Financial Regulatory Reform: The New Rules on LoanThe New Rules on Loan

Originator Compensation

Mitchel H. KiderJoseph E. SilviaLeslie A. Sowers

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Introduction

T i t CTopics to Cover:

• Scope of coverageLO C ti Wh t i hibit d? Wh t i• LO Compensation: What is prohibited? What is permitted?

• Prohibition on steering • Record retention requirements• Interplay with the loan originator compensation

and anti steering provisions of the Dodd Frankand anti-steering provisions of the Dodd-Frank Act

• Another statute to be considered in addressing l i i t ti F i L bloan originator compensation: Fair Labor Standards Act

• Issues and questions

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Introduction • On August 16 2010 the Federal Reserve Board issued aOn August 16, 2010, the Federal Reserve Board issued a

final rule to address loan originator compensation practices – 75 Fed. Reg. 185 (Sept. 24, 2010)

• Amends Regulation Z, implementing Truth in Lending• Does NOT implement Dodd-Frank Act provisions on

originator compensation• Effective date: April 1, 2011

• Applies to any covered transaction for which the creditor receives an application on or after April 1, 2011

Practice Tip: Should we wait until April 1st to implement our LO compensation plan?plan?

• Competition concerns• Discussions with loan officers and brokers

• Stated goals of the new rule:Stated goals of the new rule:• Protect mortgage borrowers from unfair, abusive, or

deceptive lending practices; and • Help ensure that consumers can choose from loan

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poptions that include the lowest interest rate and lowest amount of points and origination fees

Introduction

Th i hibiti i th lThree main prohibitions in the new rule:

• Compensation based on loan terms or conditions: Loan originators may not receive compensation that is g y pbased on loan terms or conditions, other than loan amount

• Compensation from multiple sources: Loan originators• Compensation from multiple sources: Loan originators may not receive compensation from the lender or other parties if the loan originator is receiving compensation directly from the consumer

• Steering: Loan originators are prohibited from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest to g gincrease the loan originator’s compensation

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Scope of CoverageWhat transactions are covered by the new rule?What transactions are covered by the new rule?

• All closed-end consumer credit transactions secured by first or subordinate liens on a dwelling that are subject to TILA

• Includes closed-end reverse mortgage transactionsg g• All owner occupancies (first and second homes)• All lien positions

Wh t t ti t d b th l ?What transactions are not covered by the new rule? • Open-end loans (e.g., HELOCs)• Timeshares

L difi ti t i i t l l f fi d R Z• Loan modifications not rising to level of a refinance under Reg. Z• Loans secured by real property that do not include a dwelling

(i.e., vacant land)• Loans not “covered” by TILA (e g business purpose loansLoans not covered by TILA (e.g., business purpose loans,

such as a loan secured by a home purchased for use as a rental property)

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Scope of CoverageIs compensation from Secondary Market TransactionsIs compensation from Secondary Market Transactions covered?

• Generally does not cover transactions that occur between creditors and secondary market purchasers to whichcreditors and secondary market purchasers, to which consumers are not a direct party

• Does not apply to payments received by a creditorwhen selling the loan to a secondary market investorwhen selling the loan to a secondary market investor

• However, when a mortgage brokerage company brokers a loan to a creditor, the brokerage company is not exempt from the new rulenot exempt from the new rule

• The prohibitions on compensation to loan originators (“LOs”; i.e., loan officers and mortgage brokers) extend to all persons’ payments to an LO, not just the creditor’sall persons payments to an LO, not just the creditor s payment to an LO, to prevent evasion by structuring payments to LOs through non-creditors, such as secondary market investors

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Scope of CoverageWhose compensation is subject to the new rule?Whose compensation is subject to the new rule?

