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Legal Risks Associated with Mortgage Loan Officer Compensation

How a bank compensates mortgage loan officers can present legal risk for the bank.  Banks need to make sure their compensation practices comply with the federal Fair Labor Standards Act and related state laws, as well as Regulation Z.

Threshold Question: Are Loan Officers Exempt or Non-Exempt?

The exempt / non-exempt status of mortgage loan officers has been heavily-litigated in recent years and has been the subject of several Department of Labor opinion letters.  The inquiry remains very fact-specific and depends on what the loan officers actually do not just on their job descriptions. Relevant questions include:

  • How the mortgage loan officers are compensated (salary basis, hourly basis, commissions, etc.)
  • How much time (hours/week) the loan officers spend in the office (including a home office)
  • What the loan officers do while in the office.
  • What they do while working outside of the office.
  • How involved the loan officers are in generating sales. (e.g., meeting with prospective borrowers at their homes or other locations, meeting with referral sources such as real estate agents, developers, etc.)
  • How much time (hours/week) the loan officers spend generating sales.
  • Others duties and responsibilities of the loan officers.
  • How much time (hours/week) loan officers spend on those other duties and responsibilities (e.g., completing loan applications, gathering credit information and other documentation for the loan application process, etc.)
  • How much judgment and discretion the mortgage loan officers exercise.
  • How much flexibility the mortgage loan officers have in setting work hours and schedules.
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CFPB Proposes New Amendments to Mortgage Servicing Rules

On May 6, 2014, the CFPB issued proposed amendments to the mortgage rules under the Truth in Lending Act (TILA) affecting Regulations Z and X.  The proposed amendments affect the small servicer/small creditor exceptions to the mortgage rules and the “Qualified Mortgage” determination.  The CFPB proposes to partially re-define who may qualify as a “small servicer” under § 1026.41 of Regulation Z (incorporated by cross reference in Regulation X), revise the scope of the nonprofit small creditor exemption from the ability-to-repay rule in § 1026.43(a)(3)(v)(D) of Regulation Z, and establish a limited cure procedure where a creditor inadvertently exceeds the “Qualified Mortgage” points and fees limits.

Amendment to the “Small Servicer” Definition:  The CFPB originally presumed that most nonprofits would qualify for the “small servicer” exemptions.  However, during implementation of the mortgage rules, the CFPB learned that certain nonprofits might not qualify as “small servicers” because they were part of a larger association of nonprofits that are separately incorporated but that may operate under mutual contractual obligations, share a charitable mission, and use a common name or trademark.  In order to save resources, such associations sometimes consolidate servicing activities, with one of the associated entities providing loan servicing to one or more others, for a fee.  Under current rules, such nonprofit servicers would not qualify for the “Small Servicer” exemptions because they service, for a fee, loans on behalf of a non-“affiliated” entity.  The CFPB proposes to amend the definition of “Small Servicer” so as not to exclude qualified nonprofit entities within such formal associations where certain requirements are met.  Related changes to the section’s formal comments are also proposed.

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“Is it safe?” Banking in 2014

Szell:  Is it safe?
Babe:  I don’t know what you mean. I can’t tell you something’s safe or not, unless I know specifically what you’re talking about.
Szell:  Is it safe?
Babe: Yes, it’s safe, it’s very safe, it’s so safe you wouldn’t believe it.
Szell:  Is it safe?
Babe:  No. It’s not safe, it’s… very dangerous, be careful.

In the 1976 movie Marathon Man, Babe (Dustin Hoffman) is held down while Nazi war criminal Szell (Laurence Olivier) drills Babe’s teeth without anesthetic, trying to learn if it is safe to sell a cache of diamonds stolen from concentration camp victims.  Babe has no idea what Szell was asking about so has no information to disclose, even under torture.

After a decade of painful regulatory examinations without anesthetic, bankers are now asking the same question from the perspective of the tortured.  Is it safe to do business again?  As in Marathon Man, whether it is safe depends in part on what “it” means – what the proposed business is and who the customer is.  It also depends on the bank’s systems and infrastructure to manage the risk.

Given the changing legal and liability landscape, and changing expectations of examiners, bankers are uncertain about the risks of engaging in many types of business.  Some of the areas of uncertainty include providing banking services to third party payment processors, payday lenders, or money services businesses.  Other bankers are wondering about banking services for legal marijuana retailers, or their clients taking courses for forex, or buyers, sellers, or processors of virtual currencies.  Some bankers are even hesitant to return to mortgage lending in light of all of the new regulations and regulatory scrutiny.

