Remember the CFPB rule that prohibited you from discussing your audit with your peers?

The CFPB’s proposed amendments to its rule on the disclosure of records and information is now the subject of a blog post written by Compliance Attorneys Ballard Spahr.

Entitled “CFPB Proposal Unconstitutionally Imposes Prior Restraint on Regulated Entities’ Speech,” the blog post focuses on a provision in the CFPB’s proposed rule published in the Federal Register on August 24, 2016.  I previously advised you all about this. The provision would prohibit the recipient of a civil investigative demand (CID) or letter from the CFPB providing notice and opportunity to respond and advise (NORA) from disclosing the CID or NORA to third parties without prior consent of a high ranking CFPB official.  The blog post explains why the proposal is not only ill-advised as a matter of public policy but is also unconstitutional both as a prior restraint on speech and a content-based restriction.

The CFPB’s proposal also includes a provision that would expand its discretion to share confidential supervisory information with state attorneys general and other agencies that do not have supervisory authority over companies.

I have previously blogged that I felt this was one of the most stupid, ill-advised rules I had ever seen. If mortgage industry participants cannot share their audit experiences they lose the opportunity to benefit from a peer’s audit and thus improve their operations based on someone else’s experience. Benefitting the consumer, of course. At other time in any other universe, working together would have been encouraged.

So let’s see how this ends up. I would bet Mr. Trump would have a field day with this rule.

Call me if you need assistance with your Compliance Program. A nationwide service, we have hundreds of satisfied Brokers and Mini-C’s and we can assist you as well. Ask about our Audit Protection Plan. Nothing like it, anywhere.

(800) 656-4584 Extension 103

CLICK HERE  to view our web site.

 

 

 

Have a laugh on me. Read below.

I just received a marketing email that came from a think tank in DC. It made reference to something called the Data Transparency Coalition, and was presenting training on financial transparency to be presented by a representative of the  US Treasury.

So, at the bottom it also said this:

“Workshop Available to Federal, State and Local Government Employees Only. Press is NOT Invited to Attend to Permit Candid Discussion at this Educational Workshop”

nutface

Would you find this as amusing as I do? What are they discussing that they need to exclude some outside attendance? I swear its true.

Also a quick comment on those of you who feel like Dodd Frank will be abolished. Just my opinion, no it won’t. It will be modified and refined and probably made smaller. But it is here to stay. The great recession will guarantee that we will never be allowed to operate without stricter compliance parameters. Don’t delude yourself.

It is the end of the year and many of you must re-certify for NMLS and State purposes – making important statements about your compliance in your financial reports.

If you are stretching the truth or maybe not ready for an audit at all, please call us at (800) 656-4584 x103. We can help and if we hear from you this week we can certify you for year end. We work pretty quickly this time of year to insure you can be truthful when you re-certify.

With respect,

Nelson A. Locke, Esq.

Compliance Services and Locke Law US, LLC

(800) 656-4584

Audit Rating System Finalized.

The Federal Financial Institutions Examination Council (FFIEC), whose members include the CFPB, has finalized guidance setting forth a revised uniform interagency consumer compliance rating system (CCRS).  The revisions reflect changes in consumer compliance supervision since the current rating system was adopted in 1980.  The other FFIEC members are the Fed, FDIC, NCUA, OCC, and State Liaison Committee.

The FFIEC members plan to implement the revised rating system for consumer compliance examinations that begin on or after March 31, 2017.

The CCRS includes three categories of assessment factors: board and management oversight, compliance program, and violations of law and consumer harm.  The assessment factors in the three categories consist of the following:

  • To assess an institution’s board and management oversight, examiners will consider: oversight and commitment to the institution’s CMS; effectiveness of the institution’s change management process; comprehension, identification and management of risks arising from the institution’s products, services, and activities; and any corrective action undertaken as consumer compliance issues are identified.
  • To assess an institution’s compliance program, examiners will consider: whether the institution’s policies and procedures are appropriate to the risk in the institution’s products, services, and activities; the degree to which compliance training is current and tailored to risk and staff responsibilities; the sufficiency of monitoring, and if applicable, auditing, to encompass compliance risks; and the responsiveness and effectiveness of the consumer complaint resolution process.
  • To assess an institution’s violations of law and consumer harm, examiners will consider: the root causes of any violations identified during examinations; the severity of any consumer harm resulting from the violations; the duration of time over which the violations occurred; and the pervasiveness of the violations.  The CCRS includes incentives for self-identification and prompt correction of violations.

The revised rating system uses a scale of 1 through 5, with 1 representing the highest rating and lowest degree of supervisory concern and 5 representing the lowest rating and most critically deficient level of performance and thus the highest degree of supervisory concern.  An institution’s overall rating under the CCRS is intended to reflect a comprehensive evaluation of the institution’s performance under the rating system by considering the categories and assessment factors in the context of the institution’s size, complexity, and risk profile.

The CCRS does not assign specific numeric ratings to any of the above assessment factors and an institution’s rating is not be based on a numeric average or any other quantitative calculation.  As a result, an institution does not have to receive a satisfactory rating in all categories to receive an overall satisfactory rating.  Conversely, even if some assessments are rated as satisfactory, an institution can still receive an overall less than satisfactory rating.

