it seems like there was a rule that said you could ding a mlo for errors he may have made on the loan documentation but you could not ding a mlo for early default buy-backs.
is that true?

This is from the commentary as permitted:

vii. The quality of the loan originator's loan files (e.g., accuracy and completeness of the loan documentation) submitted to the creditor.

As long as the "ding" is based on "accuracy and completeness" of loan documents, that should be ok. The ding cannot be tied in anyway to the pricing or profitability of the loan.

thanks - but of course, that would mean, if you not only have to buy back the loan for early default, but you also refund the premium to the secondary market....now we are getting into "profitability"

I think you can still do it. Just be consistent and also ding for documentation errors on your portfolio loans. You'll have more support that the ding is actually tied to the documentation errors that way.

I have been doing some reading and I'm still confused.

Let's say that the MLO leaves Owner's Title off the GFE on a purchase loan and the bank has to refund to customer; can the bank take the amount paid to the cust from the MLO's comp on this?

Thanks,

I thought you could only "ding" a MLO for overall file compliance and not for a specific loan. And I don't think you can reduce the MLO compensation to pay for any tolerance issue...but I could be mistaken. With current rules, final rules, and proposed rules all bouncing around in my head, I can't keep them all straight...

I can't remember specifically if it was RESPA or the 2011 Reg Z Comp Rule, but you cannot charge the LO for the tolerance cure.

As an aside, I would also liken it to charging your tellers for an cash shortages in their cash drawers. If a teller is short, do you take the shortage out of their paycheck?

Dani, thanks, would you please explain what you and burgess meant by "ding" then. I remember that originally we could change their commission structure if they had errors, but could not hold from pay to reimburse for errors. However, to me, a "ding" could mean dinging their pay.

"I think you can still do it. Just be consistent and also ding for documentation errors on your portfolio loans. You'll have more support that the ding is actually tied to the documentation errors that way."

"...but you cannot charge the LO for the tolerance cure."

Truly not being argumentative, just want to be sure I am on the right page, especially since mgmt asked this question last week and I told them that they could not ding their commission for the reimbursement. Thanks,

Not a problem.

In the original discussion, I was referring to something like a penalty (like a flat fee or reduced total comp) off of the LO's comp if they messed up the file documentation (ie incorrect TIL, flood notice not delivered timely, completion errors on GFE, etc). I believe you can decrease the LO's compensation based on their inability to get the docs right (ie they only get .5% of the loan amount instead of 1%, or $50 off the total comp for that loan), you just can't charge them for the actual tolerance cure.

IMO, any "dings" to the LO's comp would need to come from some kind of structured penalty matrix you come up with prior to the incident actually occuring. For example, your overall comp plan that would be communicated to the LO could look something like this:

You will get 1% of the loan amount. You will be charged $50.00 or .5% of the loan amount (whichever is less) for any documentation errors.

Hope that makes sense.

Thanks,

Agree with Dani. Most MLO Comp plans have a penalty clause for documentation errors, but they all must have same clause.
Sorry had to change up response. I had a bank that paid a flat fee comp to all its MLOs in one state and a 1% to MLOs in a different state. Their comp plan had flat fee penalty in one state and % penalty in the other state.

Going to piggyback on this...

LO lender paid comp is X amount. When LO locks and then has to extend/relock for whatever reason, the pricing difference causes the Bank to take a hit due to the LO's pricing and the cost from the investor to extend a lock.

Agree or Disagree - Bank may not force a higher rate on the consumer to cover the LO Comp and any investor costs associated with extending the rate lock.

Agree or Disagree - Bank may not reduce LO Comp due to pricing differences.

Agree or Disagree - Though disclosed accurately on the HUD, can LO Comp and SRP be in the same general ledger account as long as we're able to show a full and accurate accounting of both?

From my Summary of Loan Originator Compensation Requirements under the Truth in Lending Act (Reg Z)
Reductions in compensation are permitted to cure unforeseen tolerance violation under RESPA (p.4, 203), and the reasons for it must be documented (p.525-527).

But you can't reduce their compensation for change in transaction terms.

I Agree with ^^^^

Thank you!!

Does anyone know if it would be permissible to "recapture" compensation that has already been paid to a LO if a loan pays off or is reduced by more than 50% during the first six months? I'm thinking no, but I have an attorney telling us it's ok.

Ask the attorney if he is willing to forgo his fee, if he has to defend the opinion in court. You may not penalize the MLO for what may or may not happen with the file in the future, unless there is violations with documentation. What if the borrower won the lottery? If they payoff the loan, should the MLO be required to return his/her commission? I think that would be hard to defend.

Resurrecting this topic a bit. I am not able to find the section of the Reg. that Dani York referenced above. Did the part about decreasing compensation based on [vii. The quality of the loan originator's loan files submitted to the creditor] get removed? What compensation penalties can a bank use to deal with a poor-performing MLO?