• A “loan originator”: a person, with respect to a particular transaction, who for compensation or other monetary gain or in expectation of compensation or other monetarygain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person

• Includes payments to both a natural person and anIncludes payments to both a natural person and an entity:

• Individuals (brokers and loan officers) employed by mortgage brokers mortgage bankers andby mortgage brokers, mortgage bankers and financial institutions who, for compensation, arrange, negotiate or otherwise obtain a consumer loan for another person; and

• Mortgage broker companies

• Applies to payments to a creditor that closes a loan in its name but uses table-funding from a third party to

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its name, but uses table funding from a third party to fund the loan

Scope of CoverageWhose compensation is NOT subject to the new rule?Whose compensation is NOT subject to the new rule?

• Creditors that originate loans closed in their own names and with their own source of funds

• Servicers modifying an existing loan on behalf of the current owner

• Loan modification must not constitute a refinancinggas defined under Reg. Z (“when an existing obligation [that was subject to TILA’s disclosure requirements] is satisfied and replaced by a new obligation undertaken by the same consumer”)obligation undertaken by the same consumer”)

• Managers, administrative staff and other employees of creditors and loan originators:

• Who do not originate loans and

• Whose compensation is not based on whether any particular loan is originated

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p g

Scope of Coverage

Practice Tip: How do the new rules affect the compensation of Branch and Production Managers?

• Is there a carve out for such managers?

• To what extent, if any, can Branch Manager personal production be included in Branch Manager compensation?

• If a Branch or Production Manager is involved in approving some loans, to what extent must these loans be removed from their compensation?

• Impact on net branches and how they operate

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LO Compensation

Wh t i “ ti ?”What is “compensation?”

• Fees the loan originator retains or keeps, regardless of the label or name given or associated with the fee

• Salaries, wages, commissions, and any financial or similar incentive, including:

• Annual or periodic bonuses; and A d f h di i t i i il i• Awards of merchandise, services, trips, or similar prizes

What is not “compensation?”

• Amounts a broker receives and passes through for bona fide and reasonable third party charges (e.g., title insurance or appraisals)

• Amounts the loan originator retains or keeps resulting from g p gunintentional overcharges of bona fide and reasonable third party charges

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LO Compensation

Cl if i E lClarifying Examples:

1. Mortgage broker charges a $400 application fee and uses that amount to pay $350 for a property appraisal and $50 for a credit

treport: • Application fee does not constitute LO compensation for the

purposes of the rule

2. Mortgage broker deliberately marks up a third-party fee and retains the difference:

• Mark-up amount retained is LO compensation

3. Mortgage broker is uncertain of the cost of a third-party charge at the time the $400 application fee is charged (i.e., mortgage broker chooses from a list of appraisers that usually charge in a range of $300-$400 for a typical appraisal), and later therange of $300 $400 for a typical appraisal), and later the appraisal fee is determined to come in at $300 (i.e., $50 less than expected):

• Mortgage broker may retain the $50 without it being deemed compensation under the FRB Rule

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compensation under the FRB Rule

LO CompensationLoan terms or conditions: No loan originator shall receive andLoan terms or conditions: No loan originator shall receive and no person shall pay a loan originator directly or indirectly, compensation based on any of the loan terms or conditions

• What is a loan term or condition? No express definition but• What is a loan term or condition? No express definition, but examples provided:

• Interest rate• Annual percentage rateg• LTV ratio• Prepayment penalty• A factor that, while not itself a loan term or condition, serves

as a proxy for a loan term or condition (e.g., credit score or DTI ratio)

• One express exclusion also provided: • Loan amount (when the loan originator’s compensation is• Loan amount (when the loan originator’s compensation is

based on a fixed percentage of the loan amount)

Practice Example: May compensation be based on either loan type/product or loan purpose?

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or loan purpose? • Loan type/product (e.g., conventional, FHA, VA) = NO• Loan purpose (e.g., purchase, refinance) = YES

LO CompensationLoan Terms or Conditions Example:p

Practice Tip: Credit score or DTI ratio is a proxy for a loan term or condition when either of these factors results in different interest rates for the same loan to different consumers, and the loan

Practice Example: Consumer A and consumer B receive loans

originator’s compensation from the same creditor for these loans varies in whole or in part based on either of these factors.

pfrom the same loan originator and creditor.