The important note is YES this does apply to small Brokers and Lenders and has already been rolled out in a few states. In recent audits, it has been used thoughtfully and seemed fair. Frankly the people having the worst audit experience are those who think they are somehow “above” the process. Be warned.

Nelson A. Locke, Esq.

(800) 656-4584

http://www.lockelaw.us

 

On December 1st, the FLSA “Overtime Rule” is being updated. Who does this affect?

Back in May 2016 the Department of Labor (“DOL”) announced that effective December 1st, 2016 employers would have to raise the salary level of exempt employees to $47,476 per year for the employee to still be considered exempt. That is about $900 a week.

Now I am getting panic calls and emails asking me if this means you should increase your mortgage loan originator hourly wages to keep the exemption. So here comes the shocker.  

Folks, your mortgage loan originators are NOT exempt. This December 1st rule applies to true administrative employees and managers. Based on last years DOL ruling, this new ruling does NOT apply to mortgage loan originators. MLOs have not been exempt since May of 2015. The MB had sued the DOL to make them exempt, but SCOTUS agreed with the DOL regarding the DOL ruling that MLOs were not exempt because MLOs were involved in sales.

Let’s start out with the history behind the rule.

Under the old administrative exemption of the FLSA, employees who are paid on a salary basis of at least $455 per week (pre-December 1st 2016) may be exempt from overtime compensation if the employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and their primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Employees in the financial services industry generally meet the duties requirements for this exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments, or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing, or promoting the employer’s financial products; provided, however, that their primary duty is not selling financial products.

There’s the rub: provided their primary duty is NOT selling financial products.

So, pretty much, any MLO who is originating cannot be considered exempt any longer. So December 1st does not affect them. It affects non-selling managers and administrative staff. The new level of over $900 a week is real. That is what you should review.  

Back to your MLOs. What can you do to protect yourself from being sued for overtime by a disgruntled or opportunistic former MLO?

  • Don’t fight the rule but rather have a policy in writing that prohibits any non-exempt employee (which is what the DOL calls your MLO staff) work beyond 35 hours a week unless approved in writing.
  • If you enforce this strongly I think this creates a rebuttable presumption for the DOL that you may have used your best reasonable efforts to comply.
  • You may experience an MLO who stepped outside his job description if he worked more hours than 35 hours a week without written approval. If you kept an eye on him or her and then they raise this issue, you can counter with an “ultra vires” or “frolic and detour” argument. The key to this is to enforce your policy and keep an eye on your non-exempt employees.
  • You would need a procedure in place that creates and monitors regular non-exempt employee time sheets and has your non-exempt employee sign a certification about hours worked under penalty of perjury every pay period, whether they have commission due or not. And you would need to demonstrate you enforce your rule and send people home when appropriate.

SUMMARY: Mortgage Loan Originators are non-exempt employees. As such they are subject to the protections of the overtime rule of the FLSA. If you don’t monitor and manage their hours worked, you can end up in a very bad place. Don’t prohibit overtime; rather require they obtain your pre-approval in writing. Next, monitor every pay period with non-exempt employee certification regarding hours reported. Keep these records carefully. When you find a violator, be able to show you enforce your own rules.

ONE FINAL COMMENT. We are still engaging with plenty of loan originators who think they can be paid as a 1099 contractor. The DOL decision applies the common law definition of employee.

Here you go, compliments of Black’s Law Dictionary. “Black Letter Law”.

“An employee is a person who works in the service of an employer under an express or implied contract of hire, under which the employer has the right to control the details of the work performed.”  

So you have a license that requires a sponsor who is paid instead of you, who provides you with documents, compliance overview, and training, and maybe even leads. And you must originate and process your loans under his or her direction. And then, your employer has to pay you from what he is paid, because you cannot be paid directly under the current rules.

If you still think you are independent, you are just not listening.  You are an employee.

 Respectfully,

 Nelson A. Locke, Esq.

Mortgage Industry Compliance Expert

Attorney and Expert Witness

Office (800) 656-4584

Cell (305) 951-2785

http://www.lockelaw.us

http://expertlenderservices.com

HMDA Reporting is changing and it looks like it affects Brokers now.

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I got a call from a client about changes to HMDA, specifically if these changes affected him as a Broker only. Usually Brokers left this function up to their lenders because the lenders made the credit decision.

There are some new rules going into effect. The new rule eliminated the asset test for lenders. Whereas in the past some lenders may have been excluded from having to file because their assets were smaller, that’s no longer the case. There are some other major changes coming in 2017.

The language I saw said if Lenders made the lending decision on at least 25 loans that closed in the last year then they had to file. This is a significantly lower threshold than the current 2016 level  of 100 closed loans. But then the CFPB chimed in.

The CFPB published a warning sent to 44 “Brokers and Lenders“. The CFPB uses the word “Brokers”. Why did they say “Brokers”?

So here is what I found, the rule the CFPB pointed to does not talk about the lending decision. It specifically mentions originating home purchase loans. This is taken from the CFPB letter.

