:

  • Compliance - reports to?
  • Production Sales - reports to?
  • Processing, Operations - reports to?
  • Financial Control - reports to?

If these are all the same person, then state that. 

If you have any questions about licensing, or if you just want to hand it off to someone else to manage, please let me know. 

MortgageManuals.com does include the business plan in the Complete Broker, Correspondent, Lender and Compliance Packages. 

#mortgagelicensing #mortgagecompliance #mortgagebroker

Sunday, January 3, 2021

What is a "Written Supervisory Plan?"

Regulators requesting "supervisory plans" may be on a fishing expedition


Screenshot of Washington State Regulations showing supervisory plan requirement

Before you purchase a "supervisory plan" we need to agree that regulators do not define the term clearly. At issue; many states that require supervisory plans have figured out that companies will try to avoid accountability for employee actions by saying "the employee did it, not us." The regulator wants to eliminate this excuse, so requires you to tell the employee specifically what his or her job entails.

Use this rubric to customize your manuals and entitle them appropriately for the regulator.


The "Written Supervisory Plan" requirement is a bit of a red herring. There isn't a particular guideline defining what that means; the rule simply says you are responsible for your employees' actions.  

This means you must have an overall employee operating plan, such as an HR module. In addition, you must have the basic policies and procedures for regulatory compliance for all employees. Then, if you have licensed originators, you must have origination policies and procedures. If you process loans in state and you have processors, you must have processing policies and procedures. The same is true for closing, underwriting and any other function, such as wholesale, that you have.


Effectively, the mortgage correspondent package or mortgage banker package meets this requirement. Simply print the documents as the applicable title to a PDF. E.g.; 2-0 Compliance would be "2-0 All Employee Compliance Related Supervisory Plan." "3-0 Originator Supervisory Plan" etc.

If you are a very small company where only the principals are active in originating, you can use the Quality Control Plan and Compliance Policies and Procedures and call them "Employee Supervisory Plan."