• Consumer A has a credit score of 650, and consumer B has a credit score of 800.

• Consumer A’s loan has a 7% interest rate, and consumer B’s ,loan has a 6.5% interest rate because of the consumers’ difference in credit scores.

• The creditor pays the loan originator $1,500 in compensation for consumer A’s loan and $1,000 in compensation for pconsumer B’s loan.

• NOT PERMITTED because the creditor varies compensation payments in whole or in part with a proxy for a loan term or condition (i.e., the consumers’ credit scores reflect difference

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(in interest rate).

LO CompensationWho can compensate the loan originator?Who can compensate the loan originator?

• Single source for compensation: Loan originator may eitherreceive compensation directly from a consumer, or receive compensation directly or indirectly from a lender or other person, p y y pbut not both

• When any loan originator receives compensation directly from the consumer, no other loan originator (e.g., the mortgage b k l th l f th t b k )broker employer or another employee of the mortgage broker) is allowed to receive compensation from the creditor or another person in connection with that loan

• Affiliates are treated as a single personAffiliates are treated as a single person

Practice Example: A parent company has two mortgage lending subsidiaries. If a mortgage broker delivers loans to both subsidiaries each subsidiary must compensate the mortgagesubsidiaries, each subsidiary must compensate the mortgage broker in the same manner.

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LO CompensationSources of Compensationp

• If the consumer increases the loan amount to include the loan originator’s origination fee and that fee is paid to the loan originator from the loan proceeds, is that considered direct

f h ?payment from the consumer?• YES

• Is compensation derived from an increased interest rate considered direct compensation from the consumer?considered direct compensation from the consumer?

• NO

• Are points paid by the consumer considered payments directly from the consumer?

• NO

• If the origination fees are paid by a consumer to the creditor and the creditor pays the originator from these fees, can the loan originator also receive compensation directly from the consumer?originator also receive compensation directly from the consumer?

• NO

• May a loan originator be paid a salary or hourly wage by the loan originator’s employer that is not tied to a specific loan, if the loan

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originator s employer that is not tied to a specific loan, if the loan originator receives direct compensation from the consumer?

• YES

LO CompensationWhat are permissible compensation methods? at a e pe ss b e co pe sat o et ods

Compensation based on: • A fixed percentage of the loan amount, where the fixed percentage

remains the same for all loans (no “tiers” based on loan amount)remains the same for all loans (no tiers based on loan amount)• Fixed minimum or maximum dollar amounts permitted

• Overall loan volume (i.e., total dollar amount of credit extended or total number of loans originated) delivered to the creditor

• Long-term performance of the originator’s loans• An hourly rate of pay to compensate the originator for the actual

number of hours worked• Whether the consumer is an existing or a new customer• Whether the consumer is an existing or a new customer• Payment that is fixed in advance for every loan the originator

arranges for the creditor (e.g., $600 for every loan arranged for the creditor, or $1,000 for the first 1,000 loans arranged and $500 for each additional loan arranged)additional loan arranged)

• Percentage of applications submitted by the loan originator to the creditor that result in consummated transactions

• Quality of the loan originator’s loan files (e.g., accuracy and

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completeness of the loan docs) or• Legitimate business expenses, such as fixed overhead costs

LO CompensationWhat are permissible compensation methods?What are permissible compensation methods?

Practice Tip: Legitimate business expenses should be incorporated into a formula for calculating compensation (as opposed to d d i f h )deducting money for such expenses)

• Otherwise, state labor laws regarding deductions must be considered

• E g Colorado law specifies the types of deductions that• E.g., Colorado law specifies the types of deductions that may be made, and requires a written agreement be in place for certain deductions to be taken

Practice Tip: Yield Spread Premiums (“YSPs”) are NOT outlawed by this rule.