Is it allowed to lower compensation on a specific transaction because an MLO didn't issue a revised LE in a timely manner? In other words, they had the information that would have allowed the creditor to charge the borrower, but didn't "react" in time. 12 CFR 1026.36(d)(1) - 7(especially ii) seems to potentially give the right to lower compensation in such circumstances, but the language regarding "unforeseen circumstances" is tripping me up. Does it really only mean in cases where a fee increases and the creditor has the right to issue a revised LE and re-baseline tolerances, i.e charge the borrower, but they choose not to pass the increase along to the borrower and just eat it as a lender credit?

[7. Permitted decreases in loan originator compensation. Notwithstanding comment 36(d)(1)-5, § 1026.36(d)(1) does not prohibit a loan originator from decreasing its compensation to defray the cost, in whole or part, of an unforeseen increase in an actual settlement cost over an estimated settlement cost disclosed to the consumer pursuant to section 5(c) of RESPA or an unforeseen actual settlement cost not disclosed to the consumer pursuant to section 5(c) of RESPA. For purposes of comment 36(d)(1)-7, an increase in an actual settlement cost over an estimated settlement cost or a cost not disclosed is unforeseen if the increase occurs even though the estimate provided to the consumer is consistent with the best information reasonably available to the disclosing person at the time of the estimate. For example:

i. Assume that a consumer agrees to lock an interest rate with a creditor in connection with the financing of a purchase-money transaction. A title issue with the property being purchased delays closing by one week, which in turn causes the rate lock to expire. The consumer desires to re-lock the interest rate. Provided that the title issue was unforeseen, the loan originator may decrease the loan originator's compensation to pay for all or part of the rate-lock extension fee.

ii. Assume that when applying the tolerance requirements under the regulations implementing RESPA sections 4 and 5(c), there is a tolerance violation of $70 that must be cured. Provided the violation was unforeseen, the rule is not violated if the individual loan originator's compensation decreases to pay for all or part of the amount required to cure the tolerance violation.]

See comment 36(d)(1)-2.i.G.

Thank you for the citation. I see it now. This still seems to be more about compensation, rather than penalizing, which can create a different end result. In other words, Loan Officer A gets $100 when the file is completed accurately and $0 when the file is not completed accurately. It doesn't necessarily seem like the creditor can take money away from the LO. For instance, LO earns $500 commission based on loan amount, but then gets "dinged" $100 for an inaccurate file, resulting in $400 net compensation. This reference doesn't make it clear for that scenario.

Also, what about the particular reference I cited for the tolerance cure issue? Does it work when it's the "fault" of the LO, or is it only when the LO just wants to keep the price of the loan lower than a competitor and gives a lender credit out of his/her compensation?

Basically, if it does not involve the terms of the transaction - you can pretty much do whatever you want too. Dinging a LO for quality or cures, regardless of the cause, has nothing to do with the terms that the consumer receives.

Before I'd impose a monetary penalty on a lender I'd be very sure that it's blessed in HR policy or Loan policy as a punitive measure and the the infractions leading to such a result are very clearly spelled out. I do think that hitting a lender in the wallet may be the only way to gain his or her attention, shy of termination.

Alright. Thank you very much for the insight.

So, even if the underlying fee, such as an appraisal fee or even discount points could be considered a "term of the transaction" the ding for a tolerance cure would be considered separate? Because the ding is related to the cure and not the actual fee?

I'm taking the definition for "term of the transaction" here from the Official Interpretation.

TRANSACTION TERM DEFINED.
A “term of a transaction” under § 1026.36(d)(1)(ii) is any right or obligation of any of the parties to a credit transaction. A “credit transaction” is the operative acts (e.g., the consumer's purchase of certain goods or services essential to the transaction) and written and oral agreements that, together, create the consumer's right to defer payment of debt or to incur debt and defer its payment. For the purposes of § 1026.36(d)(1)(ii), this definition includes:

The rights and obligations, or part of any rights or obligations, memorialized in a promissory note or other credit contract, as well as the security interest created by a mortgage, deed of trust, or other security instrument, and in any document incorporated by reference in the note, contract, or security instrument;

The payment of any loan originator or creditor fees or charges for the credit, or for a product or service provided by the loan loan originator or creditor related to the extension of that credit, imposed on the consumer, including any fees or charges financed through the interest rate; and

The payment of any fees or charges imposed on the consumer, including any fees or charges financed through the interest rate, for any product or service required to be obtained or performed as a condition of the extension of credit.

The fees and charges described above in paragraphs B and C can only be a term of a transaction if the fees or charges are required to be disclosed in the Good Faith Estimate, the HUD-1, or the HUD-1A (and subsequently in any integrated disclosures promulgated by the Bureau under TILA section 105(b) (15 U.S.C. 1604(b)) and RESPA section 4 (12 U.S.C. 2603) as amended by sections 1098 and 1100A of the Dodd-Frank Act).