Annually, a for-profit mortgage-lending institution other than a bank, savings association, or credit union, must collect, record, and report data identified in HMDA and Regulation C to the appropriate Federal agency when: (i) in the preceding calendar year, it either: (A) originated home purchase loans, including refinancings of home purchase loans, that equaled at least 10 percent of its loan-origination volume, measured in dollars; or (B) originated home purchase loans, including refinancings of home purchase loans, that equaled at least $25 million; and (ii) on the preceding December 31, it had a home or branch office in a Metropolitan Statistical Area (MSA); and (iii) it either: (A) on the preceding December 31, had total assets of more than $10 million, counting the assets of any parent corporation; or (B) in the preceding calendar year, originated at least 100 home purchase loans, including refinancings of home purchase loans.  12 C.F.R. §§ 1003.2, 1003.4, 1003.5.

Guys, I think you better crank up your HMDA data collection effective January. You could always argue with the CFPB that all you did was take an application, but the attached agency chart quickly makes that a mute point. 2016-hmda-reporting-criteria-102716

Notice how it says “receive applications, originate, or purchase”? Broad.

I will dig into this a little deeper, but for now, prepare as if you will have to report.

Nelson A. Locke, Esq.

(800) 656-4584

 

 

 

 

 

 

I’m not changing my mind on this one. An NMLS sponsored MLO is an employee. Period.

October 18th, 2016

The debate rages on. Unfortunately, most of those who have challenged our position that an MLO must be a W-2 – are either asking the wrong people for advice, or are not asking the question in an open and honest way.

If you have found an attorney who is telling you your 1099 practice is just fine, ask him for his written legal opinion. You will need that to show to the regulator that makes this an issue. While it won’t guarantee you won’t have a finding or fine, it is a defense of sort. Except I warned you, didn’t I. And the attorney won’t pay your fine for you.

The only reasonable conclusion is that a sponsored MLO is an employee.

We include the attachment titled 22-mlo-w2-discussion-021015 to our clients at the front of our MLO Policy Manual – Book Two. You should read this first. Let’s set the stage.  

Now, if you are saying your state regulator is ignoring this issue their misfeasance does not mean you are not at personal risk for violating Safe Act, CFPB, IRS, and DOJ rules. The facts are clear – the CFPB has asked the states to look for violations of federal regs when auditing. When the CFPB issued its updated exam guidance, it again asked the states to assist.

Now see attached pdf extractions, highlighted sections. The cfpb-exam-manual-irs-references-and-employee-definition-101816 is a 924 page “guide”. I saved you some time and copied the three pages that matter for you. Next, look at originatorcompensation-and-thefedrule_q-a. This is a transcript from an Industry Legal Webinar held in 2011.

Note the reference to the common law test – the common law definition of employee. Not YOUR definition, but what the IRS test uses to determine if a MLO is independent, or not. Let me give it to you here.

Directly from the IRS:

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

NOW about the Fair Labor Standards Act:

In an attempt to interpret provisions of the Fair Labor Standards Act and discern between employee and independent contractor status, courts and federal agencies have come up with the “economic realities test.” It looks at the dependence of the worker on the business for which he or she works. If a person gains a large portion of their salary or commission from that business, chances are that person qualifies as an employee.

These courts also use the “right to control” test. When the hiring party controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee. If you are sponsored and your Broker has to answer for your work, you are an employee.

If an employer does not have any authority over how a party accomplishes his or her work the relationship between the parties is that of independent contractor. But that can’t be: you are sponsored, right? And can only “work” at one place at a time, right?

We are always looking for new clients. If you need to tighten up your compliance efforts, call us at (800) 656-4584.

More about your Corporate Governance Book….

Man, this is a mess out there. As part of our Compliance Program we started reviewing the condition of corporate records. We never realized how many people have no idea WHAT should be in their corporate records.  We do think everybody knows WHY you need to do this (shields you from personal liability)  but we have been reviewing different Secretary of State Filings and the typical mortgage broker is all over the place. No one passed with flying colors.

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So let’s make a list. Because this is important.

If you are a Corporation, either a C corp (for profit and pays its own taxes ) or an S corp (pass-through to you where you pay the taxes on your return):

  • Articles of INCORPORATION
  • By-Laws
  • Annual Reports to your Secretary of State
  • Annual Meeting Minutes – the report to your Shareholders
  • Anything in-between where the Corporation took action that should be properly recorded and approved in your Book.
  • This is the same list whether one shareholder or 1000 shareholders.

If you are a Limited Liability Company it is a bit different.

  • Articles of ORGANIZATION
  • Operating Agreement
  • Annual Reports to your Secretary of State
  • Member’s Minutes from meetings with your members
  • And, anything in-between where the LLC took action that should be properly recorded and approved in your Book
  • If you are a “single member LLC” the rules are a little looser but those of you who know me, know I think that more is better. Have meetings with yourself. Keep records with yourself. You get the picture.

Hope this helps. If you are unsure of your “condition”, email me at nl@lockelaw.us

Thanks.

Nelson A. Locke, Esq.

Compliance Services

(800) 656-4584