S• However, YSPs are permitted only as a credit to the borrower • A creditor may not compensate a mortgage broker with a YSP

because a YSP is based on the interest rate

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LO CompensationPractice Example: Does the Rule allow a creditor to provide their loanPractice Example: Does the Rule allow a creditor to provide their loan officers with some allowances or latitude (e.g., a point bank), to adjust or negotiate loan pricing up or down, so long as it doesn’t affect their compensation?

Yes There is nothing in the Rule that prevents a creditor from• Yes. There is nothing in the Rule that prevents a creditor from authorizing their employee loan officers to negotiate loan pricing up or down, including:

• Using a point bank;• Approval procedures whereby the loan officers must obtain

permission for such adjustments from their branch manager; or • Waivers or adjustments to creditor and/or third-party fees (situations

where the creditor pays all or a portion of third-party fees)

• Under no circumstances can such adjustments affect the amount of compensation the loan officer receives in connection with a transaction

• Overages or shortages as we know them – in which the loan officer• Overages or shortages as we know them – in which the loan officer shared in the increased or decreased revenues – are a thing of the past

• Intersection between new loan originator compensation statutes/ regulations and fair lending

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regulations and fair lending

LO Compensation

P ti E l T h t d tiPractice Example: To what degree can compensation vary among loan officers and brokers?

• A creditor may pay 2 loan officers differently, as long as such variance is not based on loan terms or conditionssuch variance is not based on loan terms or conditions

• May be based on any permissible factor (e.g., loan quality, loan performance, current market conditions, etc.)

• A creditor may pay its retail loan officers more or less than it pays to outside brokers

• Are compensation floors and caps permissible?p p p• Yes

• Can floors and caps vary among loan officers?• Yes, as long as the variance is based on a legitimate

business expense or other permissible factor

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LO CompensationPractice Example: Can commission levels vary by branch?Practice Example: Can commission levels vary by branch?

• Yes, under certain circumstances. In general, variations among branches with regards to such costs as rent and overhead can be taken into account in setting loanoverhead can be taken into account in setting loan originator compensation.

• Local competitive factors may also be taken into account

• For example, loan originators working out of a branch located in a market with average loan balances of $1 million may have higher dollar commission rates than loan originators in a branch with average loan balancesloan originators in a branch with average loan balances of $200 thousand. However, if a loan originator in the latter branch originated a $1 million loan for a consumer located in the market of the first branch, he or she could not receive a higher commission rate.

• Creditors should be mindful of possible fair lending impacts of any difference in compensation of loan

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originators by branch

LO CompensationCan LO compensation be revised? If so when?Can LO compensation be revised? If so, when?

• YES – Periodic revisions: A creditor or other person paying a loan originator may periodically revise the loan originator’s compensation prospectively, so long as the revised p p p y gcompensation is not based on a loan’s terms or conditions

• Factors such as loan performance, loan volume, and current market conditions may be reviewed and a loan originator’s compensation revised prospectively based on that review

Practice Tip: Federal Reserve Board Staff Commentary to the rule contemplates a periodic revision to compensation after six months. While this is not a minimum or maximum threshold, a periodic revision conducted more frequently may be subject to higher scrutiny.

• NO – Modification of loan terms: When a creditor offers a loan with specific terms and conditions, and subsequently, different terms or conditions are negotiated for that loan, the loan

i i t ’ ti f th t l t ioriginator’s compensation for that loan may not increase or decrease based on the renegotiated terms or conditions

• No changes in LO compensation even if such a modification benefits the consumer (e.g., waiving fees, lowering interest rate, increased

dit t )

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credit, etc.)• May a creditor require a loan originator to pay for fees that the loan

originator fails to collect and/or include on the GFE?

Prohibition on Steering

H d th R l hibit “ t i ?”How does the Rule prohibit “steering?”

