FAQs
Question: One of our loan officers believe they heard in a webinar/seminar that if a loan support staff member were to answer questions about a loan for a customer (i.e. the customer wants to confirm their loan interest rate or their closing date, etc.) the loan support staff would be considered a Loan Originator, is this correct?
Answer: The definition of a “loan originator” (LO) is quite broad under the rule: a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any loan origination activities.
Per Regulation Z’s definition, a person doing just one of any of these loan origination activities is deemed a LO:
- Taking an application;
- Arranging a credit transaction;
- Assisting a consumer in applying for credit;
- Offering or negotiating credit terms;
- Making an extension of credit;
- Referring a consumer to a loan originator or creditor; or,
- Advertising or communicating to the public that you can or will perform any loan origination services
Whereas, a person is not deemed a LO if he/she:
- Performs purely administrative or clerical tasks on behalf of a LO or creditor, but does not take consumer credit applications or offer or negotiate credit terms available from a creditor.
- Provides bona fide third-party advisory services, such as those an accountant, attorney, or registered financial advisor would.
- Provides HUD-approved housing counseling services in certain circumstances.
- Provides general explanations, information, or descriptions of credit products in response to consumer queries.
- Provides contact information for fellow employees of a loan originator or creditor upon the consumer’s request, so long as particular credit terms are not discussed with the consumer or the consumer is not referred to a particular LO based on the consumer’s financial characteristics.
- Performs loan-processing activities, such as compiling and assembling credit application packages and supporting documentation, for a LO or creditor.
- Performs credit underwriting activities, as long as there is no communication directly with the consumer about specific credit terms.
So, the institution will need to be careful in what information non-LOs are permitted to provide to consumers. Certainly non-LO staff could coordinate a closing date, confirm receipt of information provided by the consumer, etc., but a non-LO could not communicate specific information to the consumer that could be construed as “offering or negotiating” credit terms.
Question: The regulation indicates contributions to bonus plans can’t exceed 10 percent of total compensation – define total compensation.
Answer: The Official Staff Commentary to section 1026.36(d) states when calculating “total compensation” for an individual LO, the institution should use the LO’s wages and tips reportable for Medicare tax purposes in box 5 on IRS Form W-2 (or IRS Form 1099-MISC if the originator is an independent contractor). If the institution chooses, it may also include all contributions made to the LO’s accounts in designated tax-advantaged plans that are defined contribution plans – such as 401(k) retirement plans. In addition, if any compensation paid to an individual LO consists of an award of merchandise, services, trips or similar prizes or incentives, the institution must include the cash value of the award when calculating total compensation.
Also keep in mind, when calculating total compensation the institution should use the same time period for which the bonus determination was calculated, whether or not the bonus is actually paid during that particular period. For example, if you pay an individual LO a bonus at the end of each quarter under a non-deferred profits-based compensation plan, the quarterly bonus payment is limited to 10 percent of total compensation received during the quarter.
Question: In the past, our bank has excluded mortgage income from the calculation of our bonus program, will this meet the requirements of the regulation?
Answer: The Official Staff Commentary states a non-deferred profits-based compensation plan (i.e., a bonus plan) does not include a plan that is determined with reference only to profits from a business other than a mortgage-related business, as determined in accordance with reasonable accounting principles. So, your program will be compliant under the rule provided the plan is not based upon profits from “mortgage-related business.” The CFPB’s Small Entity Compliance Guide describes profits from “mortgage-related business” include mortgage origination fees, interest earned on mortgage loans, income earned from servicing mortgage loans, and proceeds earned from the sale of mortgage loans to secondary market investors.
Question: The LO qualification rules effective January 10, 2014, require LOs who are not otherwise licensed and NMLS registered have a background check and credit bureau in place prior to acting as a LO. Our institution started ordering background checks and credit reports for all new hires about seven years ago, but before that, I am finding the more tenured employees do not have a criminal background check or credit report in their personnel file. Must we obtain background checks and credit reports on these tenured employees?
Answer: The LO qualification rules, found in Regulation Z at 1026.36(f) require an institution to obtain a criminal background check, credit report and information from the NMLSR on administrative, civil or criminal findings reported by any government jurisdiction prior to letting the individual act as an LO.
The institution must collect this information for any individual:
- Hired on or after January 10, 2014; or
- Hired before that date but for whom no applicable statutory or regulatory background standards were in effect at the time of hire to screen that individual, or the applicable standards were not used to screen that individual.
After the initial screening, an institution only has to perform subsequent reviews and assessments if it knows of reliable information indicating that the individual LO likely no longer meets the standards set by the rule. For example, if it knows of criminal conduct by an individual LO through a newspaper article, a previously obtained criminal background report, or the NMLSR, it must collect the above information to determine whether any resulting conviction, or any other information, causes the individual to fail to meet the standards set by the rule, regardless of when the LO was hired or previously screened.
If an institution has an existing employee who is not an LO and then subsequently moves into a LO role, the employee would be subject to the qualification requirements. So if the institution did not obtain the required criminal background check, credit report, and information from the NMLSR on administrative, civil, or criminal findings reported by any government jurisdiction at the time of hire (because it was not required for the position the staff member was originally hired), the institution would be required to do so prior to letting the employee act in the capacity of a LO.
Question: The LO qualification and training requirements only apply to those staff registered with the NMLSR as a Mortgage Loan Originator (MLO), correct?
Answer: Not necessarily. The definition of a LO is much broader in Regulation Z than it is under the SAFE Act. Regulation Z defines a “loan originator” (LO) as: a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: a person who takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. The term “loan originator” includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition…”
Whereas, under the SAFE Act, a MLO is defined as: An individual who: (1) Takes a residential mortgage loan application; and (2) Offers or negotiates terms of a residential mortgage loan for compensation or gain. Also keep in mind, the SAFE Act contains a de minimis exemption for originators who originate less than five mortgage loans per 12-month period. There is no de minimis exemption in the Regulation Z rule. A staff member who acts in the capacity of a LO for a single transaction is covered by Regulation Z’s rule.
Thus, an institution may have LOs per Regulation Z on staff who will not be required to register with the NMLS because they do not both take applications and offer or extend credit, or because they participate in fewer than five transactions per 12-month period, but still may be covered by Regulation Z’s qualification and training requirements. It will be important for an institution to properly identify staff who may be LOs per Regulation Z but not MLOs under the SAFE Act.
The CFPB’s Small Entity Guide does an excellent job of explaining the applicability of the LO qualification requirements. It can be found on the CFPB website at: https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/loan-origination-rule/.