Reg Z Rules for Loan Originator Compensation April

Reg Z Rules for Loan Originator Compensation April 12, 2011 James M. Milano milano@wbsk. com 1

Introduction Topics: • How We Got Here • Reg Z Rule – Back to Basics • What to Do Right Now

How We Got Here • Regulators Primary Concern: o LOs Put Own Interests First o No Liability

LO Comp Rule - General • 9/24/10 – FRB Final Rule • Regulation Z o Regulation o Official Interpretation o Unofficial comments • Effective date: April 1, 2011 • Revised Effective Date: Litigation Stay

Scope What transactions covered? • Closed-end consumer credit transactions secured by a dwelling • All liens, forward and reverse What transactions not covered? • HELOCs and Timeshares • Business purpose loans

Scope (cont’d. ) • Whose compensation? • “Loan originator” - person who for compensation or gain, or expectation, arranges, negotiates, or otherwise obtains an extension of consumer credit for another

Scope (cont’d. ) NOT subject to the new rule: • “Creditors” - close loan in own name with own funds • Non-Producing Managers: o Do not arrange, negotiate or obtain, or o Compensation is not based on whether any particular loan is originated

LO Compensation • “Compensation” o Salaries, wages, commissions, “thing of value” • Excluded o Bona fide third party charges

Rule 1 - Terms/Conditions No LO shall receive, and no person pay, an LO (directly or indirectly) compensation based on any loan terms/conditions. • “Term/Condition”: o Interest rate o APR o LTV ratio o Prepayment penalty o Proxies (e. g. , credit score or DTI ratio)

Rule 1 No T/C Payment • Permitted: o. Fixed percentage of loan amount, where percentage same for all loans (floors and caps allowed) o. Overall loan volume, pull through (RESPA) o. Long-term performance of loans (Employment Law)

Rule 1 - Some Permitted Methods • Existing vs. new customers • Fixed dollar amount per loan • Hourly/salary pay for actual hours worked • Quality of files (e. g. , accuracy and completeness) • Legitimate business expenses, e. g. , fixed overhead costs

Rule 2 – No Dual Compensation • LO may either receive compensation directly from consumer, or directly or indirectly from other person, but not both

Rule 3 – No Steering • Really a Broker Restriction Rule • LOs prohibited from “steering” consumer to loan based on fact that LO will receive more compensation in that transaction than in other transactions LO offered or could have offered, unless in consumer’s interest

Rule 3 – No Steering (cont’d. ) 3 general ways to satisfy: 1. Creditor employees: LO employees of creditors complying with prohibition on compensation based on loan terms/conditions deemed compliant with steering prohibitions 2. Least amount of compensation: LO reviews possible loan offers available from significant number of creditors with which LO regularly does business and directs consumer to transaction paying the least amount of creditor-paid compensation 3. Safe harbor: Satisfy safe harbor requirements (Details below)

Rule 3 – No Steering (cont’d. ) 1. Present consumer with loan options from significant number of creditors with whom regularly do business, including: • Loan with lowest interest rate; • Loan with lowest interest rate and no risky features, and • Loan with lowest total dollar amount for origination points or fees and discount points 2. If more than 3 loan options presented for each type of transaction, LO must highlight the 3 options meeting above criteria; and 3. LO must believe consumer likely qualifies for the loan options presented

Rule 3 – No Steering (cont’d. ) • Don’t have to: o Establish new creditor relationships o Inform consumer about loans if not likely to qualify o Direct consumer to transaction providing least compensation if in consumer’s interest

That’s It!

What to Do Right Now • Stop reading, start writing • The Real Rule: o Regulation Z 12 CFR 226. 36(d) and 226. 36(e) o Official Staff Commentary

Legal Disclaimer: Today’s webinar is for informational purposes only. The information contained herein and associated with this presentation are not intended to constitute, and is not a substitute for, legal or other advice. These materials provide an overview of some of the federal regulations that may affect mortgage loan originations. These materials are designed to alert the reader to the regulatory that may have a bearing upon the reader's business activities. The materials cover areas in which the proper interpretation of law and regulation can be highly dependent upon particular facts. Consideration of particular facts may reveal exceptions or differing interpretations these regulations. Accordingly, taking action simply upon the basis of information provided in these materials is not advisable. These materials are not a substitute for consultation with qualified legal counsel regarding the manner in which the laws and regulations referenced herein may be interpreted and apply to particular facts. You should consult appropriate counsel or other advisers, taking into account your relevant circumstances and issues.

Questions?

Reg Z Rules for Loan Originator Compensation Jim Milano milano@wbsk. com 202 628 2000 21