• Loan originators are prohibited from directing or ‘‘steering’’ a consumer to a dwelling-secured loan based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered, unless the consummated transaction is in the consumer’s interest

• Directing or “steering” = advising, counseling, or otherwise influencing a consumer to accept a particular dwelling-secured loan

• Transaction must be closed

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Prohibition on SteeringWhat does it mean to be “in the consumers interest?”

• The transaction must be compared to other possible loan offersavailable through the originator (if any) for which the consumer was likely to qualify at the time of the transaction

• Possible loan offer = an offer that the creditor likely would extend upon receiving an application from the consumer (i.e., offer does not need to actually be extended)

A il bl l ld b bt i d f dit ith hi h th l• Available = loan could be obtained from a creditor with which the loan originator regularly does business

• Likely to qualify = based on creditor’s standards and credit terms at the time of the transaction

• Good faith belief

• Based on information reasonably available

• May rely on information provided by consumer even if subsequently• May rely on information provided by consumer, even if subsequently determined to be inaccurate

• Loan originator not expected to know all aspects of creditor’s underwriting criteria (only pricing and other information creditors routinely communicate to loan originators such as rate sheets and

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routinely communicate to loan originators, such as rate sheets and minimum credit scores)

Prohibition on SteeringThree ways to satisfy the prohibition:y y p

1. Creditor employees: Loan originator employees of creditors complying with the provisions of the rule prohibiting compensation based on loan terms and conditions in

i i ti l f th i dit l (i l toriginating loans for their creditor-employers (i.e., loan not “brokered” to another creditor) are deemed to comply with the steering prohibitions

• Employee loan originators must comply with either 2 or 3Employee loan originators must comply with either 2 or 3 below when brokering a loan to another creditor

2. Safe harbor: Satisfy the safe harbor requirements

3 Least amount of compensation: The loan originator reviews3. Least amount of compensation: The loan originator reviews possible loan offers available from a significant number of creditors with which the originator regularly does business and directs the consumer to the transaction that will result in the least amount of creditor paid compensation to the loanleast amount of creditor-paid compensation to the loan originator

Practice Tip: Can loan officers’ compensation for brokering loans be separated from their compensation for loans originated through their

l dit ?

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employer-creditor?• Yes. The compensation a creditor pays to its employee loan officer for

originating the creditor’s loans can be different from the compensation it pays to that loan officer for brokered loans.

Prohibition on Steering• Significant number of creditors = 3 or more creditors with whomSignificant number of creditors 3 or more creditors with whom

loan originator regularly does business• If loan originator regularly does business fewer than 3

creditors, loan originator is deemed to comply by obtaining offers from all creditors ith hom it reg larl does b sinessoffers from all creditors with whom it regularly does business

• Regularly does business = a loan originator regularly does business with a creditor if:

• There is a written agreement between the originator and theThere is a written agreement between the originator and the creditor governing the originator’s submission of mortgage loan applications to the creditor;

• The creditor has extended credit secured by a dwelling to 1 or more consumers during the current or previous calendarmore consumers during the current or previous calendar month based on an application submitted by the loan originator; or

• The creditor has extended credit secured by a dwelling 25 or more times during the previous 12 calendar months based on applications submitted by the loan originator.

• For this purpose, the previous 12 calendar months begin with the calendar month that precedes the month in which the loan

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originator accepted the consumer’s application

Prohibition on SteeringHow is the Safe Harbor satisfied?How is the Safe Harbor satisfied?

1. Consumer must be presented with loan options from a significant number of the creditors with whom the loan originator regularly does business, that include:

• A loan with the lowest interest rate;

• A loan with the lowest interest rate with no risky features (e.g., negative amortization, prepayment penalty, interest-only ( g g p p y p y ypayments, balloon payment within first 7 years, demand feature, shared equity, shared appreciation); and

• A loan with the lowest total dollar amount for origination points or fees and discount pointsand discount points

2. If more than 3 loan options are presented for each type of transaction, loan originator should highlight the 3 loan options which meet the above criteria; and

• Less than 3 loan options for each type of transaction may be presented if the option(s) presented satisfy the above criteria (e.g., 1 loan meets all the requirements)

3 L i i t b li i d f ith th t th lik l

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3. Loan originator believes in good faith that the consumer likely qualifies for the loan options presented

Prohibition on SteeringWhat is not required by the anti-steering provisions?What is not required by the anti-steering provisions?