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CFPB Issues Final Integrated Disclosure Rules

On November 20, 2013, the CFPB published the final rules required by the Dodd Frank Act to provide for integrated mortgage disclosures under the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”).  The new rules provide for two new forms of disclosure to replace the existing RESPA Good Faith Estimate and HUD-1 disclosures and the corresponding early and final TILA disclosures.

The first new form (the Loan Estimate) will provide disclosures to help consumers understand the key features, costs, and risks of the mortgage for which they are applying, and will replace the RESPA Good Faith Estimate and the “early” TILA mortgage disclosure form.  This form will be provided to consumers within three business days after they submit a loan application. The second form (the Closing Disclosure) combines the RESPA HUD-1 and final TILA disclosures regarding all of the costs of the loan transaction.  The Closing Disclosure will be provided to consumers three business days before they close on the loan.

The rules will take effect on August 1, 2015.  Watch this BankBryanCave.com site for more details over the coming weeks and months.  In the meantime, the CFPB’s publication, exceeding 1800 pages, is available on the CFPB’s website.

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Financial Services Update – March 11, 2011

OCC Criticizes Durbin Amendment

Last Friday, John Walsh, the Acting Comptroller of the U.S. Currency who oversees regulation of the nation’s largest banks, sent a letter to the Federal Reserve criticizing the Fed’s proposed rule to implement the Wall Street Reform Act’s “Durbin debit card swipe fee” amendment. In the letter, Walsh said the Durbin amendment “takes an unnecessarily narrow approach to recovery of costs that would be allowable under the law and that are recognized and indisputably part of conducting a debit card business. This has long term safety and soundness consequences – for banks of all sizes – that are not compelled by the statute.”

Locke to Leave Commerce for China

On Thursday, President Obama announced that he had chosen Commerce Secretary Gary Locke to succeed Jon Huntsman as U.S. Ambassador to China. While the President has yet to announce Locke’s replacement, speculation has centered on the former Mayor of Dallas and current U.S. Trade Representative Ron Kirk.

Attorneys General Mortgage Settlement Stalled

The proposed settlement by state attorneys general with the five biggest U.S. mortgage servicers leaked out this week. The proposal, which calls for a dramatic increase in loan modifications, is intended as the basis for settling allegations of widespread wrongdoing by the big loan servicers in handling millions of foreclosures. The settlement would be with Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and GMAC/Ally Financial Inc. In a press conference earlier this week, Iowa Attorney General Tom Miller, who led an investigation on behalf of the 50 states’ attorneys general, predicted that a broad settlement could be reached within about two months. Miller said the agreement was worked out jointly with federal agencies including the Federal Deposit Insurance Corp, the newly created Consumer Financial Protection Bureau and Justice Department. On Tuesday, Brian Moynihan, chief executive of Bank of America, the largest U.S. servicer, said at a meeting with analysts and investors that he opposes widespread principal reductions for homeowners in default. On Thursday, Rep. Spencer Bachus (R-AL) and Sen. Richard Shelby (R-AL), the top Republicans on the House and Senate banking committees, also criticized the proposed settlement as a “regulatory shakedown.”

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Mortgage Reforms under the Dodd-Frank Act

The following outlines the primary consumer protection requirements of the Mortgage Reform and Anti-Predatory Lending Act (the “Act” or the “Mortgage Act”), which is Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Effective Dates. The Mortgage Act is somewhat ambiguous as to its effective dates.  There is a possible argument  that those many provisions of the Act for which no regulation is specifically required took effect immediately upon the signing of the Act by the President on July 21, 2010.  We believe do not believe that to be a plausible interpretation.

Under the best interpretation of the Act, those provisions for which no regulations are issued would take effect 18 months after the designated transfer date.  The designated transfer date is the date on which the various consumer protection functions are transferred from the federal banking agencies to the Consumer Financial Protection Bureau (the “Bureau”).  Where regulations are required by the Act, they must be issued in final form within 18 months of the designated transfer date, and the regulation and corresponding Act provision then would take effect within 12 months thereafter.

The Consumer Financial Protection Bureau. The majority of the Mortgage Act’s provisions will be included in the “enumerated consumer laws” that the Bureau will implement and enforce.  However, most of the regulations that the Act requires would be written by the Federal Reserve, presumably due to the delay until the designated transfer date.

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