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?

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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

Can I pay a Loan Originator by 1099?

As we roll into tax season, we return again and again to the topic of originator compensation; it remains the most ambiguous topic in compliance. Varying comp, broker company compensation, borrower-paid or lender-paid, all represent areas of confusion. But nothing confounds more, with multiple layers of regulations, than whether you can pay a loan originator as a contractor by 1099.

Conflicting Interests

Ironically, originators WANT this, while other industries experience the opposite with employees decrying the "gig economy" and its loss of employment benefits. But mortgage brokers want to minimize costs and payroll taxes represent a high margin expense. Originators also may benefit from treatment as self-employed with a much wider latitude to expense business development costs than employees. 

On the other side, state and Federal governments have taken aim at the contract labor movement because of the loss in payroll taxes. The IRS has taken steps to formalize the delineation between formal W-2 employees and 1099 contractors.

https://www.irs.gov/pub/irs-pdf/p1779.pdf

The IRS guidelines basically say, “If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” The IRS focuses on three main areas when determining employment status:

• How much control the employer has over the worker’s behavior and work results. (Who controls training, where and when the person works, what equipment they use?)
• How much control does the employer have on finances? (Does the employer have primary control over the person’s profit or loss?)
• What is the relationship between parties? (Does the worker receive benefits and is it a long-term relationship?)

Here is the 20-point checklist from the IRS, which may be used as guidelines in determining if a worker can be legally paid as a contractor:

• Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
• Does the individual receive training from your company?
• Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
• Must the individual personally perform the contracted services?
• Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
• Is there a continuing relationship between your company and the individual?
• Must the individual work set hours?
• Is the individual required to work full time at your company?
• Is the work performed on company premises?
• Is the individual required to follow a set sequence or routine in the performance of his work?
• Must the individual give you reports regarding his/her work?
• Is the individual paid by the hour, week, or month?
• Do you reimburse the individual for business/travel expenses? 
• Do you supply the individual with needed tools or materials?
• Have you made a significant investment in facilities used by the individual to perform services?
• Is the individual free from suffering a loss or realizing a profit based on his work?
• Does the individual only perform services for your company?
• Does the individual limit the availability of his services to the general public?
• Do you have the right to discharge the individual?
• May the individual terminate his services at any time?

Further, fair labor laws stipulate minimum wages, safe working conditions, and benefits. 

https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/misclassification-facts.pdf

Draw a Bright Line

We may never get closure on this matter; too many variable circumstances exist for a regulator to draw a definitive line. This exposes the mortgage industry to individual legal or regulatory actions such as those we have already seen; lawsuits for minimum wage claims and licensing censure for incorrect classification of marketers as contractors. 

There's Only ONE Legitimate Solution

In our estimation, the ONLY legitimate solution lies in having the employee/contractor affirmatively claiming self-employment. For mortgage brokers, this means licensing as a company as well as an individual. In other words, instead of just an MU-4, the loan originator will also file an MU-1 and MU-2 in his or her natural name. In this way, the mortgage originator can insist on payment as a contractor with no risk to the employer for misclassification or wage-hour claims.

The state, then, will ensure that there is an EXCLUSIVE agreement between the company and the loan originator firm, that will ensure that all business gets conducted through the company, and not through multiple other firms. In other words, you are an exclusive wholesaler for the loan originator. 

In Virginia, there is an exclusive loan brokerage agreement. 

But Everyone's Doing It

Yes. We hear of this all the time. The fact that other companies pay via 1099, and even advertise it,  does not mean you've missed something. Structures like this take advantage of the ambiguity in the rules, hoping to "fly below the radar" of lax oversight. Many states don't validate compensation plans by drilling down into W-2 employees versus contract employees. It's likely that this is what you are seeing. You take a chance when offering non-standard plans. 

Exceptions

• HUD requires that lenders participating in its programs affirmatively eschew conflicts of interest created by outside employment. Lenders offering FHA financing must compensate employees by W-2. 

You Cannot EVER Pay a Branch Manager as 1099

This is a contradiction in terms. A manager, by definition, is an employee responsible for ensuring employees perform their duties according to company policy. 

SAFE Act Update

Transitional Licensing Update - We updated the SAFE Act Licensing Policy to iterate the requirements of Transitional Licensing for LOs. Remember that you MUST have an existing license to transition. Registration does not count. Also, the company has to be licensed before you can transition to the company.

Licensing Processors - It should be obvious that processors or other employees don't need to be licensed. It should be equally obvious that processors who aren't employees MUST be licensed. Among other things, besides a license, that your contract processor must have:

• Processing Policies and Procedures
• Information Security
• Fair Lending
• Anti-Money Laundering
• Anti-Predatory Lending

Consult your Vendor Management plan.

Time to Revisit Mortgage Vendor IT Security Reviews

A document management vendor spills files onto the street

It's an accident waiting to happen. Walking down the street through a busy downtown, I witnessed a reminder of the inadvertent problems you can encounter through exposure of customer information. A banker's box of loan files fell off a dolly and crashed into the street spewing customer information onto the roadway. Luckily, for this vendor, the wind was calm, and the driver picked up the materials and returned them to the box without further incident. For me, this highlighted one of the many concerns my clients deal with; information security plans.

Who's Touching Your Clients' Data?

In the image above, it's clear that the driver could have taken the opportunity to capture some information from those loan files. Why weren't the boxes sealed? These are some of the elements that a site inspection of a vendor can reveal. Always review your vendor's procedures.

Today most of our files are transmitted electronically. One client used this as a rationale for not having locked file cabinets in a shared office space. But the reality, upon inspection, revealed "relics" all over her office. Copies of documents she scanned were in shadow files. Other printed material was left in folders on desktops. We overlook that our landlords and cleaning crews have access to the physical space. Always lock your cabinets and leave a clean desk.

Nevada, New York, Pennsylvania and Other Picky Regulators

A slew of requests from Nevada and New York reveal that these regulators have identified the information security weaknesses in our offices. They demand companies have an information security plan, which includes a vendor approval process.

For brokers, particularly, this may seem like overkill, since they don't even have a chance to approve attorneys, appraisers and credit bureaus. They can only use companies previously approved by the investor or wholesaler. However, it makes sense in the context of the level of diligence the lender or broker uses in having the protection of customers' non-public information top-of-mind. Don't send customer information to anyone unless you have ascertained they have received screening from another regulated entity. Better yet, screen them yourself. 

A Vendor Management Information Security Self-Audit Example

You can combine these audits with other elements of your vendor review. For instance, if you have a credit bureau you are reviewing, in addition to their information security plan, you can access their Fair Lending and any other consumer protection policies. Remember that if your vendor is licensed in your state, you can rely on the state's examination of a particular element of the vendor approval.

If you would like a copy of the Vendor Self-Audit Checklist please e-mail me, or like our Facebook page. (Make sure you send me your e-mail address!)