• Loan originator is not required to meet the safe harbor requirements• Failure to satisfy the safe harbor does not subject the loan y j

originator to any presumption that the loan originator failed to comply with the anti-steering provisions of the rule

• Loan originator is not required to establish a business relationship with any new creditorsrelationship with any new creditors

• Loan originator is not required to inform a consumer about a potential transaction if the originator makes a good faith determination that the consumer is not likely to qualify

• Loan originator is not required to direct a consumer to the transaction that will result in a creditor paying the least amount of compensation to the originator

Practice Tip: What is a creditor’s liability for a broker violation of thePractice Tip: What is a creditor s liability for a broker violation of the prohibition on steering?

• A creditor’s liability for a broker’s violation with the steering provisions is not addressed under the Rule

• We strongly recommend that creditors impose a requirement on

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We strongly recommend that creditors impose a requirement on brokers to deliver a copy of a document evidencing compliance with these provisions (i.e., a borrower-signed document showing that s/he was offered loan options meeting the safe harbor)

Record Retention Requirements What records must be maintained? For how long?What records must be maintained? For how long? • Creditor must maintain records showing:

• Compensation paid to a loan originator on a transaction andand

• The compensation agreement in effect on the date the interest rate was set for the transaction

• Rate is set when the rate is locked/re-locked or re-• Rate is set when the rate is locked/re-locked or re-priced

• If the loan originator is a broker, a disclosure of compensation or other mortgage broker agreement required by state law would be presumed to be a record of the amount paid to the broker

• Retention period should comply with Reg. Z – 2 years after the date disclosures are required to be made or action isthe date disclosures are required to be made or action is required to be taken – or any other period required by state law

Practice Tip: Although the FRB Rule does not impose record keeping

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Practice Tip: Although the FRB Rule does not impose record keeping requirements on brokers, brokers will need to keep adequate records demonstrating their compliance with the safe harbor provisions.

Interplay with Dodd-Frank ActDodd-Frank Wall Street Reform & Consumer Protection Act

• Signed into law on July 21, 2010• Incorporates several separate new laws, including:

• Mortgage Reform and Anti-Predatory Lending Act (Title XIV)g g y g ( )• Includes originator compensation and anti-steering

provisions similar to those in the Board’s new rule on LO compensation

C Fi i l P t ti A t f 2010 (Titl X)• Consumer Financial Protection Act of 2010 (Title X)• Creates the new Bureau of Consumer Financial

Protection (CFPB), which will take over rulemaking authority for enumerated consumer laws, including TILA, as of July 21, 2011

Major differences between Federal Reserve Board’s New Rule and Dodd-Frank Act

• Unlike the Dodd-Frank Act, FRB Rule: • Provides safe harbor for anti-steering provisions• Permits consumer to compensate the loan originator based

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p gon loan terms or conditions

• Liability and penalties expanded under the Dodd-Frank Act

Interplay with Dodd-Frank ActMortgage Reform and Anti-Predatory Lending Act CoverageMortgage Reform and Anti-Predatory Lending Act Coverage

• A “mortgage originator” is any person who, for or in the expectation of, direct or indirect compensation or gain:

• Takes a residential mortgage loan application;• Takes a residential mortgage loan application; • Assists a consumer in obtaining or applying to obtain a

residential mortgage loan; or• Offers or negotiates terms of a residential mortgage loang g g

