I've just survived a hurricane. In the resulting re-building process, I've learned one thing definitively; many people say that they can fix your problem - just give them a "deposit." In fact, that's a pretty good way to ensure you'll never hear from them again.
I see the same thing in the loan officer compensation wars currently evolving. No compliance officer or attorney worth his or her salt will authorize a non-compliant compensation plan because the risks so far outweigh any temporary benefits. However, as margins and business shrinks companies are adopting risky plans because they're likely to be out of business when the bill comes due. Unfortunately, this drives the entire market in the same direction.
When arranging compensation plans in a way that allows the company to capture a flat fee is fine. Charging a flat fee (subject to QM cost limits) to a customer is also fine. Charging a loan originator a monthly desk rental or other fee is also fine. However, netting costs from a loan officer's comp is a problem. You cannot withhold fees from an agreed-upon commission.
To be considered compliant with the "Anti-Steering Rules" you must set flat commission rates from your wholesalers across the board so the loan originator cannot increase his or her income by steering the customer to a particular product or lender.
A common trend today involves the adjustment or reduction of a loan originator's compensation because the customer changed to/from borrower-paid compensation. You should only do this in conjunction with a "best interests" scenario, not as a matter of course. We do not know that Federal regulators will accept this as a standard practice for reducing a customer's price.
Independent Contractors, Again
We get the question about whether a specific state will always accept loan originators paid via 1099. You must know that a state does not necessarily regulate this, though it may take a position. For example, Texas, North Carolina, and CA DFPI do mandate that loan originators must be employees, not contractors. States regulate licensing and business practices, so even though you may see a tacit acceptance of originators as 1099 contractors, this is an internal decision for each company.
To understand the consequences of 1099 contractors, understand that the IRS and the US Department of Labor define the issue of employee status. Can a loan originator really be a contractor if you control certain elements of their business? For instance, you really should require a loan originator to use your technology (laptops, phones, and networks) to avoid exposing your customers to cyber risks. If a contractor must use your equipment, are they really a contractor? In another instance of controlling the work environment, you must license a remote location or approve the use of remote access. Does this create an employee relationship? If you are offering employee benefits, such as health care, it's likely you are an employer.
For these reasons and others, any reputable compliance consultant or attorney who knows the rules will NOT recommend 1099 employment agreements. I KNOW THAT EVERYONE IS DOING IT.
Furthermore, regulators have paid surprisingly little attention to this matter. In the end, what may drive your decision relative to 1099 or W-2 is the possible re-classification of your company's contractors as employees in an audit. The penalties are enormous - unpaid taxes, plus a 100% penalty, plus interest.
You CAN withhold taxes and mark the employee's W-2 as "Statutory Employee" which will allow them to deduct their business expenses on Schedule C. Or have the employee get licensed as an LLC, or even as a Sole Prop, and pay the LLC directly.
There is a sample Loan Originator Agreement in the folder you got with your 2-0 Compliance Module. You can also copy it here:
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