• Individual and entities covered:• Creditors (as defined in TILA) are generally exempted • However persons closing but not funding a loan (i e table-However, persons closing but not funding a loan (i.e., table

funding) and mortgage brokerage companies are covered

• Does not cover:• Individuals engaged in purely administrative or clerical tasksIndividuals engaged in purely administrative or clerical tasks• Employees of manufactured home retailers• Licensed real estate brokers unless they are compensated for

originating a loan

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• Financers of a maximum of 3 property sales per year• Loan servicers

Interplay with Dodd-Frank ActProhibited mortgage originator compensation methods and steeringProhibited mortgage originator compensation methods and steering conduct under Dodd-Frank Act:

• Loan Terms or Conditions: No mortgage originator compensation from any source based on loan terms, other than the principal loan amountamount

• Dual Compensation: Mortgage originator may receive compensation from the creditor or from the consumer, but not both

• YSPs: No more yield spread premiums as a method for compensating mortgage originators

• May not steer a consumer from a qualified loan or to a loan that consumer lacks the reasonable ability to repay or to a loan with predatory characteristics (undefined)

Permissible mortgage originator compensation methods and conduct under Dodd-Frank Act:

• Origination Volume: Mortgage originator compensation based on g g g g pvolume of loans during a set period of time

• Consumers may still pay discount points to obtain a lower interest rate and those points may be financed in the loan

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Secondary market transactions are not covered

Fair Labor Standards ActWill I still have to comply with the Fair Labor Standards Act?Will I still have to comply with the Fair Labor Standards Act?

• Yes. Any discussion of loan originator compensation would be incomplete without a discussion of the FLSA due to recent FLSA collective actions by loan originators

• Unlike loan originator compensation provisions in the new FRB Rule and Dodd-Frank, focus of FLSA is fair payment of wages as opposed to consumer protection

• FLSA establishes minimum wage overtime pay andFLSA establishes minimum wage, overtime pay, and recordkeeping requirements

• Employees covered under the FLSA must be paid a guaranteed minimum wage and one and one-half times the employee’s regular rate of pay for each hour over 40 worked in a workweek, unless they fall within an exemption

• Current federal minimum wage is $7.25 per hour (there are specific exceptions not applicable here)specific exceptions not applicable here)

• States and localities may set their own minimum wage• Where an employee is subject to both the state/local and

federal minimum wage laws, the employee is entitled to the

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higher of the two minimum wages

Fair Labor Standards Act• FLSA is applied on a workweek basis• FLSA is applied on a workweek basis

• What constitutes a workweek under the FLSA?

• A workweek is a fixed and regularly recurring period g y g pof 168 hours – 7 consecutive 24-hour periods

• A workweek need not coincide with the calendar week and may begin on any day and at any hour of y g y y ythe day

• Averaging of hours over 2 or more weeks is not permitted

• FLSA does not limit the number of hours employees aged 16 and older may work in any workweek

• States may impose their own laws beyond the FLSA and an employer must comply with the more stringent law to the extent state and federal laws differ (e.g., states may impose a higher minimum wage)

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higher minimum wage)

Fair Labor Standards Act• FLSA and implementing regulations provide exemptionsFLSA and implementing regulations provide exemptions

from minimum wage and overtime requirements

• Prior to Administrator’s Interpretation No. 2010-1, the exemptions widely viewed as most likely to be applicable toexemptions widely viewed as most likely to be applicable to loan originators were the administrative exemption and outside sales exemption

• DOL’s recent shift: Administrator’s Interpretation No 2010-1DOL s recent shift: Administrator s Interpretation No. 2010 1

• Issued on March 24, 2010, without solicitation• DOL concluded that loan officers performing typical

duties have a primary duty of making sales for theirduties have a primary duty of making sales for their employers and, thus, do not qualify for the administrative exemption

• Reverses DOL’s prior stance that loan officers wereReverses DOL s prior stance that loan officers were exempt administrative employees

• DOL focused on the “production vs. administrative” dichotomy

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y

Fair Labor Standards Act• At this point it is unknown how much weight courts might• At this point, it is unknown how much weight courts might

give to the DOL’s new position

• Despite the DOL’s new blanket approach, overtime exemptions still require a fact intensive individual analysisexemptions still require a fact-intensive, individual analysis

• Given the uncertainty, employers may want to consider more conservative options for loan originator compensation:

• Classify loan officers as non-exempt• Rely on other exemptions, such as the outside sales

exemption

• Requirements for outside sales exemption: • Employee’s primary duty must be making sales, or

obtaining orders or contracts for services or for the use gof facilities for which a consideration will be paid by the client or customer; and

• Employee must be customarily and regularly engaged f th l ’ l l f b i

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away from the employer’s place or places of business

Issues and Questions

Wh i i h f f i th FRB l ?Who is in charge of enforcing the new FRB rule?

• Until July 21, 2011: • For financial institutions their primary regulatorFor financial institutions, their primary regulator • Federal Trade Commission for those not covered in

the list in 108(a) (e.g., non-federally regulated entities))

• After July 21, 2011: • Primarily the Consumer Financial Protection Bureau y

created by the Dodd-Frank Act and the Federal Trade Commission

• Other federal regulating agencies also have f t th fi i lenforcement powers over the financial

institutions subject to their supervision

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Issues and QuestionsLiability/penalties for violations of new FRB Rule/Reg Z?Liability/penalties for violations of new FRB Rule/Reg. Z?

• Same as all current TILA provisions

• Creditor Liability – although natural persons are y g pincluded in the definition, generally natural persons do not meet the definition because they are not extending the credit

• Specific penalties (civil and criminal) are contained within Section 130 of TILA:

• A person is liable for the sum of (1) actual damages, plus (2) 2x the amount of any finance charge (but no less than $400 or2x the amount of any finance charge (but no less than $400 or more than $4000 for closed-end mortgages (open is $500 to $5000))

• Class actions capped at $500K• Higher penalties for high cost loans• Higher penalties for high-cost loans• A state AG may bring an action for violations in connection

with high-cost loans• Criminal liability for willing and knowing violations: up to $5K

or 1 year imprisonment or both

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or 1 year imprisonment or both

• Statute of limitations is 1 year

Issues and Questions

Who ill enforce the Dodd Frank Act pro isions?Who will enforce the Dodd-Frank Act provisions?

• CFPB – primary enforcement agency for TILA, including the originator compensation provisionsg

• Prudential regulators (for institutions subject to their supervision) and the Federal Trade Commission have certain enforcement powers as wellcertain enforcement powers as well

• State Attorneys General – may bring an action for violations in connection with the originator compensation provisions

• Statute of limitations for originator compensation violations is increased from 1 year to 3 years

C i i l li bilit f illi d k i i l ti• Criminal liability for willing and knowing violations

• No liability if borrower is convicted of fraud in obtaining the loan

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Issues and Questions

Li bilit / lti f i l ti f D dd F k A t?Liability/penalties for violations of Dodd-Frank Act? • Individual liability on originators for violations of the

compensation and steering provisions in the same amount as creditors for all other provisions generallycreditors for all other provisions generally

• Consumers may assert originator compensation violations as a defense by recoupment or set off (no time limitation)

S f f• Specific penalties for TILA violations in connection with closed-end mortgages have generally not changed

• Primary changes:

• Class action cap has been increased to $1M

• In connection with originator compensation violations, a person is also liable for an amount equal to the sum of all fi h d f id b th l thfinance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material

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Thank You!Mitchel H. Kider, Managing Partner

kid @ b kkider@wbsk.com

Joseph E. Silvia, Associate silvia@wbsk comsilvia@wbsk.com

Leslie A. Sowers, Associate sowers@wbsk.com

Weiner Brodsky Sidman Kider PC 1300 19th Street NW, 5th Floor

Washington DC 20036202.628.2000

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www.wbsk.com